Press Conference by Shozaburo Jimi, Minister for Financial Services

(Excerpt)

(Tuesday, September 21, 2010, from 10:42 a.m. to 11:17 a.m.)

[Opening Remarks by Minister Jimi]

Today, decisions were made at the Cabinet meeting attended by the Senior Vice Minister and the Parliamentary Secretary.

I have nothing further to report.

[Questions & Answers]

Q.

At the inaugural press conference the other day, you stated that you intend to give positive consideration to the SME Financing Facilitation Act including the postponement of its expiration given the current business climate. As the basis of making the decision of whether to postpone it or not, will interviews be conducted with, say, relevant organizations? Is there a set future schedule for making such decision?

A.

I was asked a similar question when I assumed office the other day. The SME Financing Facilitation Act was established last autumn based on tremendous efforts made by former Minister for Financial Services Shizuka Kamei as a temporary measure to facilitate financing especially for small and medium-sized enterprises (SMEs) under the tough economic climate and employment conditions.

In fact, those of you who have carefully read the agreement reached among the three parties at the time the Act was created would know that it is written in the tripartite agreement. While I was serving as the chairman of the Policy Research Council of the People's New Party (PNP) at the time, and the Democratic Party of Japan (DPJ), the Social Democratic Party (SDP) and the PNP had in fact agreed before the change of government on what kind of policy pledges they would fulfill if they came into power, about a week before the public notice of the commencement of the election on August 30-it was one of the six policy pledges.

In the policy pledges, which I call the “Super Manifesto,” our commitment to properly implement SME financing including dealing with the credit crunch and credit withdrawal-the gist of the SME Financing Facilitation Act-had already been written in the form of a common pledge before the election, based on which the three parties reached an agreement after the change of government on September 9, 2009. The content, as it was, was then passed on to and implemented by former Minister for Financial Services and Postal Reform Shizuka Kamei.

This was not hammered out by Mr. Kamei out of the blue; it was based on the common policies agreed upon by the three parties before the August 30 election was announced by the previous administration. It was one of those policies. As it was an extremely tough era back then, a similar bill that had in fact been passed in the House of Councillors by the DPJ, SDP and PNP was scrapped regrettably due to the lack of majority vote in the House of Representatives at the time. This bill, which had been actually submitted by, among others, former chairman of the Policy Research Council Masayuki Naoshima and myself and scrapped in the House of Representatives, basically became the foundations of the Act, so I hope you understand that.

Having gone off on a tangent a bit, let's get back: This is a temporary measure, legislation that expires at the end of March 2011 to cover the calendar year end and the fiscal year end twice when there is greater demand for funds among SMEs. As to whether or not we will postpone the expiration of the Act, we will take all factors into consideration, such as the improvement status of the Japanese economy and cash flows of SMEs and the prospects for next fiscal year onwards, and the progress made in financial institutions' financial facilitation efforts, conduct interviews with various parties as just pointed out, and conduct studies by taking into account the possibility of the postponement of its expiration, as I stated previously. As the yen is strong at the moment, the situation is extremely tough especially for SMEs. As I stated earlier, the SME Financing Facilitation Act was created based on projections that the economy should recover substantially in about two years, so with this in mind, we will conduct studies while considering the postponement of its expiration as a possibility.

Q.

In relation to this, the Act covers home loans in addition to loans to SMEs. What is your view on the treatment of home loans?

A.

We intend to properly conduct studies in view of home loans as well. As you know, the DPJ, SDP and PNP, which were opposition parties at the time, had been told by many people how they took out a home loan only to be made redundant by their employers. There were many people in an extremely difficult situation with home loans that they had taken out based on the assumption that they would be employed indefinitely, only to be made redundant by their employers or see their employers go bankrupt all of a sudden. Events like this led to the revision of the terms related to home loans. As employment conditions remain extremely tough, and given that finance and politics are for the people, we intend to conduct studies with this in mind, considering the postponement of the expiration of the Act as a possibility.

Q.

I am Namikawa from Toyo Keizai.

