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| Minister Watanabe delivered a keynote speech at a dialogue meeting with SME Managers in Niigata(January 16) |
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The 125th Meeting of the Council on Insurance against Compensation for Automobile Damage Liability. (January 18) |
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Outline of Dialogue Meeting Between Minister for Financial Services Watanabe and SME Managers, etc. (in Niigata)
On January 16, 2008, the Financial Services Agency (FSA) and the Kanto Finance Bureau of the Ministry of Finance held a dialogue meeting in the Tsubame-Sanjo region of Niigata Prefecture, between Minister for Financial Services, Yoshimi Watanabe, and managers of small and medium-size enterprises (SMEs) and representatives of financial institutions in the region. The objective of this meeting was to listen to the voice of the local community and reflect it in financial regulation and supervision going forward.
The meeting follows the direction made by the Prime Minister that the conduct of politics and public administration should be reviewed comprehensively so as to change the mindset of government in a way that ensures public administration reflects the standpoint of consumers and ordinary people. By engaging in dialogue with both the providers and users of financial services in local communities, the meeting was held with the aim to reflect the viewpoints of people actually doing business in local communities in financial regulation and supervision.
<Program>
- Keynote speech by Minister for Financial Services Yoshimi Watanabe "Future Development of Regional Industries and the Role of Regional Financial Institutions"
- Dialogue Session between Minister Watanabe and participants
1. Key Points of Keynote Speech by Minister Watanabe
I. Recent Financial and Economic Developments
- Unfortunately, Japan's competitiveness in the global economy has been sharply eroded. To make matters worse, the global financial markets have been rocked by problems triggered by the subprime mortgage crisis. If the yen appreciates, it will have a direct impact on the prices of products exported from Japan, even as Japanese companies' earnings are being squeezed by rising materials prices. We must tackle these issues with an enhanced sense of crisis.
- Regrettably, Japan's nominal GDP has remained flat, in contrast with the continued growth of that of the United States. Meanwhile, the nominal GDP of China, which is the leading emerging country, has continued to expand and is steadily catching up with Japan's. Japan's per-capita nominal GDP, in particular, has been continuing to decline. Although Japan was ranked second among the member countries of the OECD (Organisation for Economic Cooperation and Development) in terms of the size of per-capita nominal GDP at its peak in 1993, it has now fallen to 18th place. Since the peak period, workers' wages have seriously stagnated, which has been a major impediment to Japan's efforts to completely overcome deflation.
- Regarding the expansion of the market capitalization of major securities markets around the world since 1990, market capitalization of the Tokyo market has grown 1.5-fold compared with that year, while the U.S. market's has expanded 5.7-fold. In China, meanwhile, market capitalization in Hong Kong, Shanghai and Shenzhen expanded 20-fold, 25-fold and 55-fold, respectively. This huge expansion has drawn an influx of funds, which has spurred investment-led economic growth. In contrast with countries trying to stimulate economic growth, China is struggling to come up with ways to cool down its overheating economy.
- On the other hand, a look at the balance sheet status of Japanese companies as indicated by the Financial Statements Statistics of Corporations by Industry shows that their capital is small relative to their liabilities, with the proportion of capital in the total assets standing at 35% and the proportion of liabilities at 65%. In the era of inflation, taking in loans used to provide a very advantageous means of raising funds. The lesson we have learned over the past ten years or so, however, is that heavy reliance on loans as a fund-raising means leads to a very precarious situation once asset deflation occurs. In most other developed countries, the proportion of capital is larger than that of liabilities.
- From the viewpoint of the relationship between capital expenditure and cash flow, Japanese companies have made capital expenditures only within the extent of their cash flow since the collapse of the so-called bubble economy, which was driven by asset inflation. In the wake of the bubble economy's collapse, private sector companies struggled hard to repay their debts, and signs have only recently appeared that they are starting to raise funds again through loans. The amount of outstanding loans has fallen to a level barely above 400 trillion yen, with the ratio of loans to GDP dropping to 80%. Regarding trends in the amount of funds raised by companies and the amount of financial assets held by households, the two have shown parallel movements in the United States, whereas in Japan, the stagnant fund-raising activities by companies have offered a stark contrast to the steady growth in household sector financial assets. This is a precise reflection of Japanese companies' excessive focus on debt repayments amid deflation.
II Current State of Regional Economies
- Regional economies face a supply-demand imbalance amid intensifying global competition. I feel that that the greatest cause of Japan's failure to completely overcome deflation lies precisely in the state of regional economies.
- In this context, a variety of initiatives have been implemented in regions across the country. For example, there is an initiative to achieve regional development by connecting with the global economy. Kucchan Town in Hokkaido has attracted investment from Australians who have found out that this town offers fine powder snow for skiers.
- On the other hand there are cases, like an initiative by Nagahama City in Shiga Prefecture, in which regional revitalization is achieved within the framework of the domestic economy. Nagahama City acquired a Meiji-era building known as "Black-Wall Bank" as part of its effort to create an attractive townscape. In addition, the city established a glass-making workshop for souvenir goods, which has become a very popular tourist site. This is a successful example of an initiative to revitalize an entire region by focusing on a specific specialty.
- A similar initiative is also under way on a remote island. The island town of Ama, in Shimane Prefecture, has started an initiative to establish its own local brand of beef, which is taken from cows fed with grass rich in mineral ingredients stemming from the surrounding sea. In addition, the town offers a specialty dish called "Sazae" curry, which features turban shell as an ingredient, and other specialty produce, with the entire island looking like a department store offering a variety of goods. This initiative has prompted some people who have deserted the island to return there, leading to an increase in the town's population.
