Press Conference by Shozaburo Jimi, Minister for Financial Services

(Excerpt)

(Tuesday, December 7, 2010, from 11:27 a.m. to 12:01 p.m.)

[Opening Remarks by Minister Jimi]

Let me begin with a topic that you may raise questions about later; I assembled the respective chairmen of major financial institutions yesterday, and together with the Minister of Economy, Trade and Industry, listened to what they had to say about cash flows at the year-end under the Act concerning Temporary Measures to Facilitate Financing for SMEs, etc.  The chairmen stated that they intend to ensure proper cash flows for small and medium-sized enterprises (SMEs) at the end of the year.

The other issue is that documents which financial institutions are required to submit to the Financial Services Agency (FSA) have been increasing over the past decade.  I discussed this issue yesterday with the Minister of Economy, Trade and Industry to reduce the documents by 20 percent.  In the organization of bureaucracy, there is no one but the Minister of State elected by the people who can make such a suggestion.  Financial institutions cannot say that they would like to have the burden of paperwork reduced to the FSA, a regulatory authority, even if they want to.  The three representatives I asked yesterday told me that their burden of paperwork is enormous.  As this issue has been in my mind for some time, I told the FSA Commissioner, on their behalf, to look into specific ways of reducing the documents to be submitted by financial institutions to the FSA.  I intend to work on this issue properly.

I reported this issue at the informal gathering with Cabinet ministers as well.  As exemplified by documents that universities are required to submit to the Ministry of Education, Culture, Sports, Science and Technology (MEXT), documents which various institutions are required to submit not only to the FSA but also to other government offices have substantially increased over the past decade.  I will give you an example as a doctor: back in the day, few documents had to be prepared upon medical examination, but nowadays we have to write documents in detail.  To go to the extreme, we could say that we spend more time writing documents than examining patients.  This defeats the purpose.  In a recession like this, what matters the most is to give consideration to the cash flows of financial institutions.  I believe that core business should not be neglected due to having to spend many hours writing documents.  As Japan has experienced ongoing peace for 65 years and economic stagnation for 20 years, the bureaucracy tends to become document-oriented.  At the informal gathering with Cabinet ministers, I reported my instructions to reduce documents to be submitted by 20% to properly rectify this.  I also suggested that other ministries and agencies do the same.

Thank you for listening to my long statement, I thought it needed to be understood now that the Diet session is over.

[Questions & Answers]

Q.

On the topic of the SME Financing Facilitation Act just mentioned, the Chairman of the Japanese Bankers Association (JBA) stated at the opinion-exchange meeting yesterday that the issue is not only the burden of paperwork but also concerns over moral hazard.  He stated that a review should be conducted properly by examining such side effects.  What are your thoughts on his opinion?

A.

It was JBA Chairman Masayuki Oku who brought up moral hazard.  Financial discipline is important, as I have repeatedly stated at press conferences here.  Lending money and having it paid back with interest is fundamental to financial businesses, so in that sense, it is not surprising that moral hazard has been brought up.

There is no such thing as a policy that is perfect in every aspect while properly taking such factors into consideration.  Nevertheless, we are currently in a recession, so the priority is to ensure cash flows for SMEs and save SMEs.  On the other hand, we are talking about financial businesses here, so financial discipline should be strictly observed.  In my 25-year career as a member of the Diet, I served as Parliamentary Vice-Minister of the Ministry of International Trade and Industry (MITI) twenty years ago.  As financial institutions are functioning extremely well, financial institutions have good knowledge of corporate management and other such information especially in consulting functions.  For example, they know which company wants to sell land in what location, and which field such-and-such company currently wishes to expand into by making new capital investments.  In my hometown in Kyushu, when I asked questions to people like the branch manager of a regional bank, I found them extremely knowledgeable.

In particular, employees of regional banks, shinkin banks and credit unions have a close relationship with SMEs, so they have good knowledge of financial instruments that are selling well and other such information.  Accordingly, one of the objectives of the SME Financing Facilitation Act is to have such consulting functions properly utilized.  Unemployment is high at present, with total unemployment rate standing at 5.1 percent and the number of wholly-unemployed persons totaling 3.35 million: the economy has not recovered from the recession since the Lehman Brothers shockwave.  For example, industrial production dropped about 60 percent, and even Toyota's production fell about 40 percent at the time of the Lehman Brothers shockwave two years ago.  Due in part to the strong yen, industrial production has only recovered by about 80 percent since then.  In that sense, while concerns over moral hazard are indeed important, private companies cannot grow in a sound manner unless financial businesses are sound and robust at the same time, while giving consideration to financial discipline and moral hazards at all times.  In other words, without extremely smart financial institutions, free economies can neither develop nor be sustained.

The topic of Basel III also came up in that context.  During the financial crisis in Japan twelve years ago, while I was serving as Minister of Posts and Telecommunications, Hokkaido Takushoku Bank went bankrupt, Yamaichi Securities collapsed and the soundness of financial institutions became a stringent requirement in liberal society.  However, efforts made at the time focused solely on improving the soundness and the capital adequacy ratio of financial institutions, giving rise to severe credit crunch and credit withdrawal.  In my experience, two profitable Sogo Department Stores went bankrupt in my hometown of Kitakyushu City, one located in the front of Kokura Station and the other in Kurosaki.  Citizens of Kitakyushu have had an extremely tough time since then.  With much pain, I have learned the impact of financial crisis on the regional economy.

At the time, there was something called the warranty against defects, which was extremely problematic.  It goes without saying that financial discipline is necessary, but in those days, financial businesses collapsed one after the other.   Given that such outcome is not desirable either, I believe it is necessary to have a balanced view on these matters as the Minister of State in charge of financial regulation and supervision.  It is vital to maintain balance and carefully monitor the situation with both eyes.

