(Provisional translation)

Policy Statement by Shoichi Nakagawa, Minister of Finance and Minister of State for Financial Services, at the Committee on Financial Affairs of the House of Representatives

February 12, 2009

(Introduction)

In my recent speech on fiscal policy, I stated my views on the course of public finance in the period ahead. At this committee today, as Minister of Finance and Minister of State for Financial Services, I would once again like to present my views on the issues that need to be tackled in the period ahead in the areas of fiscal policy and financial administration.

(Measures addressing the recent economic and financial situation)

I would like to begin by discussing the measures to address recent economic and financial developments.

If we turn our attention to the developments in the global financial and capital markets, the market prices of securitized products and financial derivatives originally developed in the United States and other countries and widely held mainly in the U.S. and Europe, dropped sharply. This caused large-scale losses at financial institutions mainly in the U.S. and Europe that had failed to undertake sufficient risk management plunging the markets as a whole into turmoil — a “once-in-a-century” financial crisis.

The recent turmoil in the financial and capital markets has had a negative impact on the real economy, including through credit crunch, and the global economy has fallen into a severe downturn. Japan’s economy is also rapidly worsening, with exports and production decreasing and consumption stagnating, as well the employment situation becoming increasingly serious.

In order to respond to this situation, we will promote three-step economic and fiscal policies under the severe fiscal conditions: in the near-term, the emphasis will be placed on reviving business activity; in the medium-term, rebuilding government finances; and in the medium- to long-term, economic growth through reforms.

Firstly, we have put together a series of economic measures totaling approximately 75 trillion yen, comprising approximately 12 trillion yen allocated to fiscal response measures and approximately 63 trillion yen allocated to financial responses. As for the individual steps in this series of measures, we are rapidly implementing them beginning with those most able to be put into effect quickly. However, in order for these countermeasures to be effective, we believe it necessary to implement the budget for FY2009 in tandem with the first and second supplementary budgets for FY2008 in a seamless manner.

Moreover, at the Summit on Financial Markets and the World Economy, in November 2008, Japan announced that it was prepared to lend up to 100 billion dollars to the IMF. This proactive announcement received high international praise. We would like to continue to share our experience of surmounting the crisis that followed the collapse of the bubble economy by our own ability, and actively participate in the discussions for designing a framework to respond to the new global economic and financial situation in the aftermath of the financial crisis. In this way, we will contribute to the global economy whilst at the same time working toward economic recovery in Japan.

(Japan’s current fiscal condition and fiscal consolidation efforts)

Next I would like to talk about Japan’s current fiscal condition and fiscal consolidation efforts.

As I previously mentioned, Japan’s economy has been pulled into the vortex of the global financial crisis. Meanwhile, the country’s fiscal condition is also extremely severe, given that the outstanding long-term debts owed by the central and local governments are projected to total 804 trillion yen (158% of GDP) at the end of FY2009, which is the worst level among major developed countries.

As stated in the declaration of the Summit on Financial Markets and the World Economy, it is essential that we maintain a policy framework that will ensure fiscal sustainability even in the situation where an immediate response is called for. Particularly in the case of Japan, given the enormous amount of outstanding debt, fiscal consolidation is a priority in order to work toward stable economic growth. We will continue our fiscal consolidation efforts in accordance with our current nonbinding goal relating to the primary fiscal balance, while at the same time giving top priority to economic recovery for the time being.

In order to fulfill our medium-term responsibilities relating to fiscal policy and to extend to the public a stronger sense of safety regarding the social security system, we will promote our efforts toward a fundamental reform of the tax system, including that of the consumption tax, in accordance with the “Medium-term Program” approved by the Cabinet at the end of 2008.

(Outline of the draft budget for FY2009 and the tax system reform plan)

I would now like to give an outline of the draft budget for FY2009 and the tax system reform plan.

The draft budget for FY2009 is a “bold, action-oriented budget to safeguard people’s daily lives” and, as such, aims to implement measures to protect people’s daily lives and Japan’s economy in the midst of the current global economic and financial crisis.

To protect people’s daily lives, we have taken measures to ensure sufficient doctors and medical treatment and to promote employment, as well as to support child birth and child rearing. We are also introducing policies to provide safety nets to protect Japan’s economy and measures to cultivate future growth. These essential measures were formulated in a highly prioritized manner by utilizing the framework for addressing the priority challenges. From the viewpoint of maintaining fiscal discipline, we are continuing reforms based on the “Basic Policies 2006.” Moreover, in line with the points suggested by the Council for Comprehensive Review of Administrative Expenditures, a thorough reduction in unnecessary spending will be carried out by strictly reviewing the necessity of respective policies. These measures include drastic cuts in government expenditure relating to public interest corporations and special accounts, as well as expenditure on public relations.

