Provisional translation

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

(Excerpt)

November 7, 2008

[Opening Remarks by Minister Nakagawa]

I did not report any particular matter at today’s cabinet meeting. There was a report on Prime Minister Aso’s telephone conversations with U.S. President-elect Obama that were held this morning. I do not have anything else to talk about regarding the cabinet meeting or the following informal meeting of cabinet ministers.

However, I would like to talk about our decision to introduce flexibility into the regulation on financial institutions’ capital adequacy ratio. Although this is in response to the global financial turmoil, we will do what we can within the limits of the existing rules. Previously, banks subject to domestic standards were required to deduct the amount of valuation losses on their securities holdings, including stocks and bonds, from their Tier 1 capital while being not allowed to add the amount of valuation profits to the capital amount. We have now decided that neither profits nor losses should be reflected in the Tier 1 capital. As for banks subject to international standards, we have decided that valuation profits and losses should be treated within the Basel framework, as is the case in other countries. Namely, neither profits nor losses on holdings of central and local government bonds should be reflected in the tier 1 and 2 capital. Neither profits nor losses are to be counted in the calculation of the capital adequacy ratio. These decisions concern the calculation method of the capital adequacy ratio, and accounting treatment is a different matter. Since we plan to start applying the new rule in the fiscal term ending in December this year as a measure to remain in place until the fiscal term ending in March 2012, we intend to begin the public comment process soon.

The second matter I would like to mention is the reclassification of restructured loans as non-performing loans, an issue which I have already discussed in committee deliberations. There were suggestions that we should ensure that all officials are aware that restructured loans should be allowed to not be reclassified as non-performing loans if the borrowers submit plans that envision a business turnaround within five years or if a 10-year plan is being implemented according to schedule. Therefore, today, I intend to issue a relevant written directive to inspectors and supervisory officials. As I would also like to ensure that all financial institutions are aware of this, I intend to request financial institutions to provide loans to SMEs in light of their actual state and treat loans to SMEs in the way I mentioned.

[Questions and Answers]

Q.

There are only several days to go before the financial summit, which will be held on November 15. What will the Japanese government call for at the summit and what outcome is it hoping for from the meeting?

A.

As for what outcome we are hoping for, it is very important that the participants first confirm the need for cooperation, since unlike the G-7, which is a group of developed countries, the G-20 is a forum that brings together representatives from around the world. What outcome to aim for will be discussed at the working level, at the ministerial level and the heads of government level. In any case, we hope to achieve success based on international cooperation by all means. For its part, Japan will call for the promotion of the G-7 action plan. Furthermore, the Prime Minister has expressed Japan’s intention to actively tackle the issues, such as the supervision of securitization products and what to do with fair-value accounting, that were mentioned in a package of everyday-life-support measures announced by him on October 30. So, we will call for discussions on international rules, attach importance to and place our hopes on the role of international organizations such as the IMF and provide support for them. Over the past two days, the market condition deteriorated. Yesterday in particular, the U.K. market performed poorly despite coordinated interest rate cuts, including a 1.5 percentage point cut in the U.K., and other countries’ markets also fared poorly. Also, as the yen showed some volatility in foreign exchange trading, we will continue watching market developments until the weekend. Japan, as well as other countries, intends to actively do what it can before the financial summit.

Q.

There have been media reports that a meeting of Finance Ministers will be held before the financial summit. Has the United States notified Japan of such a meeting?

A.

Finance Ministers have been summoned to Washington, so I intend to go there. However, it has not been decided whether a meeting of G-20 Finance Ministers will be held.

Q.

Following the election of Senator Obama as U.S. president, he is set to assemble a new team, including a new Treasury Secretary. What do you hope the United States will do?

A.

We will just wait and see who will be appointed in the United States. In any case, I hope that the United States will quickly and boldly deal with the financial and economic crisis that erupted in its own markets, and I expect that Japan can provide support based on its own experiences. So we intend to ensure close communications with the United States and provide support where possible. I would also like to maintain close communications with people who will become cabinet members after Senator Obama takes office.

Q.

Regarding the relaxation of the rules concerning the capital adequacy ratio, regional banks may find it too complicated to do accounting. How about the impact of stocks...

A.

I will repeat what I said for clarification. I said that banks subject to domestic standards are allowed to not count losses. As for banks subject to international standards, precisely speaking, they are allowed to not count losses while counting profits. In any case, this rule change is an emergency measure to cope with the rapid expansion of losses, and we have no intention of changing our international commitments or laws with regard to either type of financial institution, as I said at the beginning of this press conference. I hope that financial institutions will take advantage of the new rules in a manner that would benefit them.

Q.

Could you tell me again until when this provisional measure will remain in effect?

A.

Until the fiscal term ending in March 2012. We will introduce this in time for the fiscal term ending in December.

(End)