I had been refraining from following up on this question due to the recent Cabinet reshuffling: you responded to our question the other day that there are no minutes relating to the license of the Incubator Bank of Japan in the days of the Program for Further Financial Reform. May I confirm that the meetings back then were not held pursuant to laws, given that the minutes do not exist? Minutes must be kept for all meetings held in government offices according to laws, so may we assume that the meetings back then were not based on laws due to the lack of minutes?

A.

I will look into the fine details later, but basically, government offices are financed by taxes, and have authority based on the Constitution and laws, as a matter of course. The Cabinet is formed as a result of election by the people; then the Prime Minister comes forth, who appoints the Minister for Financial Services according to the Constitution. As this is an extremely democratic government office, it is common sense from my point of view to properly keep or publicly disclose the minutes regarding financial regulation and supervision which have a huge impact in ordinary circumstances as a basic rule, given that an executive branch of government is basically in the public domain. From what I have heard, minutes of seven or eight meetings were disclosed to the public after it was said that this would be done initially, but information on the progress in the interim was not disclosed at all. I think this is extremely odd in view of the rules of the executive branch of government. Basically, from the viewpoint of common sense, it is odd as a government in an open democratic nation that there are no minutes, especially on such a matter that has later had a significant impact on banking regulation and supervision, given the rules of government offices.

Q.

I have a request regarding the work schedule of the Program for Further Financial Reform, which was published a number of times. Work in the stage dated November 29, 2002 involved the acceleration of banking license approvals. It is not impossible to interpret acceleration in this context as pressure being applied to give approvals quickly, rather than executing the conventional approval procedures and checks. Please investigate why this happened. Also in relation to what you just stated, if Mr. Kimura (former Chairman of the Incubator Bank of Japan) became a consultant to the FSA in order to do this, he may be deemed to have served as a consultant in meetings with no minutes that are not based on laws. Please investigate this and disclose the findings to the public, given that the Incubator Bank problem has arisen in such a way that might impose a burden on depositors.

A.

As you are well aware, 2002 was a time when, if not regulatory-reform supremacy, the so-called Washington Consensus characterized especially by deregulation, small government, the shift from the public sector to the private sector and market fundamentalism, were imported heavily into Japan from the United States through politicians Mr. Koizumi and Mr. Takenaka. At the time, the belief was that only the very basic conditions have to be met for approvals and licenses to be granted by government offices. To go to the extreme, the logic was that poorly-performing companies would be culled by the market so any mess left afterwards should be mopped up by the judicial system-I remember clearly that such discussions took place. Based on my experience working as a lecturer at a university in the United States, I acknowledge that the United States and Japan are indeed two different countries, with one example being the extremely large number of independent administrative commissions in the United States. Japan had created a hundred and several dozens of independent administrative commissions during General MacArthur's era. However, most of the 100-plus independent administrative commissions have disappeared since General MacArthur's occupation ended, apart from a few such as the Japan Fair Trade Commission remaining to this day.

When I served as the Minister for Posts and Telecommunications 12 years ago, I studied a bit on independent administrative commissions to deal with postal services and telecommunications under Plan 1 submitted by then-Prime Minister Ryutaro Hashimoto. My knowledge may be limited by the books I have read, but historically, you see those badge-wearing sheriffs in western towns in the United States. This is a reflection of extremely strong law enforcement.

Upon the construction of the Transcontinental Railroad, two private companies came forward to build the Transcontinental Railroad. As we are talking about the United States here, they engaged in cut-throat price competition. This resulted in the bankruptcy of one of the companies. As train fares increased subsequently due to the adverse effects of monopoly, a riot broke out among farmers in Chicago, in Illinois, one of the Midwestern states where agriculture is a prominent industry. Farmers had to sell their produce in the cities, but the train fares had become higher and higher. This caused a mass riot. As you know, executive power is weaker in the United States than in Japan. Judicial power is the strongest. There are so many independent administrative commissions in the United States, as they were created to serve as a bridge between judicial and executive bodies, according to one or two books I read back in the day.

So, General MacArthur's occupation forces created independent administrative commissions. Throughout the occupation, there was a Radio Regulatory Commission in the Ministry of Posts and Telecommunications, and members of the Commission could not be dismissed even by the Prime Minister or the Minister for Posts and Telecommunications.

