Provisional translation

Press Conference by Toshimitsu Motegi, Minister for Financial Services

(Excerpt)

August 26, 2008

[Opening Remarks by Minister Motegi]

At today's cabinet meeting, my August 27-30 trip to the United States was approved.

During the trip, I will visit Washington D.C. and New York to discuss global financial developments and measures taken by authorities with FRB Chairman Bernanke and U.S. government officials.

[Questions and answers]

Q.

Regarding your trip to the United States, the outline of which you already told us about, I expect that your meeting with FRB Chairman Bernanke will attract intense attention amid the continued turmoil in the global financial market. What specific issues do you intend to discuss with Chairman Bernanke and (Securities and Exchange Commission ) Chairman Cox?

A.

Basically, we will probably hold frank exchanges of views about current global financial developments such as the subprime mortgage problem. Also, I plan to seek their frank opinions of the state of the Tokyo market, as Japan tries to strengthen the competitiveness of its financial and capital markets in order to put them on a par with the London and New York markets. In addition, I would like to exchange views with Chairman Cox about specific tasks such as the international convergence of accounting standards, for example.

Q.

At your press conference last week, you said we still need to remain vigilant over financial developments. Over the past year, disruptive incidents have occurred during each earnings reporting season -- some people say that it seems as if Japan's financial crisis of a decade ago is being replayed. Under these circumstances, there are arguments that like Japan, the United States should use public funds and that Japan should strongly urge the United States to do so. What is your view in this regard?

A.

Basically, it is up to the relevant authorities to make a decision. Probably, the situations in the United States, Europe and Japan are somewhat different. In the case of the United States, the impact of the subprime mortgage problem first spread to financial institutions and then reverberated to the real economy. Meanwhile, as I have said over and over again, Japanese financial institutions have escaped damage from the subprime mortgage problem itself, while they have been affected by the weakening of the Japanese economy caused by the increasingly severe condition of the global economy; thus, the sequences of events in the two countries seem to be somewhat different. First, I would like to gather information and ascertain how the U.S. authorities assess the current situation -- for example, how they assess the problems of the GSEs (government-sponsored enterprises) and regional banks in light of the most up-to-date data.

Q.

At a meeting yesterday of the Council on Economic and Fiscal Policy, Prime Minister Fukuda expressed his concern over financing for small- and medium-size enterprises (SMEs). Could you tell me about the status of deliberations on measures to be taken by the FSA, which I understand will be announced this month?

A.

When I met with Prime Minister Fukuda yesterday morning, he instructed me to do my best with regard to financing for SMEs in light of the current economic condition. As you know, the balance of loans provided to SMEs has been declining since September last year. The FSA's analysis of the situation as of June showed that the decline stemmed from the weak corporate earnings due to the high prices of crude oil and raw materials and sales-related problems, rather than a change in financial institutions' lending stance. As we must check the most recent situation in order to provide our assessment as of August, we have conducted a questionnaire survey through the Local Finance Bureaus and dispatched senior FSA officials to various regions to hold hearings with financial institutions and also listen to the voices of local SMEs, including the smallest companies -- I have directly issued an instruction in this regard. Probably, we will be able to get a rough picture by early next week. I believe that the most important task for now is to ensure that financial institutions properly exercise the financial intermediary function for SMEs, of course on condition that they conduct appropriate risk management.

Q.

Regarding the reform of the civil servant system, I understand that an advisory council meeting will be held in September. Given that a bill related to the proposed cabinet personnel management bureau must be submitted to an ordinary Diet session, I expect the outline of the bill will emerge by the end of the year. What will be the frequency of the advisory council's meetings?

A.

We are now making final scheduling adjustments so as to hold the first meeting in early September. I think that the council of advisors will meet as necessary in order to make suggestions in various ways, rather than holding regular monthly meetings. Frankly speaking, we have not decided the frequency of the meetings. However, as we would like to roughly decide by the end of November what the proposed cabinet personnel management bureau should be like, we will probably convene the entire council on some occasions and seek the opinions of members individually on other occasions while the secretariat proceeds with its work.

Q.

Late last week, a U.S. regional bank went bankrupt, becoming the ninth bank to collapse this year. At a time when concern remains about the problems of the GSEs and just before your trip to the United States, how do you assess the condition of the U.S. market?

A.

The problems of the U.S. market induced by the subprime mortgage problem have led to the bankruptcy of U.S. regional banks. The share prices of U.S. financial institutions, including major ones and the two GSEs (Fannie Mae and Freddie Mac) have dropped sharply. These incidents have reminded us of the seriousness of the subprime mortgage problem. Therefore, I would like to ascertain the most recent situation. I have already described the outline of the situation, and I will be able to provide a clearer picture next week.

Q.

I understand that you discussed what to do with the Employment and Human Resources Development Organization with the Prime Minister yesterday. Could you tell me about the status of deliberations in the run-up to the meeting of a panel of experts scheduled for September 3?

A.

I discussed this issue with the Prime Minister yesterday. At a meeting of the panel of experts, I also discussed it with Chairman Mogi. The panel has already held three meetings and is now ready to summarize points of debate. At the meeting scheduled for September 3, our staff will first report on the organization's past records in order to prepare the panel for discussions on the future course. The Prime Minister has strongly urged us to reach a conclusion quickly. In this respect, we are in agreement with Chairman Mogi, so a direction will be set at a meeting to be held in the latter half of September.

Q.

Did the prime minister issue any instruction with regard to efforts toward reaching a conclusion?

A.

I reported to the Prime Minister on the time frame that I mentioned just now, and he agreed with it.

Q.

