Press Conference by Shozaburo Jimi, Minister for Financial Services

(Excerpt)

(Friday, Feb. 17, 2012, from 8:37 a.m. to 9:11 a.m.)

[Opening Remarks by Minister Jimi]

Today, I do not have anything particular to announce.

[Questions & Answers]

Q.

I will ask you three questions.

The first question concerns the Tokyo Stock Exchange (TSE). Yesterday, the TSE made an announcement on the cause of its system glitch and punitive measures against President Saito and other executives. Could you tell me how you view those measures and what administrative action the Financial Services Agency (FSA) is likely to take?

A.

Regarding the system glitch that occurred at the TSE on Thursday, February 2, we recognized problems such as the obstruction of investors' transactions and the risk that it could affect the credibility of the Japanese market and the international competitiveness of the exchange business, so the FSA Commissioner summoned President Saito within the same day and issued an order for the submission of a report based on the Financial Instruments and Exchange Act (FIEA), as I told you. We have required the TSE to examine the cause and draw up measures to prevent a recurrence of the system glitch.

According to the TSE's announcement made on Thursday, February 16, in response to the order, the cause of the glitch was that when a hardware malfunction capable of affecting the system operation occurred, the TSE employees in charge judged that there was no problem without proactively conducting their own checks. The TSE submitted a report that described plans to implement institutional improvement and enhancement measures so as to prevent a recurrence of a system glitch and conduct a wide-ranging inspection of its system.

In addition to the measures to prevent the recurrence of a system glitch, the TSE announced internal punitive measures, such as pay cuts, against President Saito and other relevant executives.

The FSA judged that it is necessary to strictly examine the measures being taken by the TSE and yesterday issued a new order for the TSE, based on Article 151 of the FIEA, to submit monthly reports on the implementation of the measures to prevent the recurrence of a system glitch until the measures are completed.

On the same day, the FSA issued, in the name of the Director-General of the Planning and Coordination Bureau, a directive asking exchanges other than the TSE, settlement organizations, and securities transfer agencies to conduct comprehensive inspection regarding their response to system glitches. The FSA will make efforts to ensure that these financial infrastructure organizations conduct operations in a smooth and appropriate manner.

Q.

I will move on to the second question, which concerns Olympus Corporation. Chairman Kikukawa and other officials were arrested yesterday. Could you comment anew on this case? Also, according to explanations we received, the FIEA does not have any provision for punishment against persons who assist illegal activities. What do you think should be done about this legal loophole in the future?

A.

Concerning the first part of the question, I am aware of the case that you mentioned. However, as that concerns an individual company, I would like to refrain from making comments.

Let me point out that if a violation of the FIEA is suspected, I understand that the Securities and Exchange Surveillance Commission (SESC) conducts strict investigation and takes other actions, and I believe that appropriate actions will be taken in this case as well.

Concerning the latter part of the question, as a factor behind the cover-up of losses that lasted for many years in the Olympus case, the presence of outside collaborators has been pointed out. The FIEA provides for the administrative monetary penalty system that imposes fines on offenders in order to deter illegal acts, such as the submission of a disclosure document containing false information. However, acts that assist illegal acts are not subject to the administrative monetary penalty system. Therefore, the FSA is considering the possibility of imposing fines on outsider collaborators' assistance in illegal acts from the perspective of ensuring the fairness and transparency of the Japanese market.

Q.

Now, I will ask my third and last question.

What is your thought on dormant deposits? Also, regarding postal savings, it appears that if fixed-amount savings have remained dormant for 20 years, they cannot be returned to savers even if they claim repayment. As the Minister for Postal Reform, how do you view this arrangement?

A.

As for the so-called dormant deposits, although they are recognized as financial institutions' income for tax accounting purposes, depositors can demand repayment for an indefinite period of time without losing their rights to deposits. As you know, dormant deposits refer to deposits in accounts that have had no deposit or withdrawal activity for 10 years and the whereabouts of whose holders cannot be confirmed.

As to the utilization of dormant deposits, relevant cabinet ministers recently held a meeting to discuss such points of debate as how to ensure depositors' trust and assure convenience for them, how to share the cost of managing dormant accounts and the legal treatment of property rights to dormant deposits, and later, Minister Furukawa apparently spoke in a door-step interview. I believe that it is necessary to consider this matter from a broad perspective.

As you know, in Japan, when we open an account, we do not have to pay an account opening fee in principle. In Europe, a fee equivalent to at least around 1,000 yen has to be paid, as far as I know. Japan has a population of 120 million people and the number of accounts in the country is 1.2 billion, meaning that each person has around 10 accounts on average, and this is a very large number compared with other countries. The United Kingdom, for example, has a population of 60 million people and 150 million accounts, and South Korea has a population of 50 million and around 170 million accounts. Thus, maybe because of the absence of account-management fees, the number of accounts in Japan, at 1.2 billion, is much larger than in other countries.

