Press Conference by Shozaburo Jimi, Minister for Financial Services

(Excerpt)

(Tuesday, December 14, 2010, from 10:33 a.m. to 11:09 a.m.)

[Opening Remarks by Minister Jimi]

Yesterday, I visited Sendai to grasp the reality of the business and financing conditions and other matters associated with regional small and medium-sized enterprises (SMEs).  In Sendai, I met with the management of financial institutions and executives of four SME business groups, including the Miyagi Chamber of Commerce and Industry, to exchange views on the state of affairs in Sendai as well as the six Tohoku prefectures and the region as a whole.

During the discussion, some commented when talking about the circumstances surrounding SMEs that, thanks partly to an array of supportive policies, their businesses did show signs of recovery at some point but now they find themselves at a standstill because of the high yen and other factors, and the future prospects look increasingly bleak.

Many also voiced their wishes for measures that could increase jobs or sales and for the extension of the SME Financing Facilitation Act. The Financial Services Agency (FSA) is committed to working on the facilitation of financing for SMEs, etc. in the future, taking those inputs into account.

I heard that 800 buses come to Sendai each day from the six Tohoku prefectures and Niigata.  While Sendai has a population of one million, other cities have roughly 100,000 residents, reflecting the high level of concentration of people typical in regional cities.  This trip gave me a strong realization that Sendai is the city of concentration in Miyagi prefecture or the Tohoku region, as is implied by the fact that Shopping Center Promotion Association representatives that I met were saying that there are very few vacant stores in Sendai, generally around a few percent (the percentage of closed stores).  In contrast, however, I was told that the percentage of closed stores is roughly 18 percent on average in the prefecture's southern part, excluding Sendai, and northern part and even as high as 25 percent in particularly suffering areas, which of course amounts to one in every four stores being vacant in shopping streets in those areas.  They also said that, in Miyagi prefecture, Sendai has vibrant shopping streets but those in towns other than Sendai in the southern and northern parts (of the prefecture) are in a very grim state.

It also left me with an extremely strong impression to hear financial institution representatives say that "the SME Financing Facilitation Act saved at least 20 to 30 percent of all SMEs."

As I often say, what frequently happened in the past is that in the case of co-financing where a SME is co-financed by multiple financial institutions, such as the combination of a mega-bank and a regional bank or shinkin bank, one of them stops financing it.  In particular, the mega-bank would typically be the first one to do so.  However, everybody was saying that since this law came into force, this phenomenon has ceased.

I also heard from another Minister during today's Cabinet meeting that the president of a certain regional bank that he met with said to him, "When the SME Financing Facilitation Act was established, I thought it was a bad law but, once it came into force, it turned out to be a very good one."

In that sense, I believe that SME development is one of the most important functions of a financial institution whose core business rests with financial intermediation and, considering that Japan's foundation consists of the SMEs that make up 99.7 percent of all companies in Japan, mega-banks in particular need to review the way they manage their banks that focuses too much on looking upwards, so to speak - an attitude typical in pre-Lehman days - or looking abroad, aiming only at profit-making.  In that sense, I take pride as the Minister for Financial Services that the Act has probably contributed to changing the awareness of those who engage in the financial business.

Secondly, with both the FSA and myself having collected a broad array of data on the circumstances of various regions, I would like to speak about the extension of the duration of the SME Financing Facilitation Act.

Since the SME Financing Facilitation Act came into force last December, the FSA has been closely watching the status of its implementation as well as any effect and impacts from it, and I have visited Tokyo, Osaka, Nagoya, Kitakyushu and Fukuoka and Sendai to hear actual voices from SME business groups and financial institutions in the respective regions a number of times.  Our findings from those actions show that the business and financing conditions of SMEs still remain severe and, given the uncertainty about the future, there will likely be a constant level of demand for lending term changes and other arrangements.

