Press Conference by Shozaburo Jimi, Minister for Financial Services

(Excerpt)

(Friday, August 27, 2010, from 12:53 p.m. to 1:34 p.m.)

[Opening Remarks by Minister Jimi]

It has been a while since the last press conference. With the advent of a new administration, we are installing what is called a “Minister's opinion box” for posting opinions addressed to the Minister. Bearing in mind that the government is for the people, it is extremely important to meet the people's expectations for financial regulation and supervision with precision. In this context, we will first install an opinion box exclusively for staff members on the second floor of the Financial Service Agency (FSA) building. Staff members are encouraged to post their opinions on any kind of policy, even non-financial ones. We are also seeking opinions broadly from individuals outside the FSA regarding financial regulation and supervision in general, via telephone, fax, email and postal mail.

Opinions posted in the Minister's opinion box will be delivered to me, regardless of whether they have been received via the exclusive box, telephone, fax, email, postal mail or the administrative office, so we would like everyone-not just members of the FSA but also members of the public-to actively post their opinions.

From August 16 to 21, I went on a business trip to the United States. As already reported in brief at the informal gathering with Cabinet ministers today, I visited Washington D.C. and New York, where I met with Federal Reserve Board (FRB) Chairman Ben Bernanke, Treasury Under Secretary Lael Brainard and the President's economic advisor Paul Volcker, just to name a few. Paul Volcker, who served as FRB Chairman during the 1970s, is the economic advisor to President Barack Obama who created the so-called “Volcker Rule” in the recent financial reform legislation. In the United States, financial deregulation and economic and financial globalization had been a massive trend over the past two or three decades, basically, since the Great Depression in 1929. It was against such a backdrop in the United States that the first radical financial reform legislation in 80 years was established very recently. I asked others during my stay in the United States as to whether it amounted to a change comparable to the Copernican Revolution, and some Americans responded that it was indeed that kind of change. The major global financial trend is changing in the United States, the leading country of finance. I gained firsthand knowledge of this, having met with leading figures of the United States as the Minister for Financial Services and listened to their various opinions.

Also, an agreement on Basel III is to be shaped in the upcoming Seoul Summit in November 2010. In the lead up to the Summit, the question of what to do with the quantitative and qualitative capital enhancement targets of international banks has become a major topic of discussion on an international scale. Substantial progress is being made to reach an agreement on this topic. In regards to liquidity regulations on, for example, how much leverage is allowed, nations are close to agreeing on the rough outline, although no consensus has been reached yet on the exact figures. The financial reform legislation, that is, the Dodd-Frank Act, was established in the United States in such a key moment. The detailed provisions and department and government ordinances are to be drafted in the days ahead. I believe I have been able to exchange opinions candidly on their macroeconomic impact and their effects on the financial intermediary functions, as well as the financial and economic climate.

As you know, just because a financial institution has more capital does not mean it is better. In Japan, many credit crunch and credit withdrawal cases arose due to the capital adequacy ratio issue a decade ago, as you and I experienced. I was a Diet member of the ruling party at the time and struggled a great deal with it. At the same time, however, financial stability is also extremely important. In macroeconomics, or to stimulate the economy and attain a sustainable economy, it is necessary to have stable and sound financial institutions, as you are well aware. The question of how global harmonization in this field can be achieved has now become a critical issue at a level that has world historical significance, and is being discussed extensively at G8 and G20. My visit to the United States at such a significant point in time, or in my words, at the biggest juncture of the 21st century, was highly informative.

In addition, I have obtained approval at today's cabinet meeting to go on a business trip to China and Hong Kong starting today. During this trip, in Beijing, I will take part in the third high-level economic talks between Japan and China as one of the economic ministers. As for Hong Kong, I have had a long relationship with Hong Kong since I visited there two decades ago as Parliamentary Vice-Minister for International Trade and Industry. As you may be aware, Asia's financial center is either Tokyo, Hong Kong or Singapore. Following my trip to the United States the other day, I will visit Hong Kong, one of the financial hubs in Asia, where I hope to exchange various opinions with the people there and gain a wide range of knowledge.

[Questions & Answers]

Q.

During your trip to China over the weekend that you just mentioned, your schedule includes high-level economic talks between Japan and China, followed by bilateral discussions with an official of China's financial authority. What will you be focusing on in the financial sector during this trip to China?

A.

