Provisional translation

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

(Excerpt)

December 12, 2008

[Opening Remarks by Minister Nakagawa]

I am holding this press conference to explain to you the instruction I received from the Prime Minister in relation to emergency economic measures he announced earlier today. I understand that you have received a copy of my statement concerning the bill for revising the Act on Special Measures for Strengthening Financial Functions, which was enacted today.

First, although I would like to refrain from directly commenting on today’s movements of the stock and exchange markets, it is true that there have been rapid movements recently. I have been watching the situation, particularly the situation of the exchange market, with grave concern since the rapid movements began. I am also watching the situation in Europe. Currently, the dollar is trading above 90 yen. Rapid market movements are not favorable because they have a huge impact on the economy.

As for the emergency measures to defend the people's daily lives, the employment situation has become very grave ahead of the end of the year. In addition, the condition of the short-term money market has become very severe in line with the tight international financial situation. Needless to say, the short-term money market refers to the inter-bank market and the CP (commercial paper) market. The Ministry of Finance is concerned about this because a sharp deterioration of the environment for the issuance of securities would affect the year-end fund-raising situation of even medium-size and major companies. I have been instructed to prepare to take every possible measure regarding the current employment and financial situations, namely measures to secure employment and protect the people’s daily lives, as the top priority urgent matters. The Prime Minister gave his instructions earlier today, including a request for the BOJ (Bank of Japan).

We plan to treat the second supplementary budget and the fiscal 2009 budget as a unified 14-month budget. We intend to first submit the second supplementary budget, including the emergency measures to defend the people’s lives, which is worth about 6 trillion yen, as soon as possible for deliberation and enactment in the Diet. Meanwhile, the tax reform plan, which will be formally decided by the ruling parties later today, includes a tax cut worth about 1.1 trillion yen. In addition, the emergency measures announced by the Prime Minister include employment-related measures worth about one trillion yen and tax grants to local governments also worth about one trillion yen, which can be used flexibly at their discretion. Part of these funds are covered by budget expenditures. Therefore, some of these measures will be implemented after the turn of the year. However, as there are people who are struggling at this time, such as those who have lost jobs, those who have seen their informal employment contracts cancelled and those who have lost residences. Therefore, to support such people, we intend to implement housing-related measures and life-assistance measures immediately.

Regarding the financial situation, following today’s enactment of the revised Act on Special Measures for Strengthening Financial Functions, we would like to put the new act into force as soon as possible. We plan to put it into force next week although the deadline for the enforcement is two months from the enactment, according to the text of the act. Furthermore, the quota for funds for capital injection will be raised by 10 trillion yen from the current 2 trillion yen in the fiscal 2008 budget to 12 trillion yen. In addition, although we have already initiated crisis management measures to facilitate fund-raising, we have concluded that the purchase of CP will be necessary, so, as the Prime Minister explained earlier, we intend to allocate 3 trillion yen for the purchase of CP in the second supplementary budget and another 3 trillion yen in the initial budget for fiscal 2009, compared with the 66 billion yen or so currently allocated for that purpose. Also, we have started procedures for the purchase of CP as a measure to secure liquidity toward the end of the year. We hope that the designated financial institutions will take appropriate action in this respect. We also hope that the BOJ will take additional measures to secure sufficient liquidity amid the severe year-end fund-raising situation for companies. Next, regarding measures to facilitate fund-raising at the end of the calendar and fiscal years, as the Prime Minister said earlier, 4 trillion of the 6-trillion-yen quota for credit guarantee still remains unused, so I strongly hope that these funds will be used. During the few hours when I attended today’s plenary Diet session, some lawmakers came to me and talked about a credit crunch for SMEs in their constituencies. I will instruct the FSA (Financial Services Agency) to convene financial industry representatives for something like a briefing session - I would like to attend the session if possible - as soon as possible to remind them of the importance of the credit guarantee scheme and of the need to provide loans properly. Also, I intend to convene a meeting with the Directors-General of Local Finance Bureaus next Monday and give them an instruction regarding measures based on the revised Act on Special Measures for Strengthening Financial Functions and year-end support measures.

As for the medium-term program (for the reform of the social security and tax systems), the Prime Minister instructed the cabinet members to start preparatory work for implementing a drastic reform of the tax system, including the consumption tax, in 2011 within the framework of the ruling party’s tax reform plan. I intend to support the work on the medium-term program, which will be done under Minister (of Economy, Trade and Industry) Yosano. As securing a stable revenue source for social security is a particularly important task, I will make further efforts in this respect. I believe that the plan to increase the government’s share of the burden of contributions to the basic pension plan on a permanent basis is conditioned on the securing of a stable revenue source. We are now trying to secure funds necessary for the initial two-year period.

As I said earlier, my statement, as well as a document prepared by ministerial staff, refers to implementation of necessary measures “without any delay.” I have never before seen such strong wording as “without any delay” used in a government document. I hope that the revised Act on Special Measures for Strengthening Financial Functions will be put into force and applications (for capital injection) will be made without any delay to facilitate the provision of funds by financial institutions.