As this generated unintended adverse effects, I believe independent administrative commissions were abolished on the grounds that they did not suit Japanese culture. I have gone off on a tangent, so let's get back: During the years of Mr. Koizumi and Mr. Takenaka, deregulation was regarded as the solution to everything including such independent administrative commissions as if it were some kind of pandemic. Even taxis were deregulated, which resulted in the income of taxi drivers being cut to about two-thirds, while their working hours became 1.2 times longer. On the dark side, traffic accidents caused by taxi drivers doubled. Therefore, some law was revised again two years ago. While it is over-the-top for a government office to have complete authority to give approvals and licenses to adjust demand and supply, taxis are a means of public transport, so unnecessary deregulation tends to lead to such an outcome. Balance is required in that sense, as I have often said.

However, looking back at 2002, the trend at the time was to deregulate everything and leave the rest up to the market in the name of self-responsibility-I ultimately objected to this and dropped out of politics for 1 year and 10 months. This historical backdrop will be taken into account, but on the other hand, transparency and objectivity are required in administration as just mentioned. Accordingly, my basic and primary approach will be to closely monitor the developments in the Incubator Bank case, which will be dealt with properly by the Deposit Insurance Corporation of Japan (DICJ) in view of taking criminal and/or civil action, while having a sharp critical awareness.

I hope my long statement answered your question.

Q.

I am Miyajima from Monthly FACTA. I believe you have marked your name in the history of finance for having given the go-ahead to the “pay-off” scheme. As the “pay-off” scheme itself is funded by insurance premiums, the insurance premiums are similar to taxes in the sense that they were collected from all depositors.

On the topic of the problem in 2002 you mentioned earlier, banking inspection was conducted in June 2009, and during the nine-month period, the balance of deposits at the Incubator Bank of Japan increased 1.5 times from 400 billion yen to 600 billion yen, if my memory serves me correctly. In this context, we would like you, as the Minister who executed the “pay-off” scheme, to investigate this matter for the period from 2002 up until the implementation of the “pay-off” scheme by establishing a task force in the FSA. I believe the problem was not deregulation in 2002 but the administrative approach of the FSA itself over the past year or two. We would like you, as Minister who has carved his name into the history of finance, to properly address this problem at least as to why banking inspection had to be conducted for as long as 9 months at the Incubator Bank of Japan, regardless of whether the minutes in 2002 exist or not as mentioned earlier.

A.

We examined the governance system and the risk management system of the Incubator Bank of Japan through voluntary interviews, reporting orders, on-site inspections and other activities in relation to its business of purchasing debts from money lenders which had increased rapidly since 2008 and large loans which soared sharply since 2009. As the results of the on-site inspection launched in June 2009 identified serious problems including those in the credit risk management system relating to large loans and debt factoring operations, we issued a business suspension order and a business improvement order on May 27 and took action accordingly. That is what happened, and I do understand what have asked. As the Minister for Financial Services, I truly feel sorry for honest depositors for having had the “pay-off” scheme implemented.

At the same time, however, financial discipline has to be observed. “Pay-off” is the main course of action in the event of collapse of a financial institution, as I have repeatedly stated. If systemic risks may arise-as in the case of Ashikaga Bank-deposits will be protected in full, as I explained upon the execution of the “pay-off” scheme.

That said, according to the staff in charge, the Incubator Bank of Japan was cooperative in the first inspection but extremely uncooperative in the second inspection. Mr. Kimura is in a sense truly a specialist, having worked at the Bank of Japan. I have been told that the staff in charge had an extremely tough time in the inspection. The third inspection was conducted with the same lineup after extensive consideration with a strong sense of commitment, where it would normally take three to six months. In the end, the Bank was deemed to have been evading inspections. Being an executive branch of government, our operations must be based on laws and facts, as you are well aware. Basically, it is necessary to ensure fairness, abide by laws and issue business improvement orders or business suspension orders based on facts, so I hope you understand that difficulties were involved in the process. However, what you said is indeed understandable in the context of public sentiment, so I intend to properly fulfill my duty as Minister with that in mind.

Q.

