February27, 2002
Financial Services Agency (FSA), Japan
(Provisional translation)

Prompt Countermeasures to Deflation
(Extract: - Financial Sector)

On February 13, 2002, the Prime Minister directed the related Ministers to promptly take countermeasures to deflation, in the recognition that ''although there are various backgrounds for deflation, it is indispensable at present to solve the financial problems in order to overcome deflation.'' Based on this direction, the Government has thus far taken the measures outlined below.

The Government will continue to deploy concrete and effective measures boldly and flexibly, continuously responding swiftly to changes in economic and financial conditions. In particular, regarding the disposal of non-performing loans (NPLs), the most important issue at present, the Government will present perspectives of early resolution of the so-called NPLs problems making concrete progress with the implementation of the special inspections by taking all measures to prevent financial crisis.

The Government and the Bank of Japan (BOJ) are to take coordinated actions to overcome deflation. Therefore, the Government requests the BOJ to conduct resolved monetary policy.

1. Acceleration of the disposal of NPLs

(1) Rigorous implementation of special inspections and other measures

• The Financial Services Agency (FSA) conducts rigorously special inspections with respect to debtors which have significant impact on the operations of financial institutions.
• The FSA will conduct special inspections until March 2002, and compile and disclose their results expeditiously after their completion.
• The FSA will request major banks to disclose their financial conditions promptly after the end of FY2001 (end of March, 2002), properly reflecting the disposal of NPLs subsequent to special inspections.

(2) Further acceleration of the disposal of NPLs

• The FSA has requested major banks to take the following actions;

-	expeditious resolutions of problem enterprises by such measures as establishment of reconstruction plans to be appreciated by the market and corporate reconstruction through legal procedures, while taking into account the progress of special inspections.
-	accelerated disposal of NPLs by such measures as sales of NPLs to the Resolution Collection Corporation (RCC) and others, and active utilization of corporate reconstruction funds (deleveraging funds).

(3) Aggressive purchases of NPLs by the RCC

• The Deposit Insurance Corporation (DIC) and the RCC are to aggressively purchase NPLs including such measures as utilization of trust and corporate reconstruction funds. For the purpose of facilitating purchase of NPLs based on the Article 53 of the Financial Reconstruction Law (''the Article 53 purchases'' hereinafter), the ''Headquarter for Promotion of Loan Purchases (tentative name)'' is to be established in the RCC.
• The DIC and the RCC are to set appropriate purchase prices of NPLs, considering that purchase prices by the RCC shall be at fair value based on the last amendment of the Financial Reconstruction Law. The RCC will effectively purchase NPLs at fair value by utilizing the profits so far from collecting operations of the Article 53 purchases as its financial resources (fund for fair value purchase) for the risk of possible losses of the RCC.
• The DIC and the RCC are to carry out more fine-tuned and smooth implementation of the Article 53 purchases. For this purpose, they are to establish meetings to exchange views with the financial sector.
• The RCC should aim at substantially strengthening its organization and human resources to aggressively conduct its operations including loan purchases and corporate revival. For this purpose, the RCC will request financial institutions to dispatch personnel who are familiar with these operations.

(4) Promotion of the establishment of corporate reconstruction funds (deleveraging funds)

• Corporate reconstruction funds are planned to be established by major banks, the Development Bank of Japan (DBJ), and/or private investors during FY2001. Corporate reconstruction and disposal of NPLs will be further accelerated through these funds.

2. Stability of the financial system

(1) Ensuring the stability of financial system towards the partial removal of the blanket deposits insurance

• The soundness of financial institutions is to be ensured through appropriate inspections and supervision before the partial removal of the blanket guarantee of deposits, so that the stability of the financial system will not be undermined by the failure of financial institutions after the partial removal.

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  The measures have been taken to appoint receivers to the non-viable financial institutions (52 institutions so far during FY 2001) , and to transfer business of these financial institutions. The FSA have taken the prompt corrective actions, requiring those financial institutions which needed to recover soundness, to strengthen their capital positions and other necessary measures prior to the partial removal of the blanket deposit insurance.

• In order to closely grasp the movement of deposits before and after the partial removal of the blanket guarantee of deposits, the monitoring system on liquidity risk is to be strengthened. Close coordination with the Bank of Japan (BOJ) will be made as necessary.

(2) Avoidance of a financial crisis

• The Government requests the BOJ to take necessary measures to maintain financial stability, including all necessary measures to provide liquidity in cases that financial institutions face difficulties in liquidity due to rumors or other events.
• The Government is to ensure the stability of the financial system by taking all possible measures including capital injection when there is a threat of a financial crisis and it is judged necessary in light of relevant laws.

3. Securities market measures

(1) Strengthening the regulation of short selling

In order to enhance the investors' confidence in the Japanese securities markets, regulation, supervision, and surveillance of short selling are to be strengthened and fully implemented in addition to the following recent measures.