I do not have any further statements to make.

[Questions and Answers]

Q.

First, I would like to ask you about the emergency measures to defend people’s daily lives. I understand that the overall value of these measures is 23 trillion yen. How much will the actual spending be worth?

A.

As for life-assistance measures and employment-related measures to be implemented within this year, for example, we will immediately provide low-interest loans to some people - people who need to pay deposits to rent residences by the end of this year, for example - and provide subsidies to others - to people who have rented company-owned residences at low rates or for free, when they pay settlement money upon moving out after a certain period. Thus, there are housing-related funds immediately needed and funds not immediately needed. Funds immediately needed will be covered by the first supplementary budget.

Funds for the purchase of CP before the end of the year will be raised by the Japan Finance Corporation. These funds will be raised with the backing of government guarantee and provided to the designated financial institutions, such as the Development Bank of Japan (DBJ) - DBJ President Murofushi visited me earlier today - for the purchase of CP.

As fund-raising by the Japan Finance Corporation involves credit guarantee, which involves budget funds, it will be covered by the second supplementary budget. Therefore, I hope that the designated financial institutions will secure funds on their own, and that the government will provide support for this.

Q.

What you said apparently means that you have yet to decide whether to include those measures in the supplementary budget or the initial budget for fiscal 2009. How much of the 23-trillion-yen value of the measures represents actual spending?

A.

The necessary fiscal funds include 10 trillion yen for such items as employment-related and life assistance measures, tax grants to local governments, reserves for additional emergency measures and tax cuts as well as life-assistance measures worth 6 trillion yen, which were announced on October 30. As for financial measures, 10 trillion yen is allocated as additional funds for capital injection under the revised Act on Special Measures for Strengthening Financial Functions, and 3 trillion yen is allocated for the purchase of CP. All of these figures add up to 23 trillion yen.

Q.

What I would like to know is how much of the overall project value, 23 trillion yen, represents actual national government expenditures.

A.

(Budget Bureau Director-General Tango) I would like to provide a supplementary explanation. The 10 trillion yen allocated for the fiscal measures are basically fiscal funds paid out of the national budget. As for specific measures, although year-end housing-related measures and life assistance measures, which Minister Nakagawa mentioned earlier, are partly financed by existing funds, additional funds totaling around 150 billion yen will be included in the second supplementary budget. Also, as written here, slightly more than 600 billion yen will be allocated to cover a cut in the employment insurance premium, which will be implemented in fiscal 2009. In addition, around 200 billion yen will be allocated from a special account in fiscal 2009. For additional tax grants to local governments for the purpose of creating jobs, which is the second item on the paper distributed to you, one trillion yen will be allocated in fiscal 2009. Also, one trillion yen will be allocated as reserves for emergency economic measures, the third item, in fiscal 2009. Furthermore, tax cuts worth around 1.1 trillion yen, including at the national and local levels, will be implemented. The 6 trillion yen allocated for the life-assistance measures that were announced on October 30 are covered by fiscal funds, including national and local government funds.

Q.

My next question concerns the one trillion yen allocated as reserves for emergency economic measures, which you said you want to include in the initial budget for fiscal 2009. Will the reserves be outside or within the scope of the budget ceiling?

A.

As a rule, the amount of reserves should be the same as in the previous year. We intend to maintain fiscal discipline. However, to prepare for what could happen, as the Prime Minister said earlier - we are now facing a once-in-a-century financial crisis and Japan has been impacted by a series of global events - we are allocating one trillion yen in this way for the first time, compared with 500 billion yen, which was the largest amount of reserves allocated in the past, as the Prime Minister pointed out. This is a special step taken on condition that we maintain fiscal discipline.

Q.

Regarding the fund source, the Prime Minister said the government would not rely on deficit-covering bonds when he announced life-assistance measures in October. How do you plan to finance the latest emergency measures? Will you consider issuing deficit-covering bonds?

A.

As the Prime Minister said earlier - did you watch his press conference? He said the government will not rely on deficit-covering bonds as the fund source of either the emergency economic measures or the life-assistance measures. We are going to, if I may say so, scrape necessary funds from every possible source, including the special account for employment insurance and the special account for fiscal loan and investment programs.

Q.

I would like to ask you again about the relation between the one-trillion-yen reserves and the budget ceiling. Under the rules concerning the ceiling, reserves are treated as a mandatory expenditure item, so at the maximum, the same amount as in the previous year may be requested. I understand that factors like this were taken into consideration when the budget ceiling of 47.8 trillion yen was decided. I suppose that as a result of the inclusion of the one-trillion-yen reserves, the budget amount will inevitably exceed the ceiling by one trillion yen. Does this mean that the ceiling will be changed?

A.

As you said, it is a cabinet agreement that the amount of reserves should be the same as in the previous year. Therefore, we know that the allocation of budget funds is bound by the ceiling. While that is a precondition, we do not know what could happen in employment and other areas, as the Prime Minister said. I would like you to understand that we are taking this step to deal with problems such as the severe employment situation as a series of unfavorable data regarding Japan’s economic condition are coming out in this unprecedented situation.