In the meantime, financial discipline is extremely important when it comes to a lending term change and so on, and so it is vital to bear that point in mind in developing and carrying out an effective corporate economic reconstruction plan.  I think it is necessary to establish a stream of actions in which, as financial institutions take such steps as changing lending terms on the one hand, inputs provided by those financial institutions, particularly regional banks that boast a very practical consultancy function, as well as other consultants, including those from local Societies of Commerce and Industry and Chambers of Commerce and Industry, are firmly taken in and are fully utilized on the other hand so that corporate management and debt-payment abilities of SMEs, above all, can be improved as a result.

Bearing those points in mind, I issued an instruction to extend the duration of the SME Financing Facilitation Act for one year and to simplify disclosure and reporting documentation in its implementation to a substantial degree.  Notably, everywhere I went, I heard people talk about the substantial increase in the volume of reporting documents to submit to the FSA after the Financing Facilitation Act came into force.  The other day, I instructed the FSA Commissioner to reduce the documentation by 20 percent. While what is necessary is just necessary, I concluded that it would be appropriate to improve the practice in that sense by taking steps like substantially simplifying the disclosure and reporting documentation and helping financial institutions exert their consultancy function.

By taking the measuresopen new window that I have just announced, we are eager to work on creating an environment in which, even after this Act expires, the appropriate financial intermediation function of financial institutions should be exercised through inspections and supervisory and other actions, and we are eager to continue taking every possible measure to ensure financing for SMEs.

Thirdly, as I said on December 10, we have decided to set up an inspection committee to examine administrative and other actions against the Incubator Bank of Japan - statutory, administrative and other actions taken against the Bank, encompassing the developments leading up to its establishment, as described in the handout distributed to you.

It has been decided that its members will consist of external experts.  I am hoping to proceed with the member selection process quickly and hold its first meeting as soon as possible.  My intention is to announce the members when the first meeting is held.

Let me move on to the next topic, for which I had a question from Mr. Takahashi, who is a freelance journalist, during the last press conference and I said that I would answer it after looking into it.  In his question, Mr. Takahashi asked for my thoughts on the fact that former Minister Takenaka has not resigned from the post of Chief Research Director of Gaitame.Com Research Institute even after a business suspension order was issued against its parent company, Gaitame.Com.  Due to the lack of information that had thus far come to my attention, I am answering his question today as I am now aware that when Gaitame.Com Research Institute, a wholly owned subsidiary of Gaitame.Com, was founded in June 2009, former Minister Heizo Takenaka assumed the post of Chief Research Director and is still in office.  As you know, Gaitame.Com was issued a one-month business suspension order effective October 1 of this year on September 17 of this year because it had repeatedly caused system failures between July and September of this year.  On the other hand, Gaitame.Com Research Institute, from what I heard, has nothing to do with those system failure incidents.  In any case, I think that, considering the fundamental importance of trust in financial services, someone who was a Minister in charge of financial services in Japan must discipline himself rigorously so as not to cause any suspicion to form in the minds of the Japanese people even after resigning from the ministerial post.

[Questions & Answers]

Q.

To begin with, what is the reason for setting one year as the duration of the extension of the Facilitation Act?

A.

We got hit hard by the Lehman shock two years ago, resulting in the experience of seeing, for instance, Toyota's production drop by 40 percent.  Although things are better now, various people find the current level of recovery to be only 80 percent or 90 percent and it has recently become a little sluggish due to the high yen, as I said during my press conference after I visited Osaka and Nagoya.  The SME Financing Facilitation Act is legislation that was meant to serve as a provisional measure to help SMEs, etc. with financing in those extremely severe financial conditions.

When the SME Financing Facilitation Act was established just after the Lehman shock two years ago, it was given the duration of roughly one year.  With Toyota suffering a 40 percent drop in car sales two years ago - my home prefecture, Fukuoka, Kyushu, produces more than one million cars and is the second largest car-producing prefecture after Aichi - one after another of the car makers, including Toyota and Nissan, fired temporary workers.  It was under those circumstances that we launched this Act, but, at the same time, it is also true that in the context of a capitalist society and a free society, there is a concern that the Act might result in financial discipline deteriorating in the form of moral hazard on the part of borrowers.  As it is, indeed, naturally an important factor in a free society, and the basic rule in borrowing money is to pay it back with interest, I do think it necessary to heed any impact of the Act.