As for the advantage of this situation, there is the problem of financial exclusion in other countries. In the United States, financial institutions require the deposit of at least 100,000, 200,000, or 300,000 yen as a condition for opening an account in some states. That has become a political problem, prompting some states to ban such a practice from the perspective of preventing financial exclusion.

In addition, the ratio of dormant deposits paid back is generally as high as 40% or so, as depositors remember the existence of dormant accounts even after 10 years have passed. That probably reflects depositors' feeling of ease. In contrast, the ratio is roughly 10 to 20% in the United Kingdom and South Korea.

In that sense, the number of accounts in Japan, at 1.2 billion, is very large, and the ratio of dormant deposits paid back is around 40%. I would like you to understand that Japanese deposits have such characteristics.

In any case, at the relevant cabinet ministers' meeting two weeks ago, we held a discussion while fully taking account of the characteristics of Japanese deposits. As Minister Furukawa raised this issue for the first time, I believe that we need to conduct deliberation by fully taking account of those characteristics. From the FSA, Parliamentary Secretary Ogushi is participating in the cabinet committee, so I asked him to lead the discussion.

Regarding the other point of your question, which concerns postal savings - 15 years ago, I served as the Minister of Posts and Telecommunications under the second Hashimoto cabinet - fixed-term savings deposited before the privatization of the postal savings business change to ordinary postal savings after maturity, and after the passage of another 10 years, which would mean the passage of a total of 20 years, notices urging savers to take action are sent. If claims for repayment are not made for two months after the notice, the savers' rights to savings expire under Article 29 of the former Postal Savings Act.

However, after the privatization, postal savings were taken over by Japan Post Bank, and liquid deposits are separately managed, in the old and new accounts. While the treatment of savings in the old accounts remains unchanged, savings in the new accounts are subject to the Banking Act, so they are treated in the same way as bank deposits, as I understand it.

Q.

In short, may I take it that although there is no cause for concern regarding savings in the new accounts, which are treated in the same way as bank deposits, savings deposited before the postal savings business was taken over by Japan Post, namely before the privatization, may be affected?

A.

As I mentioned earlier, that is stipulated in the former Postal Savings Act. After the passage of 20 years, savers' rights expire. That is how savings in the old accounts are treated.

However, the amount of savings in the old accounts is continuing to decline.

Q.

Regarding the Olympus case, what does the FSA think of the fact that financial window-dressing covering up such a large amount of losses continued for many years without being noticed?

A.

It is highly regrettable that Olympus deferred the posting of losses, as I said over and over again, and I think that the company needs to accurately grasp the facts of the case and quickly disclose information, and that the administrative authorities should deal with this case in a strict manner based on law and evidence.

However, since around 20 years ago, Japan has been carrying out the Big Bang financial deregulation so as to create a free, fair, and transparent market. Particular emphasis has been placed on transparency. As Japan experienced a severe financial crisis after Hokkaido Takushoku Bank failed 15 years ago - when I was a cabinet minister - Japan implemented various reforms to create a free, fair, and global market. In that sense, it is not appropriate to judge that listed companies and financial markets in Japan in general lack discipline in light of this isolated case.

Even so, this is a serious case that has caused a public uproar, and it is very troubling to see investors, both domestic and foreign, question the fairness and transparency of the Japanese financial markets. We have been trying to develop various institutional systems, including through the revision of the FIEA, in order to ensure the fairness and transparency of the market. However, if there are points that should be improved in relation to this case, we will make appropriate improvements. As a factor behind the cover-up of losses that lasted for many years, the presence of outside collaborators has been pointed out. As I mentioned at the beginning, outside collaborators are not subject to the administrative monetary penalty system under the current FIEA, so we will positively consider the possibility of imposing fines on offenders with a view to possible revision of the law.

Q.

Regarding the presence of outside collaborators, which was mentioned just now, may I take it that the FSA has some points to reflect upon?

A.

The presence of outside collaborators has been pointed out. From my 27 years of experience as a lawmaker, we are reminded of legal deficiencies when an inappropriate incident occurs. I have often witnessed cases in which loopholes of existing laws, if I may say so, have been exploited. In this case, too, from an objective standpoint, some professionals, who were probably operating outside Japan, who live or whose addresses are registered in a tax haven like the Cayman Islands, appear to have acted as outside collaborators, from what I know from reading newspapers. Therefore, we will consider the possibility of imposing fines.

Q.

International investigation is in progress regarding LIBOR (London Interbank Offered Rate) and TIBOR (Tokyo Interbank Offered Rate). What is the FSA's stance on that?

A.

The case related to LIBOR and TIBOR has emerged as a very serious problem amid the European crisis. However, I would like to refrain from commenting on specific issues like this. Generally speaking, the FSA has already been checking banks' internal control systems through inspection and supervisory activities, and if a problem is found regarding a bank's internal control system, we will deal with it appropriately as needed.

