Provisional translation

Press Conference by Shoichi Nakagawa, Minister of Finance and Minister for Financial Services

(Excerpt)

September 25, 2008

[Opening Remarks by Minister Nakagawa]

I am Shoichi Nakagawa. I have been appointed to serve concurrently as the Minister of Finance and Minister for Financial Services. I would appreciate your kind support.

[Questions and Answers]

Q.

You are the first person to serve concurrently as the Minister of Finance and Minister for Financial Services since the administrative authorities over fiscal and financial affairs were separated. Some people think that this is problematic in light of the background to the separation of these authorities. How do you view your appointment for these two posts? Also, do you plan to review the current arrangement of separating the administrative authorities over fiscal and financial affairs?

A.

The appointment reflects Prime Minister Aso’s thinking. I am aware of the background to the separation of the administrative authorities over fiscal and financial affairs, which was carried out more than 10 years ago. However, the Japanese economy has remained stuck in deflation, while prices of foods, oil and other products have surged around the world and the growth in personal income has stagnated in Japan. In addition, over the past one year or so, the violent turmoil in the securitization product market caused by the subprime mortgage problem in the United States has put Japan in a precarious situation, although its damage is limited compared with other countries because we had already suffered from the bitter experience of the bursting of the economic bubble. So, it is important that we respond to this situation properly and quickly with all of us Japanese working as one. As both fiscal management and financial management are the vital elements of economic management, the Prime Minister has appointed me to serve concurrently in these two posts. I do not think that this will directly lead to the integration of the administrative authorities over fiscal and financial affairs. In any case, I understand that he has appointed me for these posts precisely because we are in a very precarious situation that requires flexible response.

Q.

I would like to ask you about the tax system, which is an issue of strong interest for market players and the financial industry. In early August, Prime Minister Taro Aso, who was then secretary-general of the Liberal Democratic Party, proposed the introduction of tax exemption for small-lot securities investors. The FSA (Financial Services Agency) included the establishment of a tax exempt account scheme similar to the ISA (Individual Savings Account) system of Britain, and tax exemption for dividends received by elderly people in its list of requests for the fiscal 2009 tax revision, which was submitted to the Ministry of Finance at the end of August. These measures are estimated to bring about a national tax reduction of about 140 billion yen, and the market is pinning hopes on them as likely to promote a shift of funds from “savings to investment” and invigorate investment activities. On the other hand, it is stipulated in an agreement on the outline of the tax system revision, reached at the end of last year between the government and the ruling parties, that the reduced tax rate of 10% applicable to stock dividend income should be raised back to the original rate of 20% at the end of 2008. In addition, some tax experts have pointed out that the planned tax exemption measures would make the tax system too complicated and problematic, from the viewpoint of the integrated taxation of financial income. It is said that taxation is politics. As the minister in charge of both the FSA, which makes tax-related requests, and the Ministry of Finance, which makes judgments on the requests, how are you going to deal with the issue of tax revision? My second question is - I will keep this simple - do you think it will be appropriate to combine the fiscal and financial affairs portfolios at the vice ministerial and parliamentary secretary levels?

A.

Although I understand that there is some sort of transitional arrangement, I believe that Mr. Aso’s proposal for the establishment of tax exemption for small-lot securities investors is worth considering. Of course, as the Ministry of Finance and the FSA have their respective areas of jurisdiction, careful negotiations will be necessary. Personally, I think it is worth considering. As for the question of whether to combine the fiscal and financial affairs portfolios at the vice ministerial and parliamentary secretary levels, I should perhaps consult the Prime Minister. I would like to make a decision on this issue after listening to his opinion.

Q.

I would like to ask you about the current state of the global financial markets. While some people expect that stability will be restored to the markets following the U.S. government’s announcement of a scheme to use public funds, the short-term money market remains in a state of turmoil. Firstly, how do you view the current state? Secondly, with what stance - you said earlier that the damage done to Japan’s financial system is not so heavy - are you going to attend a G-7 meeting scheduled for next month?

A.

First, I am not saying that the impact of the subprime mortgage problem, which has been continuing for one year, on Japan’s financial system and real economy is small. I am saying that Japan has learned lessons from its past crisis and received limited damage this time compared with the United States and Europe, so we need to carefully watch future developments. Also, I understand that Japan is providing short-term funds, and it is very important that countries around the world cooperate with one another in this regard. At the Prime Minister’s Office, there was talk about what French President Sarkozy has suggested. Regardless of whether we should immediately go so far as was suggested by him, it is very important that G-7 members, developed countries and other nations that have a certain level of financial scale or influence cooperate with one another, and it is necessary for them to make a very agile response.

Q.

Regarding financial affairs, banks are curbing loans in various regions. Could you tell me what you think of the current financial situation at the regional level, particularly financial institutions’ moves to curb loans to small- and medium-size enterprises (SMEs)?

A.

As I come from Hokkaido, I have first-hand knowledge of the strong helplessness that stems from the problems of increasing costs and financial institutions’ curbs on loans to regional SMEs in particular. Frankly speaking, I feel that money, which should serve as the economic lifeblood or lubricant, is not circulating.

Q.

The United States has announced a plan to purchase troubled assets with public funds, and Mr. Paulson (Treasury Secretary) has urged Japan and Europe to take a similar step. For now, the FSA has indicated that there is no need for Japan to purchase troubled assets with public funds. What is your thinking in this regard? Could you tell me what kind of support, if any, you are considering providing to the U.S. government?

A.

I think that that the United States’ bold plan to purchase troubled assets, although I do not know how much it would cost, may help to stabilize the situation in that country. However, I doubt that Japan needs to take a similar step, since I suppose that the United States faces a bigger problem, with U.S. financial institutions, be they securities companies, insurance companies or regional banks, substantially damaged.

(End)