Provisional translation

Press Conference by Toshimitsu Motegi, Minister for Financial Services

(Excerpt)

August 15, 2008

[Opening Remarks by Minister Motegi]

Good morning.

Before today's cabinet meeting started at 10 a.m., cabinet ministers held a meeting from 9:30 a.m. at the Crisis Management Center in the Prime Minister's official residence, to exchange views on an initial response to emergencies.

Today, I have an announcement to make. The members of the advisory council on the reform of the civil servant system have been selected, as shown in the list distributed to you. The eleven persons appointed as council members have excellent judgment, broad perspectives and acute insight, as well as successful careers in their fields of expertise. We intend to work out specific measures for the reform of the civil servant system while taking into consideration opinions provided from their various and broad viewpoints. We would like to adjust scheduling -- as you can see from the list, the council members are people whose work schedules are very tight -- so that the first meeting of the advisory council can be held in early September.

I do not have any further statement to make.

[Questions and Answers]

Q.

I understand that on August 13, Prime Minister Fukuda instructed you to consider revising the taxation related to securities investment in ways to promote a shift "from savings to investment," and the FSA needs to decide its request regarding tax revision by the end of August. Could you tell me about the progress of the review of the taxation related to securities investment and also the future schedule?

A.

When I met with the Prime Minister the day before yesterday, we talked for more than an hour and a half, although the meeting was intended to last only one hour, and our discussion covered very specific matters. The Prime Minister gave me instructions concerning two broad issues regarding the financial and stock markets. First, he told me that it is important as the paramount precondition that the Japanese stock market be made trustworthy in the eyes of the general public. Secondly -- this is a point that you mentioned in your question -- he urged me to strive to promote a shift "from savings to investment." For my part, I explained to him specific data, including the ownership breakdown by age groups of 1,500 trillion yen's worth of Japanese individuals' financial assets and the very low ratio of investment relative to savings in Japan compared with the ratios in Germany and the United States. As he urged me to strive to promote a shift "from savings to investment" under these circumstances, we would like to include some elements of our vision of the desirable taxation related to securities investment in our tax revision requests. We are now in the last stage of consideration of the contents of our request, with a view to reaching a conclusion by the end of August.

Also, I talked with Minister (for Economic and Fiscal Policy) Yosano about a variety of issues related to an emergency economic package intended to ensure safety and security, including how to facilitate financing for small- and medium-size enterprises and the clarification of the treatment of subordinated loans under the Financial Inspection Manual. Speaking at a recent press conference, he appeared to suggest that the economic package should include items that will be discussed as part of the tax revision to be decided at the end of the year. I will consult with him on that point again and include such items in the economic package if necessary.

Q.

On August 13, Urban Corporation filed for the application of the civil rehabilitation law, underscoring the very severe situation of the construction and real estate industries, which has affected the business results of financial institutions. How do you view the effects of the deteriorating situation of the construction and real estate industries on the management of financial institutions?

A.

As I said at a recent press conference, a questionnaire survey conducted in various regions showed that the construction industry has the greatest difficulty raising necessary funds, followed by the transport and retailing industries. As we must first obtain the most up-to-date information, we started dispatching senior FSA officials to various regions in order to examine the local situation.

Meanwhile, as you know, Japan's 11 major banks incurred a total of 234.1 billion yen in losses related to the disposal of non-performing loans in the fiscal first half, up more than 90 billion yen from the same period of last year, and the country's 110 regional banks -- although two of them have not yet announced their financial results -- incurred 148.8 billion yen in such losses, up 66.5 billion yen from the same period of last year. I believe that the increase in such losses partly reflects growing downside risks for the economy, so we will keep a close watch on the effects of the economic condition on financial institutions.

Q.

At a press conference on August 5, you said, when replying to a question, that you had no intention of visiting the Yasukuni Shrine on August 15, the anniversary of the end of the Pacific War. Today is that anniversary, and am I correct -- I am asking this to make sure -- in understanding that you have not changed your mind?

A.

No, I have not changed my mind.

Q.

I will ask you about the members of the advisory council. The members include the chairman of Rengo (Japanese Trade Union Confederation) as well as the leaders of the three major economic organizations. Why have these four people been selected as members?

A.

As I said earlier, this is a major reform that has implications for future generations, so we have selected, from a wide range of fields, people who can oversee the reform from a comprehensive viewpoint based on excellent judgment, broad perspectives and acute insight. They have been selected not because they are leaders of business organizations or a labor union federation but because of their personal qualities. I welcome the inclusion of the leaders of the three economic organizations and a labor union federation among the council members.

Q.

You said that you would like to hold the first meeting of the advisory council in early September. What will be the themes to be discussed by the council?

A.

Regarding the reform of the civil servant system, there are measures to be implemented within one year, within three years and within five years as well as the overall program. We will explain these to them and seek their opinions about how to proceed with the reform. Also, as one of our immediate tasks, we will need to work out details of the planned cabinet personnel management agency if we are to submit a relevant bill to next year's ordinary Diet session. We will fix the theme of the first meeting by taking such matters into consideration. First, we will seek their opinions on the broad outline of the reform and have them discuss issues related to immediate tasks. The first meeting will probably proceed in that way.

Q.

What about the frequency of the meeting?

A.

