Provisional translation

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

(Excerpt)

October 27, 2008

[Opening Remarks by Minister Nakagawa]

Earlier today, the Prime Minister summoned me and expressed strong concern about recent volatile stock price movements. As these could affect the real economy and the financial system, he instructed me and the policy planners of the ruling parties - the Liberal Democratic Party and the New Komeito - to take steps to stabilize the market and ensure the smooth exercise of financial functions. Minister (of Economy, Trade and Industry) Yosano and the Chief Cabinet Secretary (Kawamura) also attended the meeting.

Specifically, he instructed us to rebuild public confidence in the government and the market by issuing the instructions that I will now explain to you. This is necessary not only for Japan’s sake. As this is very important, he told us to do what we can boldly and as soon as possible. I will explain what we are able to do from today, or later.

First, the Prime Minister instructed me to tighten restrictions on short selling of stocks in order to stabilize the stock market, and this will be decided at a cabinet meeting on Friday. We will tighten restrictions as soon as possible, by the first trading day of November - that is, just after the three-day weekend starting on November 1. In addition, we would like to quickly start allowing the flexible application of restrictions regarding banks’ stockholdings.

Secondly, regarding the strengthening of financial functions, the Prime Minister gave me instructions concerning a partial introduction of flexibility into the capital adequacy ratio regulation. “Partial” introduction means that flexibility will be applied to banks subject to domestic capital adequacy standards, as opposed to those subject to international standards. Next, he gave instructions concerning support for efforts to ensure appropriate accounting of financial instruments, an issue being debated by the Japanese Institute of Certified Public Accountants. I understand that a public comment regarding this will be issued soon. Thirdly, he instructed me to consider expanding the scope of government capital participation based on the Act on Special Measures for Strengthening Financial Functions. This involves legislation, so we will ask the Diet to enact a relevant bill as soon as possible.

Another planned measure is facilitating stock purchases by employees’ stock ownership schemes, which has been proposed by the Prime Minister. We have requested the Japan Securities Dealers Association to consider this measure, so we expect that it will be able to be implemented immediately.

These are the instructions the Prime Minister gave me. As for the ruling parties - and I think that ruling party officials will give you explanations - the Prime Minister instructed them to consider how to use the Banks’ Shareholdings Purchase Corporation, apparently referring to stock purchases by this corporation. In addition, he instructed them to consider extending the effective period of the reduced tax rate for securities investment, along with the possible enhancement of tax breaks. He also gave instructions regarding a plan to expand the securities market by providing preferential treatment to small-lot investors.

These are the instructions issued by the Prime Minister. As I told you, he instructed us to start with what we are able to do immediately, and the measures I have explained to you are the ones that we can start immediately.

There is another important matter I would like to mention. This morning, I expressed my views on the foreign exchange market, regarding which cooperation with our G-7 partners is important. We are issuing a joint statement by the G-7 Finance Ministers and central bank governors, which I will read aloud to you now.

“We reaffirm our shared interest in a strong and stable international financial system. We are concerned about the recent excessive volatility in the exchange rate of the yen and its possible adverse implications for economic and financial stability. We continue to monitor markets closely, and cooperate as appropriate.” This is the statement issued by the G-7 today.

I do not have any further statements to make.

[Questions and Answers]

Q.

Are the measures decided today separate from the economic package that the government plans to work out by the end of the month?

A.

As I said yesterday, these measures are part of a second set of emergency measures. With regard to the timing of implementation, as I have said over and over again, we will quickly do what we can, regardless of the timing of that package.

Q.

Have you explained these measures to the authorities of the United States and other countries? Have they made any response?

A.

Of course, we will notify the G-7 countries of these measures now that we have announced them.

Q.

Is there any particular division of roles between you and the ruling parties?

A.

I think that the Prime Minister wants the ruling parties to hold intensive discussions on the tax system and produce a good proposal. For my part, I was instructed to do what I can in my capacity as Minister of Finance and Minister for Financial Services as soon as possible, although there will be things that I cannot do unless the bill for revision of the Act on Special Measures for Strengthening Financial Functions is enacted.

Q.

While the government has come up with a variety of proposals, some people will probably argue that excessive regulation would distort the market. What are your views in this regard?

A.

Are you talking about the restrictions on short selling of stocks?

Q.

The restrictions on purchases of shares held by banks and the use of the Banks’ Shareholdings Purchase Corporation appear to be inconsistent with each other.

A.

