(Provisional Translation)
October 28, 2005
Financial Services Agency
The Government of Japan

Approaches to the Disposal of the Financial Assets (Preferred Stocks, etc.)Acquired through Capital Injections with Public Funds

With more than six years having passed since the first series of capital injections using public funds, the original purpose of the capital injections seems, overall, to be on track to being achieved, seeing that, for instance, the financial institutions which received the capital injections (hereinafter referred to as the ''Recapitalized Financial Institution(s)'') have improved their soundness over those years and are now in most cases able to raise capital from private sources, while continued follow-up work on their plans for restoring sound management still remains necessary.

In response to such a phase transition in relation to the Recapitalized Financial Institutions, the Japanese government is increasingly required, more strongly than ever, to take an approach that places more emphasis on the standpoint of ''taxpayers' interest'' in its role of managing financial assets (preferred stocks, etc.) acquired through the capital injections, while maintaining sound management of the Recapitalized Financial Institutions and avoiding negative impacts on markets.

Assuming such a viewpoint, the FSA has put together its approach to the disposal of the financial assets (preferred stocks, etc.) acquired through capital injections as follows:

(1)	Thus far, the preferred stocks, etc. acquired through the capital injections have been disposed of at values higher than those injected or, in other words, in a manner that has brought profits to the government, with due consideration for the terms of the preferred stocks and stock price movements, and so on, based on requests by the Recapitalized Financial Institutions. We also have recently seen various forms of disposal chosen according to the financial position of each Recapitalized Financial Institution and market conditions, as well as other factors, including sale to a third party and sale in the market, in addition to repayment (buy-back) using its surplus. We believe it is desirable that the Recapitalized Financial Institutions will, upon further augmenting their corporate value and determining their capital policies, continue to make efforts on their own initiative for the repayment of the public funds in a fashion that fulfills the so-called ''Three Principles'' set by the Deposit Insurance Corporation of Japan (DICJ):
	(i) maintaining sound management of the financial institutions, (ii) avoiding public costs, and (iii) avoiding negative impact on the markets.
(2)	In addition, considering the aspect of asset management with more emphasis on the standpoint of ''taxpayers' interest,'' as the role of government needs to be adapted to the phase transition in relation to the Recapitalized Financial Institutions, it will be an appropriate course of action to establish a basic principle to ensure collection of profits accruing on the public funds as the fruit of the stabilization of the financial system, while maintaining sound management of the Recapitalized Financial Institutions and avoiding negative impacts on markets, in line with investment behavior of private shareholders and taking due account of the terms of the preferred stocks and stock price movements, as well as other factors. This would in turn also contribute to minimizing public costs for the purpose of financial system stabilization. Moreover, the preferred stocks, etc. acquired through the capital injections should, as in the past, be disposed of on the basis of fair value based on current market value, etc.
(3)	With the above points in mind, DICJ, charged with the administration of the preferred stocks etc., will be required to stand prepared to take appropriate and flexible actions in view of factors including the terms of preferred stocks and stock price movements at a given point in time, while keeping the basic position that disposal should primarily be made up on request of each Recapitalized Financial Institution in accordance with its own capital policy. Therefore, it will be a meaningful step on the part of DICJ to specify in advance clear guidelines for its possible course of actions that are founded on the terms of the preferred stocks, such as the conversion option; this would serve the purpose of ensuring predictability in the markets, etc. as well. In disposing of the preferred stocks, etc. in the future, it is natural that DICJ should pay full attention to maintaining sound management of the Recapitalized Financial Institutions and avoiding negative impact on the markets as before. Another point is that, for the purpose of proceeding smoothly with the disposal, it is necessary to continue to respect as much as possible the capital policy of each Recapitalized Financial Institution as before, and also to conduct sufficient consultation with the Recapitalized Financial Institution in considering specific measures to take.

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Reference:

EXISTING PRINCIPLES

''Exercise of the Conversion Options of the Convertible Preferred Stocks (Excerpt)''

(Financial Reconstruction Commission, June 29, 1999)

Where the plan for restoring sound management is implemented properly, the conversion option will not, in principle, be exercised for the purpose of exercising a voting right. In exercising the conversion option at the time of disposal of preferred stocks, the Deposit Insurance Corporation of Japan should examine specific disposal policies in consideration of the purposes of the Early Strengthening Law, including the financial system stabilization, as well as asset management aspects.

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''Immediate Guideline for Disposal of Preferred Stocks, etc. Acquired through Capital Injection with Public Funds'' (announced by Deposit Insurance Corporation, October 28, 2005)