- Meanwhile, there is a town that has turned away from the bitterness of the present time to the good old days of the Showa era. Bungo Takada City in Oita Prefecture created streets whose appearance recalls the Showa era.
- The Tsubame-Sanjo region has resolved the problem of supply-demand imbalance by continuously adapting local businesses to suit the needs of the time, with its strength in metal processing technology as an industrial base. Moreover, this region has created its own brand of products in a bold attempt to connect with the global economy, made active use of new materials and developed new products, and these activities have drawn our attention. This region really deserves our respect, as it has played the role of a very sensitive "antenna" that identifies market needs correctly.
- Meanwhile, regional financial institutions also have a new, additional role to play. There is an attempt to provide loans actively without relying too much on land as collateral. And there is an initiative to use movable assets or accounts receivable as loan collateral. Moreover, the Electronically Registered Receivables Act was enacted in the Diet last year in order to ensure the security of procedures for securitization and transfer of debts and facilitate corporate fund-raising. This is an era of paperless transactions. There are accounts receivable totaling tens of trillions of yen that are held by SMEs alone, and the total value of accounts receivable, including those held by larger companies, is well over 100 trillion yen. If accounts receivable are registered electronically and the ones thus backed by the effect of public registration are securitized, a drastic change could occur in corporate fund-raising.
- So-called LCFIs (large complex financial institutions) have received capital from sovereign wealth funds in exchange for issuing preferred shares when they faced a capital shortage. An arrangement like this may be used by SMEs to receive funds similar in nature to capital from regional financial institutions. As I told you earlier, the balance between capital and liabilities is greatly distorted in Japan. In order to reform the distorted balance sheet structure, we may consider going further than now in the supply of funds similar in nature to capital. Government-affiliated financial institutions have started providing subordinated loans similar in nature to capital on an experimental basis. An approach like this will probably have to be closely examined in the future as an element of regional finance.
- Although know-how regarding the pinpoint approach used in the rehabilitation of individual companies has been accumulated in various ways, regional revitalization needs an area-wide approach. The planned establishment of a Regional Power Revitalization Corporation in the next fiscal year represents just such an approach. As I have been involved in this issue for a long time, I strongly hope that the new Corporation will make great contributions to regional revitalization. Regional financial institutions have accumulated a large volume of corporate information concerning SMEs as well as regional economic matters and social affairs. I am sure that personnel at regional financial institutions have in-depth knowledge regarding their regions and are highly motivated to work hard for the sake of their regions. I am sure that they have a keen business sense and readiness to act speedily – traits that are lacking at public institutions like local governments. Under our plan, a Regional Power Revitalization Corporation will provide support for business rehabilitation related to wide-area revitalization. For example, a sight-seeing area or a hot spring resort may make a region-wide effort to attract visitors, or rehabilitation of a regional department store may be carried out in conjunction with revitalization of the surrounding shopping streets. I strongly hope that regional financial institutions will work on wide-area revitalization while bearing in mind the planned functions of a Regional Power Revitalization Corporation in this regard.
III Strengthening the Competitiveness of Financial and Capital Markets
- We plan to submit in the current ordinary Diet session a bill related to the Plan for Strengthening the Competitiveness of Japan's Financial and Capital Markets. Of the financial assets held by Japan's household sector, totaling around 1,500 trillion yen, 750 trillion yen is parked in deposits, etc., rather than invested in financial products. We must review and reform the Japanese markets once again.
- Whereas the commodity markets around the world have continued to grow rapidly, Japan's commodity market remains. We must first rebuild this market. As a first step, we may have to consider merging the exchange for financial products and the exchange for commodities by offering both types of product in the form of ETFs (exchange-traded funds). In addition, we may have to consider establishing a market specifically intended for investment by professional investors from around the world.
- We will also have to review the "firewall" regulation concerning the separation of banking and insurance businesses. For example, although it may be impossible to allow a bank to engage in cash commodity transactions, it will be worth considering allowing a company affiliated with the bank to engage in such transactions. Moreover, we may have to consider drastic deregulation concerning Islamic finance. Since Japan excels in technologies related to energy conservation and low carbon emission, we may have to implement major deregulation concerning emissions trading. Furthermore, as I told you earlier, major deregulation may be necessary with regard to share ownership related to corporate rehabilitation.
- From these viewpoints, we have drawn up the Plan for Strengthening the Competitiveness of Japan's Financial and Capital Markets and plan to submit the necessary bill in the current Diet session.
2. Dialogue with Participants
The following are examples of opinions and comments expressed by participants in the question-and-answer session that followed the keynote speech.
[Company managers]
ΟIn the Tsubame-Sanjo region, the number of companies that go out of business is far higher than the number of companies newly created, and the number of companies operating in the region has been declining year after year as a result. Is the government considering measures for increasing the number of companies, such as providing managers of bankrupt companies who are willing to start a new company with an opportunity to do so?
ΟShouldn't city banks, which also provide loans to SMEs in regions (as well as catering to large companies in metropolitan areas), engage in initiatives to provide steady support to SMEs and assist corporate rehabilitation?
[Representatives from financial institutions]
ΟRegarding a proposal to review the institutional framework for cooperative-type financial institutions such as Shinkin Banks and credit cooperatives, what roles does Minister Watanabe think such institutions should play in the future?
Financial Services Agency, The Japanese Government