Is it the Ministry of Health, Labor and Welfare or the headquarters for the promotion of administrative reform that will propose the abolition of the Employment and Human Resources Development Organization at the panel of experts' meeting in September?

A.

The meeting on September 3 is intended to summarize points of debate, and I expect that a direction will be set based on the past discussions. We would like to start discussions on what to do with each of the businesses -- or I should say functions -- that are now undertaken by the Employment and Human Resources Development Organization. After the organization is dissolved, some of its functions will be abolished and others will be transferred to other organizations, and we would like to hold discussions on this point.

Q.

I would like to ask you about the tax system related to securities investment. In a speech yesterday, you talked about a preferential treatment for elderly investors and small-lot investors. Why is preferential treatment for elderly people necessary now? According to your explanation, as I understood it, elderly people hold more than 60% of the financial assets held by Japanese individuals, and so, in order to invigorate the market, it is necessary to provide a preferential treatment for elderly investors. However, I think that what the government should do, as a policy measure, is to provide preferential treatment for people who do not have sufficient savings. What is your view on this?

A.

As I made yesterday's speech in English, my explanations may have been insufficient in some respects. We are now making final adjustments in preparation for the submission of our requests regarding the tax system related to securities investment at the end of August. Probably, our requests will include several items, such as the enhancement of the defined contribution pension scheme and the 401K plan. One major pillar will be the preferential treatment for elderly people that you mentioned -- a reduced tax rate applicable to investments made by elderly people or the introduction of a tax-free bracket -- and another pillar will be a special measure intended to foster small-lot investors through a preferential treatment, which may be called the Japanese version of the ISA (Individual Savings Account). I think that it is very important to not only provide preferential treatment for elderly people but also foster a broad base of ordinary investors.

Certainly, elderly people hold about 60% of financial assets owned by Japanese individuals, worth 1,500 trillion yen, or 2.9 times as large as Japan's GDP. In particular, elderly people hold 70% of overall stock investment trusts. From the viewpoint of elderly people, financial investment is becoming increasingly important as a "second pension plan," as their interest income is declining while the ratio of dividend income to their family income is rising. We are considering tax revision from this viewpoint. Meanwhile, younger generations hold only a small amount of stock investment trusts, as you pointed out, so it is an important task for them to build up their financial assets by continuing small-lot, long-term investments. Tax measures related to securities investment tend to invite accusations of, and fuel concern about, a preferential treatment of the wealthy. In reality, however, 70% of the people investing in stocks, stock investment trusts and other similar financial products have an annual income of less than 5 million yen. Also, households with an annual income of less than 5 million yen have been increasing their investments recently. In this sense, expanding the class of small-lot investors and supporting elderly people, for whom dividend income is becoming increasingly important as a "second pension plan," will be two major pillars.

Q.

Today, there were media reports about the dubious expenses of the personal office of Minister of Agriculture, Forestry and Fisheries Ota. As a cabinet minister, how do you view this matter, given that some cabinet ministers have resigned in the past because of dubious expenses of their personal offices?

A.

As politicians, rather than as cabinet ministers, we must submit a proper statement of income and expenses. There is no doubt that as politicians, we are held to a very high standard of ethics. Therefore, I will do my best to ensure a proper statement of income and expenses. Individual politicians' statements of income and expenses are a matter that should be handled by themselves on their own responsibility, so I would like to refrain from making comments.

Q.

Regarding the tax system related to securities investment, in your speech yesterday, you talked about the Japanese version of the ISA -- you apparently had the British ISA in mind -- as a measure to expand the class of small-lot investors. The British ISA was first introduced as a provisional measure and was later made a permanent measure, as I understand it. Will the planned preferential treatment for dividend income earned by small-lot investors be provisional or permanent?

A.

In Britain, this measure was introduced in 1999 as a 10-year provisional measure under then Chancellor of the Exchequer Brown. However, as the measure brought about substantial benefits, it was made permanent in 2007, when it was scheduled to expire. As the British ISA covers both investment and savings, the Japanese version of the ISA may be different from it. In the long-term, there is no doubt that the future Japanese tax system will be neutral in terms of impact on investment income and cover both investment gains and losses. Given this long-term direction, I expect that the items now under consideration will be provisional measures.

Q.

With the condition of the real estate market deteriorating further, a real estate developer filed for the application of the civil rehabilitation act, the latest in the recent series of failures of real estate firms. I think that a credit squeeze due to an abrupt change in financial institutions' lending stance is behind these failures. Do you think that financial institutions' adoption of a selective stance toward real estate companies is a healthy process toward resolving a market bubble? Or are you worried that it may have a negative impact on the economy? Also, do you think that there was a bubble in the market for real estate securitization in the first place?

A.

As I explained earlier, we are now holding detailed hearings regarding the current situation of various industries in various regions and regarding financial institutions' lending stance and lending terms. I would like to reply to your question next week or later, because I will be able to provide a more appropriate answer based on the results of the hearings.

Q.

I have a question regarding tax revision. When you speak of a preferential treatment for elderly people, what is the definition of "elderly"?

A.

I do not think that there is an exact definition of "elderly." However, generally speaking, there are some thresholds regarding the description "elderly" as used in various data; elderly people may refer to people aged 60 or older or people aged 65 or older, for example. Until now, we have been referring to "elderly people without providing an exact definition when discussing the tax system, yet, of course, we must discuss various matters with the ruling parties further, including the income ceiling on tax breaks, and we must eventually negotiate with the Ministry of Finance. The definition of "elderly" will be decided in the natural course of this process.

Q.

Do you mean that you will not refer to the age threshold in your request for tax revision?

A.

Although we are still putting the finishing touches, I do not expect that our request will specify the age threshold for "elderly people."

(End)