In that sense, it is hoped that an array of measures designed to achieve an early economic recovery will prove effective.  As I often say, no policy measure is 100 percent flawless, as where there is light, there is a shadow - my conviction is that a politician needs to face such a reality with both eyes open, and it is from this kind of perspective that, this time, we decided to set the duration of the extension of the Act to be one year.

Q.

It is written in the Minister's statementopen new window that there would be no fundamental solution without business results picking up, but the issue of moral hazard was probably pointed out in the discussions held in the regional context as well and there is also a concern for bad debts accumulating as a result of them becoming invisible.  Given that cautious voices are being raised against an action of simply extending the Act and that the consultancy function that you mentioned is also a little abstract, please tell us how you are intending to address the issues that I just described.

A.

Specifically speaking, as I explained by citing the example of Sendai in Tohoku yesterday as well, I was the Parliamentary Vice-Minister of the Ministry of International Trade and Industry twenty years ago.  As I also observed in the Tohoku Region yesterday, there are local organizations called Societies of Commerce and Industry, which are not Chambers of Commerce and Industry and are smaller than them.  The percentage of construction businesses in them is 25 percent - it is about 30 percent in my constituency, a figure similar to the Tohoku region, where 25 percent of Society of Commerce and Industry members are also construction businesses.

In the days of the Liberal Democratic Party (LDP) in the past, there used to be an established pattern followed in times of an economic downturn, where public works projects would be created, which would then be farmed out to regional small and medium-sized construction businesses - even when a public works project was given to a major construction firm, money would go to its subcontractors and sub-subcontractors.  At the same time, there is also the fact that the construction business is extremely important.  Earthquake-resistant construction work for municipal elementary schools nationwide is for the most part contracted to local businesses, not major contractors.  This also means that money changes hands nationwide.  Considering the safety of elementary and junior high school children - your own children or grandchildren - in the face of an earthquake and the resultant risk of their school buildings collapsing, earthquake-resistant construction is imperative, a point that we, the Cabinet, gave weight with respect to this issue as well.

That being the case, the volume of public works is, as is evident from the state of the housing construction sector, for example, no longer as plentiful as in the past.  Thanks to the SME Financing Facilitation Act, which was enacted when the effect of the largesse, in a sense, given by the LDP administration in its last days was gradually running out, the construction industry has managed to survive.  Given the nation's debt that now amounts to 9 trillion (yen), however, I believe that no matter which political party takes the reins, it would just not be feasible to go with any policy measure involving a large increase in public works spending at the levels seen in the past.

All those things considered, the consultancy function of local small and medium-sized construction businesses, which in the Tohoku region make up 25 percent of the industry, looms significant.  In the business of housing construction, a very high gross margin can be achieved from renovation or construction projects.  It is roughly 25 percent to 30 percent.  However, the gross margin from building a private condo, for example, is very small, because any business that orders a condo construction project is, of course, a professional entity.  The Ministry of Land, Infrastructure, Transport and Tourism (MLIT) is also currently encouraging the industry to venture more aggressively into the housing renovation and construction business.  Considering that the construction industry is something that remains necessary for all time, even in times of fewer public works projects, and the MLIT and the banking industry are also aware of their potential consultancy function in that area, I also feel that it will probably be necessary for businesses to, among other things, shift their management policy in that direction in an attempt to reform their business structure in the coming year.  I think that it is necessary to try coming up with various ideas in that regard.  To give them time to make such an attempt, we found it appropriate to allow one more year, which was one of the reasons behind the one-year period of extension.

As just borrowing money without developing any business improvement plan would lead to moral hazard, they are naturally required to make substantial efforts in their business operation.  Considering, however, that there is a limit to how much an SME could do in improving its business, the key to survival for the construction industry will rest with making use of its consultancy function through changing its management policy or corporate policy, just as financial institutions did in the past.