Q.

I am from TV Asahi. I will ask you two questions.

My questions concern issues directly relating to the FSA. As the authority responsible for supervising banks, does the FSA think that Olympus' credit banks have any responsibility to bear for this case or have any points to reflect upon? When I asked you this question previously, you declined to answer it, saying that it was too early. Now that this has become a criminal case, I would like to ask you again whether the FSA, as the supervisory authority, thinks the banks have any responsibility to bear or have any points to reflect upon. Also, has the FSA taken any action or is there anything that the FSA should do as the supervisory authority?

A.

Basically, the FSA refrains from commenting on matters that concern specific loans provided by individual financial institutions. Generally speaking, it is true that in the past, financial institutions, including main creditor banks, played some role in the corporate governance of borrower companies.

When I became a Diet member 28 years ago or so, most companies were backed by their main creditor banks, which, for better or for worse, played some role in the management of borrower companies. However, since then, the relationship between financial institutions and clients has changed due to financial liberalization, in other words the diversification of fund-raising means, and listed companies have come to be required to ensure timely disclosure, so my understanding is that there are limits to financial institutions' ability to obtain information other than publicly disclosed information and detect illegal practices at borrower companies.

In any case, generally speaking, I believe that it is important for financial institutions to make every possible effort to gather information concerning client companies' financial conditions and other matters from as far and wide as possible, conduct multi-faceted analysis, and make judgment on the provision of credit based on appropriate risk management.

Q.

Isn't there anything for creditor banks to reflect upon in this case?

A.

As I mentioned earlier, the FSA refrains from commenting on the Olympus case, as it is a matter concerning an individual company. However, we will take appropriate action according to common sense. The main bank system has collapsed for the reason that I mentioned, and competition between banks has intensified. In any case, generally speaking, if a problem is recognized with regard to a bank in light of laws and regulations, the FSA takes appropriate actions as needed. In this case, too, if a problem is found through the investigation, the FSA will take appropriate actions.

Q.

Let me ask you just one more question. Regarding the FSA's stance on dormant deposits, it is somewhat unclear what you meant when you said it is necessary to conduct deliberation while taking account of the various circumstances. Does that mean that the hurdle for utilizing dormant deposits is high, or that you have a positive stance on the idea of utilizing dormant deposits?

A.

This issue was raised for the first time at the relevant cabinet ministers' meeting held recently. In short, around 85 billion yen worth of dormant deposits is recorded as profits each year for the accounting purpose, and claims for repayment are made with regard to around 40% of the total, or 35 billion yen, which is recorded as losses. The total number of accounts is as high as 1.2 billion, and the costs of repayment and account management arise. The balance of 50 billion yen remains after the deduction of the 35 billion yen from the 85 billion yen. On the 50 billion yen, corporate tax would be imposed in principle. After the deduction of the 40% corporate tax, which would amount to 20 billion yen, 30 billion yen would remain. If the government decides to utilize dormant deposits, we would have to create an enormous system, as you know.

Although we have not yet made any decision as we are considering matters like that, we have grasped relevant facts, such as the presence of 1.2 billion accounts, the amount of dormant deposits, totaling 85 billion, and the total claims for repayment of dormant deposits, at 35 billion yen. These numbers are very large compared with the situation in other countries. As I mentioned earlier, claims for repayment are made for around 40% of dormant deposits after the passage of 10 years. In many other countries, the ratio is around only 10%. We are presenting these facts for relevant parties to see, and Minister for National Strategy Furukawa spoke of this matter to the people at a door-step interview.

When I happened to meet a post office employee yesterday, he told me about two old women who had been waiting in front of his post office when the office opened in the morning after seeing the TV news about the possible utilization of dormant deposits. They were mistakenly worried that their deposits might be seized and used for the recovery of the disaster-struck areas. At another post office, five people were waiting to make inquiries. Although media organizations may think that they have reported accurately on this matter, I think that some ordinary people could have such misunderstanding from my experience as a politician, so it is essential to provide information so as to avoid causing misunderstanding. Therefore, as the person in charge of financial affairs, I must appropriately follow up on this matter, which concerns the financial resources for the people's day-to-day living.

Q.

The FSA issued a new order for the TSE to submit a report based on Article 151 of the FIEA. Am I correct in understanding that the FSA has avoided issuing a business improvement order for the moment?

A.

We ordered the TSE to submit monthly reports as the first step. As the impact on the market has been very large, the TSE needs to conduct strict and careful examination in order to submit monthly reports.

If any problem is found through the examination from the perspective of preventing the recurrence of a system glitch, we will consider taking further administrative action.

Q.

Hasn't any particular problem been found so far?

A.

As the TSE is required to submit monthly reports, I hope that the exchange will conduct the examination with a sense of alertness.

Thank you very much.

(End)