My focus will be on the post-global-financial-crisis G8 and G20 including China, India and Brazil, as mentioned earlier. The reality is that G8 alone can no longer cover the global economy. There is also Basel III. Populous countries undergoing extremely rapid development such as China, India and Brazil have joined G20 with significant power. China, being Japan's neighbor, has been the Japan's biggest import and export partner in the past three years. For China, Japan is the third biggest export destination, behind the United States and EU, ranked first and second, respectively, so Japan and China are in a strategic, mutually beneficial relationship. In that sense, especially when it comes to the issue of finance, the financial sector is extremely globalized; the impact of the financial sector on the global economy is instant. China is the leading holder of U.S. Treasury securities, followed by Japan. With some 60 trillion yen of public spending, China is booming, as you may be well aware, although some people have suggested that a bubble may be forming. As measures are being taken under the initiative of the Governor of the People's Bank of China, Premier Wen Jiabao and the Deputy Prime Minister of the State Council in charge of economy, I am greatly looking forward to meeting the financial authority's officials in charge of banking, securities and insurance supervision as a matter of course.

In Hong Kong, I will also meet the Chief Executive of the Hong Kong Monetary Authority, which is equivalent to Japan's FSA and the Bank of Japan (BOJ) combined in terms of its operations. As with Tokyo seeking to become a financial center, Hong Kong has truly become a financial center nowadays, so I hope to feel the trends of the times, obtain information first-hand and engage in lively discussions.

Q.

On the topic of the appreciating yen and falling stock prices, there has been substantial volatility in foreign exchange and stock markets lately. Please share your views on this matter with us, as well as anything the FSA may have in mind as part of the economic policies.

A.

Having observed the recent developments in financial and capital markets, I am fully aware of the large fluctuations in foreign exchange markets and stock markets. The FSA will continue to closely monitor the developments in the markets including foreign exchange and stock markets, and will make efforts including fact-finding of corporate finance from the viewpoint of determining whether financial institutions' crucial financial intermediation functions are being demonstrated sufficiently.

In fact, this was a hot topic at today's informal gathering with Cabinet ministers, where various ministers expressed their opinions candidly, and Prime Minister Naoto Kan mentioned that he would make some kind of statement on this matter upon his visit to Ohta Ward or somewhere else this afternoon. I believe he will make a statement as Prime Minister as a matter of course.

Q.

Resona Holdings, Inc. announced yesterday that it would repay public funds under the Deposit Insurance Act. Firstly, your thoughts on this will be appreciated.

Secondly, some banks that have been recapitalized with public funds are not making progress in paying them back; for example, Shinsei Bank is one of the banks with no prospects of repaying the public funds in full even though a decade has passed since being recapitalized with public funds. Although this is primarily up to the bank, there are concerns that it may make no progress in making repayments even if the same supervisory approach is taken as before. Your thoughts on these matters will be appreciated.

A.

Yesterday, the Chairman and the President of Resona Holdings, Inc. paid a visit and offered to buy back preferred shares underwritten under the Deposit Insurance Act worth 400 billion yen in face value, and the Deposit Insurance Corporation of Japan (DICJ) filed an application with the FSA to process this. I have been informed that the repayment amount is 425.7 billion yen, and the gain on the disposal of the preferred shares is 25.7 billion yen.

As you may already know, DICJ's application to process this buyback was examined in light of the so-called “Three Principles” of DICJ, namely, ensuring the soundness of the financial institution's management, avoiding a public burden, and stabilizing the financial system, and was consequently approved on the grounds that there are no problems in any of the aspects of management soundness, avoidance of public burden, and financial system stability.

The FSA appreciates Resona Holdings' decision as a reflection of its stance on working to repay public funds while maintaining its management soundness based on its capital policies.

The other question regarding Shinsei Bank basically relates to the management of an individual bank; I would like to refrain from commenting on the management of any individual financial institution on behalf of the FSA as a public institution and a government agency. Generally speaking, however, we intend to conduct examinations in light of the so-called “Three Principles” of DICJ, that is, the soundness of the financial institution's management, avoidance of a public burden, and stability of the financial system, as mentioned earlier. Our policy is to accept the repayment of public funds based on these Three Principles, unless there are any particular problems.

Q.

I am Sonoda from Hokenmainichi Shimbun.

During your visit to China, what will be the key topics of discussion with the China Insurance Regulatory Commission?

A.

In regard to meeting with officials of the supervisory authority of insurance in China, financial regulation and supervision encompasses banking, securities, and insurance as in the case of the FSA, as you know, and insurance is a significant sector in the financial field, as I have talked about insurance on various occasions in the United States. In that sense, while I do not have an exceptionally strong awareness of problems, insurance is a new market in China at present. For example, efforts to transform health insurance-by this I mean public health insurance-into universal health insurance began about two years ago. In this context, I have heard that there is a great deal of interest in insurance among the people, so I look forward to discussing insurance with them.