As these are emergency economic measures, some of them may seem to strengthen regulation while others introduce deregulation. I would like you to understand that the Prime Minister has instructed us to implement these measures as a comprehensive package intended to achieve our goal.

Q.

Although you announced these measures around noon, I think that you should have made the announcement before the market opened. I have the impression that you are acting too slowly. What do you say to this?

A.

I do not believe that I am acting too slowly. I made the announcement after receiving instructions from the Prime Minister. If you are to insist that we are acting too slowly, you should convey your opinion to the Prime Minister.

Q.

I would like to ask you about the injection of public funds under the Act on Special Measures for Strengthening Financial Functions. Yesterday, Minister Yosano said in a television program that the desirable amount of funds earmarked for the injection would be around 10 trillion yen. Do you have any proposal of your own regarding this? Also, could you tell me whether the G-7 has issued a statement regarding the dollar or the euro, too?

A.

As for the second question about the G-7 statement, I already read...

Q.

Did the statement mention only the yen?

A.

The statement issued at this time did not contain references to any specific currencies other than the yen. As for the capital injection, I do not have any specific figure in mind for now. Although I think that we should secure a sufficient amount of funds based on a close examination or estimate, I have neither decided nor considered any specific figure.

Q.

Although you have been saying until now that the state of Japan’s financial institutions is sound, I think that following the government’s announcement of a large-scale package like this, doubts will arise as to whether those institutions really have no problems, with stock prices slumping at this level. What do you think?

A.

I still believe that Japan’s financial system is sound compared with the systems of the United States and Europe. However, we took quick action today in order to address the kind of concerns of which you have just spoken. We acted so as to prevent the feared situation from being realized.

Q.

Although you expressed concern about the rapid appreciation of the yen this morning, the market did not react much. Do you think that the release of that G-7 statement is a sufficient measure?

A.

Judgment as to whether or not there was a reaction depends on the point of view. I expressed concern about rapid movements. In morning trading, the exchange rate remained almost flat, so what I feared did not happen, at least during morning trading.

Q.

Do you think that any additional measures are necessary?

A.

We will make a judgment after examining the market situation. While we have not yet decided what to do, we will take quick action after examining the market situation.

Q.

There have been media reports about a series of moves by megabanks to strengthen their capital base. Do you have information regarding such moves? Also, could you tell me about the possibility that a megabank will apply for capital injection under the Act on Special Measures for Strengthening Financial Functions?

A.

Of the three mega banks that I suppose you are talking about, I know that one is moving to strengthen its capital base. If this megabank strengthens its capital base, the move will reinforce its financial foundations and raise its lending capacity, so I would like to welcome this move.

Q.

Can we anticipate the possibility that a megabank will apply for capital injection under the Act on Special Measures for Strengthening Financial Functions?

A.

The purpose of the Act on Special Measures for Strengthening Financial Functions is to strengthen the foundations of financial institutions (so as to provide loans) to small and medium-size enterprises (SMEs). In light of the purpose of this act, and given that megabanks also provide loans to local SMEs, I think that a variety of opinions will probably be expressed during the deliberations.

Q.

Did the Prime Minister express concern about foreign exchange rates or issue instructions for the implementation of any measures?

A.

As I said yesterday, he said that he was watching the situation with grave concern, as volatile movements could affect Japan’s real economy and financial system. However, he did not issue any specific instructions.

Q.

Was the G-7 statement issued under Japan’s initiative?

A.

That is correct.

Q.

When you said earlier that additional measures would be taken quickly, were you thinking of intervention in the foreign exchange market?

A.

Are you speaking of the G-7 statement?

Q.

No, I am not. You said that you would like to take additional measures after examining the market situation...

A.

We will have to take additional measures if necessary. We intend to decide what measures to take after examining the market movements, and then take action quickly. We have not yet decided what to do.

Q.

I understand that the Prime Minister gave instructions to the ruling parties with regard to the Banks’ Shareholdings Purchase Corporation’s resumption of purchases of stocks held by banks. Is the government also planning to ask the Bank of Japan (BOJ) to resume stock purchases?

A.

Although that is up to the BOJ to decide, the government would like to work together with the BOJ to deal with this situation. I believe that the BOJ agrees with us on this point, so I hope that it will take a variety of measures.

Q.

The BOJ is scheduled to hold a Monetary Policy Meeting on Friday. While some people say that the BOJ should consider reducing interest rates, what are your hopes regarding the bank’s interest rate policy, or what do you think it should do?

A.

I will make my mind up by Friday’s meeting.

(End)