The budget for general expenditures is 51,731 billion yen, and the total general account budget, which also includes local allocation tax grants etc., and national debt servicing, is 88,548 billion yen.

In terms of revenue, we project tax revenues of 46,103 billion yen, a decrease of 7,451 billion yen from the previous year’s initial budget, as a result of economic deterioration and other factors. We project other revenues of 9,151 billion yen, including a transfer of 4,235 billion yen from the Fiscal Loan Fund Account of the Special Account for Fiscal Investment and Loan Program to the general account.

In this way, while we have made maximum efforts regarding both expenditures and revenues, we project a drastic decrease in tax revenues. Therefore, we will issue new government bonds worth 33,294 billion yen.

With regard to the FY2009 tax reforms, we have made the necessary reforms relating to housing and land, corporations, small-and medium-sized enterprises (SMEs), inheritance, financial and securities transactions, international taxation, and automobile taxation in light of realizing economic recovery and so on, considering the current economic and financial situation.

(Efforts related to financial administration)

Next, I will explain the current status of financial administration.

At present, Japan’s financial system is relatively stable compared to those of the United States and Europe. However, due to the increasing impact of the volatile stock market and the deteriorating real economy, we will keep a close watch on the situation, maintaining a high level of vigilance.

In addition, corporate funding is facing extreme difficulties amidst the rapid deterioration of Japan’s economy. Thus, it is increasingly becoming important for financial institutions to give full play to their financial intermediary function in an appropriate and active manner. In order to further put in place an environment that allows financial institutions to supply funds with confidence, we have been taking various measures, including prompt enforcement of the amended Act on Special Measures for Strengthening Financial Functions, partially relaxing the capital adequacy requirements of banks, and expanding the scope of cases in which restructured loans to SMEs are not classified as nonperforming loans. We will continue to encourage financial institutions to play their role in financial intermediation in an effective manner.

Furthermore, we need to powerfully promote measures aimed at preventing a recurrence of a similar kind of the current financial crisis and strengthening the financial systems in cooperation with other countries, and also work continuously and tirelessly to strengthen the functioning of Japan’s financial and capital markets. To this end, we will propose putting in place the legal frameworks necessary to introduce new regulation for credit rating agencies, to establish an alternative dispute resolution system in the financial field, and to enable financial instruments exchanges to open up commodity markets. We will also propose establishing a legal framework to ensure the appropriate provision of fund settlement services and to promote the provision of such services.

(Outline of the bills submitted)

We have seven bills which we will ask you to deliberate on, including one that is still under consideration as to whether it should be submitted to the current session of the Diet. Three of them are related to the draft budget for FY2009, and the remaining four are on other matters.

I will give you an outline of the bills that have already been submitted to the Diet.

The first bill is the Bill on Special Provisions concerning Issuance of Public Bonds and Transfer of Funds from the Special Account for Fiscal Investment and Loan Program to Secure Necessary Financial Resources for Fiscal Management. This bill provides for measures concerning an exception to the issuance of public bonds in FY2009 as well as special measures concerning the transfer of funds from the Fiscal Loan Fund Account of the Special Account for Fiscal Investment and Loan Program to the general account in FY2009 and FY2010.

The second bill is the Bill for Partial Amendment of the Income Tax Act, etc., which incorporates various measures for the FY2009 tax reform.

The third bill is the Bill for Partial Amendment of the Customs Tariff Act, etc., which provides for matters including the enhancement and strengthening of border control at Customs and the extension of the period of application of the provisional rate of duty.

The fourth bill is the Bill for Partial Amendment of the Act on Measures Associated with Membership of the International Monetary Fund and the International Bank for Reconstruction and Development, which aims to enable Japan to increase its contributions to the International Monetary Fund in line with the Fund’s step to increase quotas assigned to its members.

In addition, we plan to submit the Bill for Partial Amendment of the Financial Instruments and Exchange Act and the Bill on Payment Services, which are aimed at putting in place the legal framework I mentioned earlier in relation to our efforts related to financial administration.

On top of these bills, we are currently considering submitting the Bill for Partial Amendment of the Act on National Public Service Personnel Mutual Aid Associations to the Diet.

Given the current economic and financial situation, it is vital to adopt not only the budget but also the budget-related bills by the end of this fiscal year. The other bills also need to be adopted as soon as possible so that the necessary measures can be implemented promptly. I hereby ask you to deliberate on these matters and give your approval.

(Conclusion)

In this speech, I have stated some of my ideas relating to fiscal policy and financial administration. I am determined to continue — with your support — to do my best in policy management.

I would appreciate the understanding and cooperation of chairman Tanaka and all the other members of this committee.

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