Depending on the situation, moving on to a different type of business might be another way to go.  Whichever region I visited, I heard about a very high level of need for nursing care facilities.  People commented that there are needs in their region in the areas of nursing care, medical care and also the environment.  They added, however, that the low pay associated with the nursing-care insurance, as you know, poses as a major hurdle.  With effort, it is feasible for regions to provide nursing-care functions in the form of facilities designed for five or six residents, such as group homes, rather than large intensive care homes for the elderly or other similar facilities that were common in the past.

The Kan administration is currently working hard on addressing detailed issues like those as part of its growth strategy.  As nursing care forms one single pillar, I believe that it is necessary to combine those approaches around it in a multifaceted fashion.

As a matter of course, recklessly showering money in the absence of any business improvement plan would lead to moral hazard.  Therefore, as I point out again and again, I believe that it is an important attempt for businesses to exercise their consultancy function and doing so is also necessary for them to survive or to achieve sustainable growth.  The Act in question encompasses all those thoughts and it is also for that reason that we chose to change its provisions themselves as well.

Q.

On the subject of the inspection committee for the Incubator Bank of Japan, what is the specific timeline that you imply by "as soon as possible" - is it, for example, within one week or by the end of this month?

Please also let us know the progress of the member selection process and the reason for keeping the committee's proceedings in camera.

A.

The specifics of the inspection schedule is precisely what this committee will be mandated to deal with from a fair and neutral standpoint, and I would therefore like to refrain from giving you any speculative answer in my capacity at this time.

As for your question about the committee's proceedings being public or otherwise, we are intending to conduct an adequate inspection and not to make public any information on the inspection before its completion in order to ensure that the committee should inspect the matter rigorously from a fair and neutral standpoint.  We are, however, planning to make public the results of the inspection.

Q.

By around when?

A.

I cannot give you any specific date at this time.  Let me just say that I would like to make the information public as soon as possible.

In addition, we are also examining the need to impose some type of confidentiality obligation on the external experts.  For example, one specific idea that I have in mind is to have them become, or for us to appoint them, Deputy Commissioners of the FSA.

Q.

On the subject of taxation, the Ministry of Finance has apparently proposed a one-year extension of the securities tax break, while the FSA is looking at two to three years (as an extension period).  As it seems that you are holding a negotiation with Finance Minister Noda today, please tell us your thought on this matter.

A.

I read newspaper articles on this topic, but the specific process of individual negotiations is being discussed now.  It is true that I will meet with Minister Noda today, though I would like to refrain from making any comment as to the details of the meeting.

In any event, we are currently trying hard to finalize the fiscal 2011 tax revisions and, in view of the fact that what is of the greatest importance is to boost the Japanese economy and that our effort is not for the sake of the FSA or anything else, I would like to act from such a standpoint so that we can gain support from those who are concerned with the matter, including Minister Noda.

Recognizing the extreme importance of its request to have the reduced securities tax rate extended, the FSA is currently pushing strongly to achieve that goal, taking into account the severe economic and financial conditions that exist now, and the apprehension about possible downturns in the future and the issue of double taxation of dividends, among other things, and I am set to have a negotiation with Minister Noda today.  Given the context of a capitalist economy, it is critical to pull together our corporate and economic conditions and to vitalize stock markets as much as possible.

Thanks to the monetary easing action of the U.S., the yen came to approximately 83 yen to the dollar.  Japan's market capitalization also went over 300 trillion yen the other day.  As I have seen the days of the economic bubble when the same figure amounted to 600 trillion yen, my personal feeling is that going over 300 trillion yen was long overdue.  Well, I also feel some sense of relief in seeing the rate finally go over 300 trillion yen.

In any case, capitalism is represented by stocks, after all - what a capitalist economy is all about is a stock-centered society with a structure in which increases in stock prices basically lead to positive impacts on the economy in every respect, such as consumption growth and corporate asset growth.  As I am well aware of this point, I am hoping to have a serious one-on-one discussion with Minister Noda today, who I understand does have fiscal discipline to adhere to on his part.

