Provisional translation

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

(Excerpt)

October 31, 2008

[Opening Remarks by Minister Nakagawa]

I did not make any particular statement at today’s cabinet meeting. There was a report regarding statistics such as the effective ratio of job offers to applicants and the unemployment rate.

Today, we will issue a cabinet order regarding the publication of data on short selling positions with a size larger than the prescribed level, which we earlier announced as part of measures to strengthen the financial functions. Although we previously planned to start the publication in mid-November out of consideration for the need for a computer system modification, we will bring forward the start date by one week to November 7, Friday. I do not have any further matters to report to you.

[Questions and Answers]

Q.

Today, the BOJ (Bank of Japan) will hold a Monetary Policy Meeting. There is speculation that there will be the first interest rate cut in seven years and seven months. What is your opinion from the viewpoint of the stock market’s weakness, the economic slowdown and the need for international cooperation?

A.

My opinion about what?

Q.

Although it may be difficult for you to comment on whether or not to reduce interest rates, what is the government hoping for?

A.

While I do not know whether there are differences between how the BOJ views the current economic condition and the global financial situation and how I view them, I hope that we can have a common view, as the government and the BOJ - although the BOJ is independent from the government - work together to manage economic and monetary affairs.

Q.

It is said that unrealized losses are arising on the government’s holding of shares in banks into which public funds have been injected. Under the revised Act for Special Measures for Strengthening Financial Functions, public funds will be injected into banks again. What action does the government plan to take with regard to the loss-laden shares in banks into which public funds were injected in the past?

A.

I think that we will act according to rules. Most major banks have received public funds, although there are only a very few banks that have not yet made repayments, and it is apparently true that unrealized losses are arising due to the recent market condition. Meanwhile, regardless of whether there are unrealized losses, the Act on Special Measures for Strengthening Financial Functions is intended to promote loans to small- and medium-size enterprises. So, I hope that judgment will be made in light of this purpose.

Q.

The U.S. Congress has required the nine banks which have already received public funds to disclose executive remuneration and employee salaries, and I understand that this is intended to keep a watch on excessive pay. Is Japan, which also plans to inject capital into banks under the Act on Special Measures for Strengthening Financial Functions, considering introducing a similar disclosure requirement?

A.

No, it isn’t. If you are suggesting that Japan should do as the United States did, I would like to point out that the scales of remuneration paid in the two countries are quite different. In the United States, executives retire with generous severance pay, even if their companies go into trouble, and find jobs elsewhere. I suppose that the cap on executive pay has been proposed under the U.S. financial stabilization act as concern has grown that such a system is harmful for the United States. In Japan, although management is not necessarily forced to take responsibility, management responsibility may be pursued in some cases, as I pointed out at a committee meeting. If the executives involved are highly paid, they may decide (to take pay cuts) voluntarily. Moreover, you would not remain silent. The U.S. cap on executive remuneration reflects the view that the system that has until now allowed executives to leave troubled companies with severance pay worth billions of yen is inappropriate. In Japan, I expect that financial institutions will act in an appropriate manner with due consideration of their past experiences, and we will conduct financial administration properly.

Q.

Regarding additional measures that you announced at this time, I think that the most important thing is to revitalize the economy and the people’s lives. What benchmark will the government use in order to evaluate the effects of the measures? Also, regarding the controversial issue of a revision of fair-value accounting, are you considering a provisional revision, or are you planning to implement a drastic revision because fair-value accounting is no longer suited to the financial system?

A.

I think that it is necessary to set a proper benchmark for evaluating the revitalization effects of the support measures. We cannot confirm that the measures have achieved their intended results and brought about benefits until we see not only GDP growth but also quantitative evidence of an improvement in the people’s everyday lives, such as increases in disposable income and automobile sales. The state of the economy depends largely on the people’s sentiment as the Prime Minister often says, so a benchmark for measuring improvement in both sentiment and actual state would provide a clearer picture.

As for your second question, there are two suggestions regarding what to do with fair-value accounting. One is that it is necessary to respond to this emergency situation in the way decided recently by the ASBJ (Accounting Standards Board of Japan), and this will, in principle, be done within the scope of the existing rules, although a revision may become necessary. In addition, there is growing global doubt as to the appropriateness of the status quo, as Prime Minister Aso said yesterday. Radical revisions of the existing rules, including those regarding securitization products and fair-value accounting, are necessary for properly evaluating derivatives products and leveraged products in a manner suited to the 21st century era of computerization and globalization.

Q.

Yesterday, the Prime Minister decided to postpone the dissolution of the House of the Representatives, citing the need to address concerns about the people’s everyday lives and the financial crisis as the basis for the decision. What do you think of his decision and how do you intend to support him with the timing of the dissolution in mind?

A.

Frankly speaking, I think that the Japanese people’s everyday lives are gloomy. Given Japan’s traditional belief that hard work is a virtue and brings about benefits, the fact that hard-working people are not rewarded with appropriate benefits could shake the very foundation of Japanese society. Although it is difficult to define a departure or an improvement from such a situation as I said earlier, it has been my belief that tackling this situation should be the top priority. While the Prime Minister agrees with me on this point, he has made various decisions from his own standpoint. However, he reiterated yesterday that implementing measures to improve the people’s everyday lives is the top priority. As for the timing of the dissolution of the House of Representatives, I expect that quite naturally, he will make the decision as he said.

Q.

Regarding an investigation concerning donations from pyramid scheme operators that you promised to conduct at a press conference two weeks ago, could you tell me the investigation results?

A.

The investigation did not find any donation.

Q.

I would like to ask you about the partial introduction of flexibility into the capital adequacy ratio regulation. You said that banks subject to domestic standards will not be required to deduct the value of unrealized losses on securities holdings from their capital amount. As for banks subject to international standards, will you take no action for now, or are you planning to call for international discussion on this matter?

A.

Although I am not positively thinking of doing so, I am not opposed to it, either. To tell the truth, I am looking for a good idea. Although I do not have a specific idea in mind, banks subject to international standards include large regional banks. If their lending stances are affected, it would not be good for the real economy, so we are wracking our brains to find a good idea. However, please do not report that we are making an active move. This matter is under consideration at various levels. I have no clear picture for now.

Q.

Are you taking into consideration the fact that as common global rules are applicable to banks subject to international standards, it is difficult for Japan to act alone?

A.

We are acting on the premise of compliance with the BIS regulation, or Basel rules, and revising them would take time. Therefore, we are looking for an emergency way to enable banks to continue or expand their loans, rather than bail them out, without violating those rules, as the rules may be part of the reason for banks’ curbs on loans. Frankly speaking, I am looking for a good idea.

Q.

Withdrawal of loans by SFCG, a lender for small businesses, has emerged as a social problem. Although this is basically a matter under the jurisdiction of prefectural governments, could you tell me about your view on it?

A.

We will investigate that matter.

Q.

Regarding the BOJ’s monetary policy, while some people think that any support that may be provided by a monetary policy step to the economy would be limited as there is little room for further interest rate cuts, you earlier expressed your hope that the BOJ will work together with the government. Do you think that the BOJ still has a further role to play in overcoming the financial crisis?

A.

I was only speaking in general terms. We are now waiting for a decision to be announced by the BOJ in several hours.

(End)