• Speeches and Material

''Regulatory and supervisory developments, and the future outlook'' Speech by Katsunori Mikuniya, Commissioner, Financial Services Agency (FSA)

The International Bankers Association
Tokyo, 1 June 2011


I am Katsunori Mikuniya, the Commissioner of the Financial Services Agency of Japan. I feel greatly honored to have this opportunity to speak at this conference today, which brings together people from foreign banks and securities companies that are operating in Japan. I would also like to express my sincere appreciation for the valuable opinions we receive from members of the International Bankers Association. Your opinions are always extremely helpful in conducting our financial supervisory and regulatory policies.

As my first remark, let me allow saying that I am deeply saddened by the tragedy of the Great East Japan Earthquake on March 11. I would like to express my condolences for all the victims of this disaster. As I come from Aomori Prefecture, which is part of the Tohoku region, my thoughts are with those people.

What impressed me and all Japanese people on the occasion of this tragedy were the support and assistance that have been given to Japan from people all over the world. Let me express my heartfelt gratitude for all the kind words, encouragement and sympathy that people around the world, including the people in this room, have given to my country. I am really impressed with all your friendship and support.

2FSA's measures taken in response to the Earthquake

Following the outbreak of the Great East Japan Earthquake at 2:46 p.m., we immediately established the Disaster Management Team headed by Minister Jimi at 3:00p.m.. The reason why it took 14 minutes until the establishment of the Team was because the elevators became out of service due to the Earthquake. It took more than 10 minutes for the relevant staff to come up to the board room via the stairs.

On the same day, Minister Jimi and BOJ Governor Shirakawa issued a joint request for financial institutions to take appropriate measures to accommodate the needs of people hit by the disaster. Since then, the FSA has been taking measures in response to the Earthquake mainly in 4 areas. These are:

  1. First, to secure the function of payment and settlement systems;
  2. Second, to accommodate the needs of people in devastated areas flexibly and promptly;
  3. Third, to ensure the function of financial and capital markets; and
  4. Fourth, to ensure the soundness of financial institutions.

(1)To secure the function of payment and settlement systems

The first area is to secure the function of payment and settlement systems. The payment and settlement systems are the core function of entire financial system, so even under the chaotic situation, we can never allow them being unstable. This work might sound sophisticated. In reality, however, it has been a struggle that is much more ''primitive''. For example, we needed to ensure stable supply of electric power in order to maintain the core centers' function, and we also needed to get the heavy oil for back-up generators, to get permission for cash delivery vehicles to get into the devastated areas, and to procure gasoline for those vehicles. We have been operating this type of work days and nights.

(2)To accommodate the needs of the people

The second area is to provide financial intermediary function and various financial services to people hit by the Earthquake as flexibly and promptly as possible. This consists of a wide variety of measures such as flexible response to depositors, provision of a grace period for loan payments, flexible provision of stop-gap funds, and a grace period for non-payment of drafts and checks caused by the disaster. Financial institutions have been continuously assuming these tasks in a sincere and timely manner. To further support these tasks, we extended on March 31 the effective period of the Act concerning Temporary Measures to Facilitate Financing for Small and Medium sized Entities for one year. Through close cooperation between the government and private sectors, and in tandem with other government agencies , we will continue to consistently maintain the indispensable financial function.

(3)To ensure the function of financial and capital markets

The third area is to ensure the normal functioning of financial and capital markets. After the Earthquake, the markets have been kept open in order to secure smooth economic activity. At the same time, the FSA, cooperating with the Securities and Exchange Surveillance Commission and financial products exchanges, has been closely monitoring the markets to prevent any inappropriate transactions that intend to take advantage of the disaster.

At the occasion of ''September Eleven'' 10 years ago, Japan was virtually the first country which had to decide whether or not to open the market after the tragedy. We decided to keep our markets open at that time, and I was at the very center of this decision-making. 10 years later, on ''March Eleven'', we faced a similar situation and again decided in the same way. This is because market is the key infrastructure for the economy.

(4)To ensure the soundness of the financial institutions

The fourth and last area is to closely monitor and ensure the soundness of each financial institution and the stability of the financial system as a whole. Financial institutions themselves are suffering from the disaster. But it is vital for the recovery and reconstruction that they nevertheless support and sustain economic activity even under this severe situation. So we have been deliberating how to deal with this issue and submitted a bill to the Diet last week. This bill -''Act on Special Measures for Strengthening Financial Function'', provides a framework for supporting broadly local economies and depositors through capital participation by the government.

3Japan's experience and some thoughts for the future

Mr. Greenspan described the recent financial crisis as a ''once-in-a-century credit tsunami''. In Japan around in this decade, we have witnessed credit tsunamis twice and this time a disaster. But we overcame the past crises, and I am sure we will absolutely do the same this time.