As this is an advisory council, a weekly meeting, for example, would not be a format befitting the group. We will convene the council as necessary in order to seek their opinions. The frequency of the meeting will likely be once every other month so, rather than every month in principle.

Q.

I have a related question. Do you plan to create the post of chairman, for example?

A.

We will probably create such a post. As the decision should be made by the council members themselves, the chairman will likely be selected at the first meeting.

Q.

I will ask you about tax breaks for securities investment. Could you tell me again about your view on tax-free treatment of stock dividends? The LDP's (Liberal Democratic Party's) secretary-general has proposed making stock dividends tax- free and you have said that it is worth consideration.

A.

As you know, in fiscal 2009 and 2010, there will be two investment income quotas eligible for tax breaks under the tax revision adopted last year: a one-million-yen quota (for dividend receipts) and a five-million-yen quota (for income from stock sales). It has been decided that a reduced tax rate should be applicable to investment income within these quotas. However, in light of the current economic condition and the need to promote a shift from "savings to investment," I believe that many people recognize the necessity of taking a further step. In this context, Secretary-General Aso's proposal is very important.

Meanwhile, when the LDP adopted measures to enable elderly people to remain healthy and continue working, Mr. Yosano, who is now the minister for economic and fiscal policy, proposed that a tax-free treatment, rather than the reduced tax rate of 10%, should be applied to the investment income of elderly people, if I remember correctly. We intend to reach a conclusion by the end of August after considering what measure will be the most effective and realistic with due consideration of a proposal like this. I think that it is a welcome development that debate like this become active in response to various proposals.

Q.

Officials of the Ministry of Finance, including the vice minister of finance, have pointed out the difficulty of providing further tax breaks amid the severe fiscal condition. What do you think of the idea of introducing tax breaks in relation to tax revenue?

A.

There are various opinions depending on whether we look at the situation from a static or dynamic standpoint. The issue of taxation may be seen in terms of tax revenue increase or decrease at a certain point in time. However, taxation may also affect economic behavior over time, leading to future changes in tax revenue. In light of this, I believe that we need to look at taxation from a dynamic standpoint, although I understand that the Ministry of Finance naturally has its own opinion.

Q.

I would like to ask you another question about tax breaks for securities investment. For now, there are three major proposals that have been made public: one from LDP Secretary-General Aso, one from the LDP's joint committee and one from the Japan Securities Dealers Association. Either of them would inevitably make the tax system very complicated, by making an addition to the existing measures adopted by the FSA on a provisional basis or by dividing taxpayers into age groups. It may be argued that from the viewpoint of simplifying the tax system or promoting a shift "from savings to investment," it would not be appropriate to consider introducing tax breaks as an economic stimulus measure. Could you tell me more about what kind of proposal will be made by the FSA?

A.

Of course, the tax system should be simple and fair, and there is no doubt that ultimately, its effects on economic activity should be neutral. However, if the tax system is actually to be neutral in terms of effects on the economy, there would not be any of the various existing special tax measures. Special tax measures are devised for some policy purpose or other, and I believe they are necessary in light of the current economic condition.

As I said earlier, we must make a decision from a comprehensive perspective, taking account of not only the expected benefits of tax breaks but also the complex clerical procedures that may be involved, for example. Also, I do not believe that the promotion of a shift "from savings to investment" is an issue that can be discussed separately from economic policy. As the shift "from savings to investment" proceeds, corporate behavior will change, which will change overall economic trends. If it leads to an increase in corporate profits, workers will also gain benefits, which will expand personal consumption. This reminds me that taxation is very closely related to economic activity.

Q.

In relation to the question about Urban Corporation's filing for the application of the civil rehabilitation law, statistics show a significant increase in the number of bankruptcies in July, and some people have pointed out that the recent series of large-scale bankruptcies may have been caused by financial institutions' move to curb loans. What is your view on this issue?

A.

In order to examine the actual state of financing in various regions without any prejudice, including whether or not there is such a move, we are conducting a questionnaire survey by dispatching senior FSA officials to regions, as I already said -- at my press conference before last, I said the survey would be completed in the first half of this year. According to the survey, the balance of outstanding loans provided to small- and medium-size enterprises have been declining since September last year. However, the main reason for this is a problem related to borrower companies' sales, rather than financial institutions' restrictive lending stance, as I told you. We intend to grasp how the situation has changed, including with regard to matters like this.

Q.

Recently, Bank of Tokyo-Mitsubishi UFJ announced a plan to make a California-based bank a wholly owned subsidiary by making additional investment. How do you view the accelerating trend of Japanese banks advancing into overseas markets?

A.

I am aware that on Tuesday, August 12, Bank of Tokyo-Mitsubishi UFJ announced a plan to launch a takeover bid in order to make UnionBanCal Corporation a wholly owned subsidiary. As this is a matter concerning a specific financial group's management decision, I would like to refrain from making any particular comment. Generally speaking, I hope that individual financial institutions will take action based on their own management judgment in line with forward-looking management strategies, thereby consolidating their base of profits.

Q.

Regarding the advisory council, former Minister Watanabe has announced a policy of making its meetings fully open to the public with a view to proceeding with reform from the people's standpoint. Do you have any particular idea as to whether or not to make the meetings open to the public?

A.

I will make them open to the public.

Q.

Are you going to make them fully open? If so, what is the purpose?

A.

If I said I would keep the meetings closed, it would be criticized as a reversal of the reform.

(End)