Simultaneously, how should insurance be regulated and supervised from now on? I believe insurance in China is not as advanced as in Japan yet. But then again, Japan's insurance industry has experienced falling stock prices and interest rates over the past decade and suffered a long period of winter-like hardship: the insurance sector, where they have something called “expense profits”, “interest gain” and “mortality profits”, the interest gain was so squeezed that at one point, negative carry was more than 1 trillion yen. In the United States, the federal government will be establishing a division in charge of insurance for the first time within the federal government organization under the financial reform legislation. As you know, basic supervision of insurance in the United States is conducted on a state-by-state basis. Despite the fact that AIU-the world's biggest private insurance company-was effectively nationalized in the United States, the insurance industry has been a bit of a blind spot in that any attempts in the past to negotiate with the central government often resulted in being told that it was a matter for the state government. The United States is a federal republic comprised of states, so in that sense, insurance varies from state to state in tax and other aspects.

With these things in mind, I believe it is necessary for financial regulation and supervision in general to keep a close eye on insurance from now on. In this regard, I intend to learn about the state of insurance in the Chinese market, which is expanding dramatically nowadays.

Q.

Additional economic policies are due to be announced this month at the earliest. Does the FSA have any policies in mind, such as measures to provide financial assistance to small and medium-sized enterprises (SMEs)?

A.

I assume you are asking what FSA's economic policies would consist of. The FSA will continue to closely monitor the developments in markets including foreign exchange and stock markets, and respond properly according to the economic and financial climate from the viewpoint of sufficiently demonstrating financial intermediation functions. In fact, at today's informal gathering with Cabinet ministers, financial measures for SMEs were brought up by the Minister of State for Economic and Fiscal Policy, if I am not mistaken. As you may already know, the Act concerning Temporary Measures to Facilitate Financing for SMEs, etc. was established based on the agreement among the three ruling parties when Shizuka Kamei served as Minister for Financial Services. I am paying very close attention to the Act, which covers a period of two years including two year ends and two fiscal year ends; I believe this is groundbreaking legislation in Japan. The perspectives of megabanks seems to have somewhat changed, as I have been told by a staff member at one of the local financial bureaus that a megabank started participating in conventions of shinkin banks and credit unions since the establishment of the Act for the first time ever. It may be common knowledge, but 99.7% of companies in Japan are SMEs, and 42 million people work for SMEs. SMEs are rather agile, flexible and extremely precious. As I may have mentioned previously, in my hometown Kitakyushu City, which is a city dominated by SMEs, I have been told by businesspeople that their companies have actually managed to survive due to the establishment of the Act. Then again, I have also heard cries from them that what they want now is work, so we intend to execute appropriate policies in a timely manner by taking these matters into consideration as well.

Q.

I am Nakazawa from the Real Estate Economic Institute.

Financial institutions are currently developing many lending schemes which may be referred to as funds by using the BOJ's new financing system for new platforms and fields for growth. I assume that the FSA intends to supervise such lending in some way and provide cooperation as much as possible. Please explain the FSA's involvement in this.

A.

As you may be aware, the BOJ is extremely independent. Nevertheless, the government and the BOJ need to communicate closely with each other in implementing monetary policies. The BOJ's primary mission is, basically, to curb inflation while exercising its independence. At present, Japan is experiencing deflation, and the international community is becoming increasingly aware that it would be extremely difficult to break away from deflation. The soundness of banks will constantly be under the surveillance of the FSA, as a matter of course. Banks are businesses licensed by the Prime Minister, not to mention that they form the core of the economy, so in that sense, it is good that banks are making contributions to stimulate the economy by using the BOJ's system. I hope they do a good job.

Q.

I am Namikawa from Toyo Keizai.

Allow me to repeat a question that I asked previously for the sake of confirmation.

The former chairperson of a subsidiary of Shinsei Bank, of which the government is a major shareholder, has taken up a post as an advisor to a bank that would be a conflict of interest under laws and regulations. From the perspective of the government, it does not make sense to me that this could happen in relation to a problem that could potentially be damaging; also from the perspective of the supervisory agency that is supervising both two companies, what could be beneficial to one company could be detrimental to the other. It is a bit hard to understand that an officer would be shared between banks where a conflict of interest exists in their relationship. It may also give rise to substantial difficulties in supervision. What are your thoughts on this?

A.

I remember you raising the question previously, but the FSA is not in a position to comment on matters related to personnel affairs of individual financial institutions. In any case, the FSA will properly follow up on the bank's managerial improvement efforts and supervise it in a stringent manner. The FSA will also continue to keep a close eye on its future management status.

If I may add one point, the post you mentioned was advisor; basically, appointments and resignations of advisors are not within the scope of notification to the FSA. That said, the people have considerable expectations, and the FSA has weighty responsibilities in regard to the soundness of the financial sector, so we will continue to execute supervision in a stringent manner and keep a close eye on the bank's future management status.

Thank you for listening.

(End)