Q.

I am Takahashi, a freelance journalist.

I would first like to ask about the inspection committee in relation to the Incubator Bank of Japan - particularly, its compatibility with trial proceedings.  Given that the charge is apparently brought for obstruction of an inspection, I would like to hear what allegation will be the focus of the committee, including, as is written here, the developments leading up to the Bank's establishment.

A.

As we are hoping to decide on the selection of inspection committee members that is reasonable in the eyes of society, it will be up to those members, who are supposed to be fair and neutral and will be responsible for making such a decision.

As it would be ill-mannered of me to those who will serve as members to make any comment on this subject in advance, I feel that it is inappropriate to do so now.

Q.

Can I take it that any reckless lending to a company run by a family member will also be subject to inspection?

A.

As the Deposit Insurance Corporation of Japan is legally positioned to pursue the civil and criminal responsibility of the Incubator Bank of Japan, I expect it to serve its function with such an understanding in mind.

Q.

I would also like to ask about the system failure incidents of Gaitame.Com that you have just touched on.  It seems to me that what should have been done is to pay damages calculated by using original position values, rather than applying the loss-cutting rule, in other words, forcefully closing the position at the rates applicable then - is it a fair assumption that no more action will follow on this matter?

A.

I have not been informed of how the Supervisory Bureau and the Inspection Bureau view this issue.  I have been informed of the fact that a business suspension order was issued and I would like to make any further decision in accordance with law, bearing in mind that fundamental fairness and impartiality, as well as common sense, are important in public administration.

Q.

I am Namikawa from Toyo Keizai.

I have two questions.

I am asking this once again in view of the unfolding circumstances where the committee that you mentioned is now scheduled to be established and the provisional payback percentage has just been set this week - I would like to know what kind of thoughts you have on the fact that Mr. Taira, an LDP Diet member, was among the founding directors of the Incubator Bank of Japan and I believe still is, at least formally, a director. In short, I would first like to hear once more about the issue of his responsibility and any other related matters.

While you are taking actions like establishing an inspection committee, I think that, any way you slice it, the reorganization procedure for the Bank has been very slow. For example, I have not heard a thing about the sponsor selection, without the progress of which and other procedures the value of the Bank will naturally go down day by day - my second question is whether or not you are finding the progress of those procedures to be slow at all.

A.

As for your first question about House of Representatives member Taira, I believe that I previously said that he, being a publicly-elected member of the national parliament, the highest organ of state power, naturally has moral responsibility that comes with such a position, but the matter is up to future members of a third-party committee, who are supposed to be fair and impartial, to decide in view of that point as well.  That is all I would like to comment on in my capacity.

In the meantime, the Deposit Insurance Corporation of Japan also serves as a receiver for the Bank and I hear that it is working hard.  Considering that the public's eyes are on its work, I do believe that it is proceeding properly with its duty as it should.

Q.

I am Minoru Sasaki, a freelance journalist.

I would like to ask about the Program for Financial Revival, the so-called Takenaka Plan, which gave a direct impetus for the creation of the Incubator Bank of Japan. What is more, it also led to the pouring-in of approximately 2 trillion yen of taxpayers' money to bail out the Resona Bank, which became de-facto bankrupt, as well as the failure of the Ashikaga Bank and the bailout merger of the former UJF Bank. In that sense, I consider the Plan to be one of the most impact-laden financial administration steps in the history of the FSA. This also somewhat relates to the question that Mr. Namikawa (from Toyo Keizai) asked during the previous conference, but are there any minutes of the proceedings made to document the development of this Takenaka Plan? Please give us your official view as the Minister.

A.

My answer is that from what I heard, there are no minutes of the proceedings for the development of the Takenaka Plan.

Q.

Why has this question been cleared by a simple answer that no minutes were made?

A.

This one and other matters that some of you have raised are to be examined by a fair and impartial third-party committee and I also expect the committee to put them into perspective as they proceed with their inspection.

Thank you very much.

(End)

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