The Financial Services Agency has been fighting against the crises ceaselessly in its history. In the remainder of my speech today, I will tell you how we have been dealing with sequence of crises and share with you some thoughts for the future. My presentation will be made according to the following line:

  1. First, I will brief you on the history of the Financial Services Agency;
  2. Second, I will explain the work that we conducted to deal with our own financial crisis, classifying them into 4 areas;
  3. Third, I will say some words on the characteristics of the recent global financial crisis;
  4. Fourth, I will explain how the recent global crisis compared to our own financial crisis, and how to weave these two strands;
  5. Fifth, I will introduce some of our thoughts on the recent international discussions;
  6. Sixth, I will touch on some issues that we need to consider as financial supervisors and regulators; and
  7. Lastly, I will end by telling you some thoughts for the future.

(1)FSA's history

When you look back at the genesis and history of the FSA, you can see that our history has always been a fight against crises. The predecessor of the current FSA, the Financial Supervisory Agency, was established in 1998 right in the middle of the long term credit banks turmoil, with the Ministry of Finance still facing housing loan problems. The Financial Services Agency was established in 2000 in such a chaotic environment. Amid this difficult situation, the FSA has set forth three major principles as its ultimate objectives. Those are,

  1. Establishment of a stable financial system;
  2. Protection of users of financial services and improvement in user convenience; and
  3. Establishment of fair and transparent market.

In order to restore the public trust in the financial system, we have been struggling to achieve these missions. It has been a bumpy and hard way. It was just last month that we could finally make an end to the housing loan problems after the continuous efforts of 15 years.

(2)Work to deal with our own financial crisis

In our past financial crisis from late 1990's, more than 180 Japanese financial institutions failed. In order to overcome the crisis, we made tremendous efforts to establish necessary frameworks and better manage those frameworks. The work focused mainly on 4 areas:

  1. First, we established a framework for the disposal of non-performing loans by individual institutions, and dealing with failures of financial institutions. We successfully reduced non-performing loans dramatically through strict and precise evaluation of toxic assets, taking them off the balance sheets and injecting capital from the public purse.
  2. Second, we created and strengthened various safety net schemes over time. As a result, I believe that Japan has now the most advanced financial-sector safety net that enables smooth recovery or resolution of ailing financial institutions.
  3. Third, we improved infrastructures that can support Japan's financial and capital markets from long-term perspective. One example is the Financial Instruments and Exchange Act.
  4. And fourth, we established and managed institutional frameworks with the aim to ensure better consumer protection for users of financial services. Looking around the world, many countries now face with the taxpayers' anger caused by the recent global financial crisis. This is what we experienced 15 years ago, when we were struggling with the housing loan problems. Our experience shows that restoring the public trust in the financial system and the financial supervisory and regulatory policy is the indispensable foundation for the financial stability.

(3)The recent global financial crisis

Through the efforts that I just described, we had begun to see some sunshine in the sky by the year 2007. But it was exactly at that time when the subprime mortgage debacle emerged. Then in 2008, Leman Brothers collapsed.

One major characteristic of this crisis was that it was something of the 21st- century type, which spreads rapidly via market to all over the world and across sectors. The original purpose of securitization was a good combination of positive side of both bank lending and direct finance. But in reality, sub-prime products ended with the vicious combination of negative side of bank lending and direct finance. This is a strong reminder of the fact that we should never be complacent that we can subdue or control completely the excessive risk taking and the greed of markets. Once balance sheets are damaged, it would take many years to put the crisis fully behind us.

(4)Comparison of two crises

We are now in the transition stage from the pre-sub-prime era to the post-Lehman era. When we compare the recent global financial crisis with past Japan's own crisis in 1990's, we can see some similarities and differences.

The similarities are the following:

  1. Before the burst of bubble, stock prices, real estate prices, and the corporate and household debt were all rising sharply. Irresponsible lending had been widespread ahead of both crises on the assumption that real estate prices would continue to go up. And turmoil was triggered by the sudden decline of the real estate prices.
  2. Many people had a tendency to refer to the so-called ''paradigm shift'' before the burst of bubble. They had seen many bubbles in the past, but thought ''this time is different''.
  3. Adverse effects of the turmoil spilled over to the real economy. As I will mention later, the financial sector and the real economy are intertwined with each other.
  4. We were able to identify the emergence and foresee the burst of bubble, but could not declare exactly when bubble would burst and affect the real economy.
  5. Excessive risk concentration had occurred in some sectors ahead of the crises. In Japan, the concentration was on banks, and this time, on markets.

The differences are as follows:

  1. Whereabouts of the risk concentration.
  2. In the case of bank lending, which was the main cause of Japanese crisis, bank's clients are obligors and the effect is basically confined to banking sector. In the case of securitized products, which caused the recent global crisis, financial institution's clients are claimants, and these products are widely distributed to all over the world.
  3. Consequently, the impact of Japan's financial crisis was basically contained within its borders. But in the recent crisis, the losses from the burst of bubble have been dispersed globally because of the wide spread of securitization and the ''originate-to-distribute model''.
  4. And this time, crisis spread instantly. It was impressive for me that financial crisis and new influenza virus spread simultaneously around the globe, which showed how the world is interconnected not only economically but also physically.