1)	Comprehensive measures against short selling (since December 21, 2001) Through regulations Application of the mark and confirm rule to short-selling of stocks on margin transactions (enforced on February 20) Through surveillance The Securities and Exchange Surveillance Commission (SESC) has recommended to the Commissioner of the Financial Services Agency (FSA) to take disciplinary actions against two securities companies since December 2001, and it continues to take rigorous and appropriate measures against violation of the regulations. Through supervision The FSA has taken disciplinary measures against seven securities companies, which violated the short selling regulation, since December 2001, and it continues to take rigorous measures against violations of the regulations.
2)	Review of margin transactions and institutional stock borrowing (since February 1) To respond to excessive margin transactions, stock exchanges and securities finance companies amended their rules to issue a timely ''precaution to the market'' and also raised ''the lending rate of stocks''. Reviewed the standard on the precautionary notification by securities finance companies (enforced on February 7) (The number of individual stocks that were notified increased from 17 stocks (Feb.6) to 31 stocks (Feb.21)) Reviewed the standard on the designation of daily-publicized individual stocks by stock exchanges (enforced on February 20) (The number of individual stocks that were designated increased from 7 stocks (Feb.19) to 18 stocks (Feb.20)) Raised the lending rate of stocks through securities finance companies (enforced on February 18) Raised the lowest lending rate of individual stocks that were notified for excessive borrowing (minimum bid of 0.05 yen per stock) Expanded the maximum raising breadth of lending rate of stocks (4 times --» 10 times) when the balance of margin is extraordinary excessive
3)	Review of the regulations of short selling (announced on February 8, 2002) Based on specific circumvention of the so called ''down-tick rule'' for short selling, short selling rule will be strengthened by introducing the so called ''up-tick rule''. (''Prohibition of short selling below the price at the last reported sale'' will be amended to, in general, ''prohibition of short selling at or under the price at the last reported sale.) (to be enforced on March 6)
4)	Further measures Further strengthening of the surveillance by the SESC against the violation of short-selling regulations - The SESC will conduct strict surveillance against the violation of short selling regulations through detailed examination of stock trading and thorough inspections against securities companies. - The SESC will be substantially strengthened in both quality and quantity of staff, including through recruiting experts from private sectors. The number of its staff will be increased by 50% in FY2002. Strengthening measures against short-selling by the Tokyo Stock Exchange (TSE) Based on ''Countermeasures against such transaction as short-selling'' announced on February 19, the TSE will require member firms to report internal management system on short selling; will strengthen the surveillance on trading; will coordinate with foreign self-regulatory organizations regarding trading originating from non-resident; and will cooperate with the Japan Securities Finance, co. ltd regarding margin transaction (working group to kick off on February 27). Revision of the standard of the stock exchanges for additional collateral for margin transaction The requirement for additional collateral on individual stocks (30 percent at present) will be strengthened. (to be enforced on March 4). Further review of cost for borrowing stocks in margin transaction To optimize the balance of costs born between buyers and sellers in margin transaction, the FSA, on February 26, will publicly request stock exchanges and securities finance companies to review such matters as their lending terms.

(2) Effective use of the Banks' Shareholding Purchase Corporation (BSPC)

• The BSPC was established on January 30, 2002. It began its share purchase operation through its special account on February 15 (Government guarantee for the funding is provided up to 2 trillion yen in FY2001 and FY2002 respectively.) The FSA encouraged banks to use the BSPC effectively on February 19.

(3) Expansion of the coverage of indices included in the Exchange Trade Funds (ETFs)

• The coverage of indices included in the ETFs should be expanded so that ETFs linked with stock price index, including by types of industry, can be issued by March 2002.

4. Measures to facilitate smooth finance

(1) Facilitating finance to small and middle-sized enterprises (SMEs)

2)

Facilitating finance from private financial institutions The FSA is to aim at further facilitation of finance to sound SMEs by promoting innovative approaches utilizing new leading know-how for financial institutions, such as the creation of business loans with expeditious review without requiring collateral and guarantee, in addition to traditional loans largely backed by real estate collateral. In view of the expansion of the safety net guarantee system by the credit guarantee associations, the FSA is to request private financial institutions to make efforts to further facilitate finance to SMEs utilizing this guarantee system.

(2) Ensuring the implementation inspections corresponding to diverse conditions of debtors' operations

• In order to avoid monolithic and inflexible applications of the financial inspection manual, the FSA will further enhance and strengthen various measures, which are taken before, during, and after on-site visit, such as continuous instructions and training of inspectors, utilization of the ''inspection monitoring'' which checks the properness of inspections in the course of each inspection, and the ''submission of opinions'' which deals with the differences of opinions between the inspected financial institution and inspectors after the on-site visit.
  
  In conjunction with the above-mentioned measures, the FSA is to draw up and make public concrete examples of applications of the financial inspection manual, which will show judgment of debtor classification of SMEs and micro enterprises, in order to contribute to improvement of grasp of actual conditions of debtors.