I understand. As the first Minister who has given the go-ahead to the “pay-off” scheme, do you intend to create some kind of organization to tackle this issue properly? I am not saying that the financial inspections conducted by the FSA were problematic, but the proper disclosure of facts such as the events dating back to 2002 you just explained would ensure transparency, which may involve providing an explanation dating back to the foundation of the FSA.

A.

I am taking this extremely seriously, especially given the comments made by the Chief Cabinet Secretary.

Q.

You have used the term “pay-off” quite frequently in reference to the Incubator Bank of Japan, but the fact is that no burden has been incurred yet by depositors at this time. Depositors might ultimately incur a burden in the form of a loss. Given that there is no burden yet, it may be better to refrain from using the term “pay-off” readily, as depositors may feel unsettled-do you agree? At least the DICJ has never used the term “pay-off”. “Pay-off,” which involves cutting off deposits, has not been executed with respect to depositors even though the media is taking the liberty of using the term “pay-off.” Depending on the situation, if the Bank's business is transferred successfully, depositors might end up not having to incur any burden. What are your thoughts on this?

A.

I would like to be given the opportunity to properly fulfill my duty with this matter firmly engraved in my mind. As you are well aware, up to 10 million yen in principal plus the interest on that principal per depositor will be protected. As you know, the Incubator Bank of Japan only deals in fixed-term deposits, and the portion exceeding 10 million yen in principal plus the interest on that principal will be reimbursed depending on the Bank's asset position, according to the rehabilitation plan formulated under the civil rehabilitation proceedings. A portion of deposits is expected to be cut.

Q.

It is expected, meaning that it is a possibility-is this correct?

A.

If my memory serves me correctly, I have stated that 2.7 percent of depositors had deposits exceeding 10 million yen. That is why a portion of deposits is expected to be cut. However, this is covered by the law concerning the collapse of financial institutions which has been put into force, which is why I have mentioned “pay-off”.

Q.

I am terribly sorry if I sound argumentative: what the DICJ is doing now is dealing with how to transfer the Bank's business by such means as financial assistance. This seems to be slightly different from the possibility of a burden being incurred by some depositors if losses arise in the course of business transfer or other arrangements in the final process.

For example, the United States operates the same system, where depositors have not had to incur any burden at all over the past year thanks to successful business transfers. Perhaps greater attention is needed in your choice of words-I am sorry for giving unsolicited advice, I hope you accept my apology.

A.

I appreciate your opinion.

Q.

I am Inoshita from Toyo Keizai.

On the topic of the SME Financing Facilitation Act regarding the postponement of its expiration, what is your judgment of the current improvement status of cash flows, taking all factors into consideration as mentioned earlier, amid the increasingly bleak economic outlook? What is your understanding of the current situation since the SME Financing Facilitation Act came into force?

A.

Okay, let me answer this question metaphorically. In my hometown of Kitakyushu City, which is a city full of SMEs, many of my supporters are proprietors of SMEs and employ as many as 100 workers, half of whom are without exception non-fulltime employees. As I have brought up a number of times before, quite a few of them have told me how grateful they are for having been saved by the enactment of such a wonderful Act, as their companies would otherwise have had to file for bankruptcy.

In this context, if we are to proceed with postponing the expiration of the Act, we will properly request various organizations to submit data or conduct interviews with them. When I served as Parliamentary Vice-Minister of International Trade and Industry twenty years ago, I was in charge of SMEs as required as the Parliamentary Vice-Minister of International Trade and Industry appointed from the House of Representatives back then for one year and three months under (former) Minister of International Trade and Industry Eiichi Nakao. Based on such experience, I have been told by SMEs how extremely helpful the Act has been. I may have also told you previously that according to what I have been informed by bureaucrats, a megabank attended a gathering of various financial institutions-a gathering of shinkin banks and credit unions at one of the financial bureaus-for the first time ever since the establishment of the Act. In that sense, my intuition as a politician is that the Act is proving to be extremely effective against the backdrop of the strong yen at this stage when we are considering the possibility of postponing its expiration.

That said, steps and procedures are extremely important for an executive branch of government. To this end, we intend to properly take the procedures and gather objective data or conduct interviews at a later date.

Thank you for listening.

(End)