Q.

I am sorry for asking you about the same matter again, but there is an unclear point regarding the basic policy for the fiscal 2009 budget, which was decided by the cabinet recently. While I understand that the basic policy stipulates that the ceiling should be maintained, it is doubtful whether the ceiling would be maintained if the one-trillion-yen reserves are added to the budget. How would you explain this?

A.

As I told you, it is a cabinet agreement that the amount of reserves should be the same as in the previous year. In addition to regular reserves set aside each year, we will allocate one trillion yen as reserves for emergency economic measures. Although I understand what you mean, we are allocating these reserves - which may not actually be used - based on a decision made by the Prime Minister in this situation of uncertainty.

Q.

Am I correct in understanding that you may allow the ceiling to be breached? As various reserve funds are necessary, the government has no option but to take an extraordinary step. Is that what you mean?

A.

As funds may be needed for various measures, we are allocating these reserves. On the other hand, the cabinet agreement I mentioned remains effective. I would give you the same reply no matter how many times you ask this question.

Q.

Could you explain the reason for expanding the quota for capital injection under the revised Act on Special Measures for Strengthening Financial Functions to 12 trillion yen? Also, is it necessary to expand the quota?

A.

We will approve capital injection if applicants are judged to be eligible as a result of the screening of their business plans by a panel of third-party experts, and I hope that they will use the funds as the source of loans for the local economy and to small and medium-size enterprises (SMEs). Thus, these funds are not targeted at financial institutions but at local SMEs that need funds. In this sense, although we cannot force them to use public funds injected as capital, I would appreciate it if they actively use the funds. There are three reasons for expanding the quota to 12 trillion yen, such as that the amount of the capital injection made after the bursting of the economic bubble, whose purpose was quite different from the purpose of the current capital injection scheme, was around 12 trillion yen. Would you like to know the reasons?

Q.

Please explain what you think is the most important reason.

A.

The public fund capital injection scheme that was implemented in the 1990s through the early 2000s was intended to support financial institutions, and 12.4 trillion yen was used for it. Also, 12 trillion yen is an estimated amount of funds that will become necessary if half of Japanese financial institutions wish to increase their Tier 1 core capital amount by 50%. If the risk asset ratio is to be increased by 4 percentage points, 11 trillion yen would be necessary on the assumption of the risk asset amount of 550 trillion yen. To tell the truth, there are a variety of opinions, with some people arguing that the smaller the quota for capital injection, the better, while others insist that we should make an abundant amount of funds available for active capital injection. In any case, I hope that the scheme will be actively used.

Q.

How much do you expect this scheme will be used? What is your estimate of the amount of capital to be requested for injection?

A.

I strongly hope that this will be actively used. Of course, capital injection is conditioned on screening. At today’s plenary Diet session, opposition lawmakers were speaking apparently on the assumption that capital will be injected into Shinginko Tokyo. This is an issue that concerns a decision to be made as a result of our screening, which will be conducted if Shinginko Tokyo applies for capital injection. In any case, capital injection involves procedures such as application and screening. I hope that financial institutions will actively use the capital injection scheme and provide necessary loans while keeping the capital adequacy ratio at an appropriate level.

Q.

Your statement included a reference to the review of the capital adequacy ratio regulation in light of the actual situation. Does this mean that the regulation will be relaxed further following the relaxation announced recently?

A.

Which part of the statement are you talking about?

Q.

The latter half of the third paragraph. It reads, “In addition, regarding the regulation on the capital adequacy ratios of financial institutions, the treatment of loans guaranteed by credit guarantee associations will be reviewed.”

A.

Although we are not considering doing anything new for now, we would like to ensure that the emergency guarantee scheme will work successfully. There is a difference in the risk level between ordinary loans and loans covered by the emergency guarantee scheme.

A.

(Supervisory Bureau Director-General Mikuniya) Currently, the risk weight of an SME loan of less than 100 million yen is 75%. However, if the amount exceeds 100 million yen, the risk weight rises to 100% even if some portion of the loan is covered by credit guarantee. To make effective use of the new credit guarantee system, the part of the loan covered by credit guarantee and the uncovered part will be treated separately. The risk weight of 75% will be applied if the uncovered portion is 100 million yen or less, while the risk weight of 100% will be applied if the uncovered portion is larger than 100 million yen. This is a revision that suits the actual situation. FSA staff will explain details later.

A.

In a committee meeting yesterday, it was pointed out that a staff member at a certain bank counter was not aware of the establishment of the emergency credit guarantee scheme. The FSA has also received a report about a similar case of ignorance. It is surprising that professionals are not aware of the establishment of the emergency credit guarantee scheme. However, as the situation is such, we intend to ensure that matters like those Mr. Mikuniya explained will be fully communicated to all relevant parties.

A.

(Supervisory Bureau Director-General Mikuniya) We will take appropriate measures that suit the actual situation.

(End)