Q.

There was a news article in the morning edition of one of the newspapers regarding the “Action Plan for the Invigoration, etc. of Financial/Capital Markets and Financial Industry”.  Please share your thoughts on the Plan with us, including on the little progress being made in coordination efforts among the ministries to create an integrated exchange.

A.

I am aware that there was a news report on the Action Plan.  The FSA plans to formulate the “Action Plan for the Invigoration, etc. of Financial/Capital Markets and Financial Industry” by the end of the year as scheduled in the New Growth Strategy Timetable adopted by the Cabinet in June 2010, and we are currently working on the task accordingly.

In fact, we plan to announce the interim draft of the Action Plan today.  Senior Vice Minister Shozo Azuma will be providing you with an explanation this afternoon, so please ask him about the details on that occasion.  Please note that the announcement today will be limited to the interim draft.  After the presentation of the interim draft, we plan to gather more feedback from interested parties in various fields as necessary and compile the final version by the end of the year.

Q.

We understand that the review of the securities taxation system is now in the final stages.  The original plan was to introduce the Japanese version of the International Standards on Auditing (ISA) upon the termination of the preferential taxation system.  Please explain the FSA's approach to ISA: if the expiry of the preferential taxation system is postponed, will the introduction of ISA also be postponed?  Or, does the FSA still have room to accept enhancements to ISA as currently being considered by some departments?

A.

Regarding our request to have the expiry of the reduced tax rate for securities postponed, we believe we have taken a step forward even though many things have happened, as the Tax Commission has decided to take it up as a major agenda item on December 3.

We at the FSA believe that the reduced tax system for securities is extremely important, especially under the current economic conditions.  The FSA will be more aggressive in requesting that the reduced tax rate for securities be extended, in consideration of the harsh economic and financial climate at present, the deterioration in the future outlook, double taxation of dividends and so forth.  Your understanding will be highly appreciated, as we are committed to exerting efforts in this regard.

On the topic of ISA just mentioned, my understanding is that it is a preferential taxation system for individuals purchasing stocks.  If my memory serves me correctly, the tax reduction amounts to 120 billion yen to 130 billion yen under the securities tax system, whereas the tax reduction amounts to 8 billion yen to 9 billion yen under the ISA.  Both are important; the ISA also seeks to encourage more individuals to participate in the securities market.  As has been said since five to ten years ago, Japan has a very small population of individual shareholders compared to the United States.  Our unwavering view is that more individual shareholders should participate in the securities market.

With these points in mind, notwithstanding the fact that ISA is also extremely important, we would first like to give priority to the postponement of the expiry of the reduced tax system for securities.

Q.

Will the introduction of ISA also be postponed if the expiry of the preferential taxation system is postponed?

A.

It is yet to be determined for certain; what matters the most is to break away from deflation and overcome this recession.  We intend to take a flexible approach from that perspective.

Q.

On the case involving the Incubator Bank of Japan (Nihon Shinko Ginko), there is speculation that there will be provisional payback to be made in the near future, and that the rate of payment will be just under 30 percent.  In any case, dramatic cuts in deposits exceeding 10 million yen are expected to be inevitable.  What are your thoughts and views on this?

A.

Following the resolution passed in both Upper and Lower Houses of the Diet regarding the appointment of the Governor of the Deposit Insurance Corporation of Japan (DICJ) the other day, I handed over the letter of appointment to DICJ Governor Masanori Tanabe and another Board Member in the chamber of the Minister for the Financial Services Agency.  I have been informed that the DICJ steering committee will be convened this afternoon, where a decision on provisional payback will be discussed.

The FSA would like to refrain from making any comments at this stage before any resolution is passed by the DICJ steering committee to be convened this afternoon.

In any case, my understanding is that procedures will commence promptly once a decision is made on provisional payback.

Q.

I am Inoshita from Toyo Keizai.

On the topic of the SME Financing Facilitation Act, you stated that the gist of the Act is now widely accepted among financial institutions, so the approach would remain unchanged even if the measures are terminated. On the other hand, you are also considering the possibility of its extension, which seems to be somewhat inconsistent. Have you not changed your mind about its extension?

A.

Back in the day, there used to be two Parliamentary Vice-Ministers, one each from the House of Representatives and the House of Councillors.  I became the Parliamentary Vice-Minister from the House of Representatives in charge of SMEs 20 years ago, while my counterpart from the House of Councillors was Hirofumi Nakasone.  From 1945 to the mid-1960s, there was a nationwide campaign to create a Ministry of Small and Medium Enterprises targeted at the Parliamentary Vice-Minister of MITI from the House of Representatives.

As the Parliamentary Vice-Minister of MITI at the time, I consequently was appointed to Parliamentary Vice-Minister in charge of SMEs by the Minister of International Trade and Industry, separately from the appointment to the Parliamentary Vice-Minister of MITI from the House of Representatives by the Cabinet to take charge of SMEs.

In that capacity, I worked on SME measures for a year and two months.  While financial institutions are indeed important, 99.7 percent of Japanese companies are SMEs, and more than 40 million people work for SMEs.  Since the Lehman Brothers shockwave, conditions in the real economy have been harsh due to such factors as the strong yen, and deindustrialization has occurred amid the extremely tough business climate surrounding SMEs.  While financial institutions which serve as the intermediary for industrial sectors are important, we believe it is more important to focus on SMEs at this time so that they can manage their businesses and make management improvements.

Thank you for listening.

(End)

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