Policy Statement by Yoshimi Watanabe, Minister of State for Financial Services, at the Committee on Financial Affairs of the House of Representatives

The 169^th Ordinary Diet Session
February 19, 2008

Thank you. I would like to give a few remarks on the current status of financial regulation in our country.

Strengthening the Financial Intermediary Functions

First, I will explain the current situation surrounding the Japanese financial system. As I understand it, the global financial markets remain in a state of turmoil caused by the subprime mortgage problem, with the effects of the problem spreading to markets for a wide range of securitization products as well as the stock markets. As a result, concern is growing that this problem could also hurt the real economy, particularly in the United States.

In this situation, major Japanese banks reported sharp declines in their profits in the third and fourth quarters of the current fiscal year ending in March 2008, mainly because of an increase in their losses related to the subprime mortgage problem. Nonetheless, the total value of subprime mortgage-related products held by Japanese financial institutions and the amount of evaluation losses at their overseas equivalents on their holdings of such products are limited relative to the scale of their overseas equivalents' holdings of such products and evaluation losses as well as the financial strength of the Japanese institutions as represented by profits reported in their financial statements and capital base. Therefore, I do not expect, at this point in time, that this problem will directly produce a serious impact on the Japanese financial system.

However, I expect that it will take some time before the global financial markets overcome the current turmoil and return to normal. We will remain vigilant to developments related to this problem and pay close attention to the risk management practices of financial institutions as well as developments in the stock, credit and foreign exchange markets, including by cooperating with the relevant authorities in and outside Japan and gathering information promptly.

Against the background of the increased downside risks to the domestic and overseas economies due to the market turmoil and a slowdown in the U.S. economy, I think that it is increasingly important to ensure that the financial intermediary functions, such as facilitation of financing for small- and medium-size enterprises, is fulfilled properly in local economies. From this viewpoint, we will continue to further promote the establishment of a framework that encourages financial institutions to make voluntary and sustained efforts in activities such as relationship-based banking.

Enhancement of User Protection and Convenience

Next, I will explain our efforts to enhance the customer protection and convenience. Last autumn, we put into force the Financial Instruments and Exchange Act in order to enhance rules concerning the protection of customers and to promote financial innovation by introducing cross-sectoral and flexible regulation. We will continue to devote our sincere efforts to enforcing this Act properly while avoiding the situation in which financial institutions would respond excessively to the Act and constrain their activities to an extent exceeding its purpose. Moreover, in order to resolve the problem of multiple debts, we will continue to implement the Program to Remedy the Multiple Debt Problem in an effective manner through cooperation with other relevant ministries and agencies. At the same time, we will keep a close eye on developments related to the money-lending business and smoothly implement the institutional reform of the money-lending business.

Strengthening of the competitiveness of the Japanese financial and capital markets

Now, I will explain our efforts to strengthen the competitiveness of Japan's financial and capital markets. In order to establish a society that enables the people to feel affluent against the background of a shift of funds from ''savings to investment,'' it is necessary to provide good investment opportunities for financial assets held by the Japanese household sector, which amount to 1,500 trillion yen, and to supply the capital necessary for business growth to both Japanese and foreign companies in an appropriate manner. From this viewpoint, the FSA put together the Plan for Strengthening the Competitiveness of Japan's Financial and Capital Markets at the end of last year.

This plan represents a comprehensive package of specific measures for strengthening the competitiveness of the markets through the ''creation of reliable and vibrant markets,'' the ''establishment of a business environment that vitalizes the financial services industry and promotes competition,''and the ''improvement of the regulatory environment (better regulation). The FSA intends to implement the measures included in the plan steadily and with a sense of urgency.

Conclusion

We plan to introduce in the current session of the Diet a bill for partial amendment of the Financial Instruments and Exchange Act and other acts, which aims to strengthen the competitiveness of Japan's financial and capital markets as I explained to you earlier. I would appreciate the understanding and cooperation of Chairman Harada and all other members of this committee.

(End)