To sum up, Japan's financial crisis in 1990's was of course very severe, but its effect was basically limited to Japan and we had to overcome the crisis in our own way. On the other hand, the recent crisis had a global-wide effect which countries all over the world had to overcome in close cooperation. Measures to resolve this crisis have been the subject of international discussion. From Japan's perspective, this means that we need to weave the two strands in a well- balanced manner: that is, good combination of domestic regulations intertwined with our history, culture and backbone; and international coordination.

(5)International arena

Now, let me go further on the ongoing international discussion on financial regulatory reform. Shortly after the Lehman shock, the focus of international discussion on financial regulations was on how to bring the crisis under control. Later, the focus shifted to how to rebuild the regulatory framework so as to prevent the recurrence of the crisis. Various issues have been on the table. In relation to the Basel III, we have discussed and agreed the qualitative and quantitative requirement for bank capital, as well as regulation on leverage and liquidity. There has also been discussion on the possibility of strengthening the regulation and supervision of Systemically Important Financial Institutions according to their risk level. There are also issues related to the OTC derivatives market, such as the use of central counterparties for the settlement of such derivatives and reporting of trading data.

We place a very high priority on the ongoing debate on international financial regulatory reform, since it will create a new landscape of global finance, and of Japanese financial system and economy. While the reform should improve the soundness of the financial system in the medium and long term, it is critically important:

  1. To pay due consideration to differences of the circumstances of the financial systems in individual countries, and
  2. To sufficiently take account of the potential impact of the reform on the real economy.

The Basel III framework that was approved at the G-20 Summit last November reflects the argument that Japan has consistently upheld during negotiations; that it is essential to fully grasp the actual economic condition and avoid undermining economic recovery.

Regarding the Global Systemically Important Financial Institutions, the public comment process is scheduled to start this summer and to be worked out by the G-20 Cannes summit in November. Here again, we believe that it is important (i) to avoid introducing excessive regulation in light of the potential impact on the economy; (ii) to ensure that G-SIFIs are regulated according to their respective risk levels, and (iii) to adopt a comprehensive, well-balanced policy package, rather than focusing exclusively on additional capital adequacy regulation. We will continue to argue this issue.

We are also actively taking part in the other work conducted by international standard setting bodies, for example, IOSCO, IAIS and IASB. In IOSCO, our Vice-commissioner Masa Kono has been designated as the chair of the Technical Committee. We have been making efforts to strengthen our international division constantly and would like to further contribute to discussion and rulemaking in the international arena.

(6)Some issues we have to consider

Now, I would like to mention some issues which I think we have to consider as financial supervisors and regulators. These are:

  • i) Good combination of short-term objectives and medium-to-long-term objectives;

  • ii) The importance of virtuous cycle between the financial sector and the real economy; and

  • iii) Collaboration between micro-prudential supervision and macro-prudential supervision.

  1. First, supervisors and regulators need to implement both short-term measures and medium-to-long-term reforms in a balanced manner. This is true not only in the crisis but also in normal times. As I mentioned before, in dealing with our own financial crisis in 1990's, FSA worked with its main focus on 4 areas, that is: steady disposal of non-performing loans; establishment of safety net; establishment of market infrastructure; and consumer protection. This is a good combination of short-term and medium-to-long-term objectives to be promoted simultaneously.
    And now to deal with the aftermath of the Earthquake, we are again working with both short-term and medium-to-long-term perspectives. As short-term measures, we are promoting financial intermediary functions through extension of Act concerning Temporary Measures to Facilitate Financing for SMEs, submission of special bill for strengthening financial institutions' capital base, and other means. As for medium-to long-term objectives, we had been discussing since before the Earthquake fundamental issues in the Financial Council, which published the ''Report by the Roundtable Committee on Fundamental Issues of the Financial System Council-Designing the Japanese Financial System in Light of the Global Financial Crisis-''two years ago. We are also promoting the ''New Growth Strategy''.
  2. Second, the financial sector and the real economy are intertwined with each other. Through the experience of our own crisis in 1990's and Lehman crisis, I have come to realize again the strong link between the financial sector and the real economy. When we faced the heavy damage particularly in financial sector but also in real economy as a whole in 1990's, we made efforts to revamp the financial sector through disposal of non-performing loans, in order for financial institutions to recover as soon as possible and to become able to sustain the real economy. In Lehman crisis, Japanese financial sector was not affected so much compared to those of the US or EU in terms of direct exposure to the toxic assets. But via foreign exchange market and capital market, and decline of export and so on, Japanese real economy was damaged heavily and the crisis also severely affected the financial sector. So we have taken various kinds of measures to sustain the economy in tandem with Bank of Japan and other agencies. The financial sector alone cannot restore or stabilize the financial system entirely. It needs strong recovery of real economy. At the same time, we cannot ensure strong and sustainable growth without resilient financial system.
  3. Third, macro-economic and market developments are as important as the idiosyncratic risks of individual firms. It is essential for regulators to identify common risk factors and make use of the sector-wide or cross-sectoral analysis in supervision. Traditional micro-prudential supervision focusing on the soundness of individual firms is of course important and necessary, but not sufficient. Regulators also need to analyze more thoroughly the effect of macro-economic and market development on the soundness of the financial system.

With all these issues in mind, the FSA has been pursuing effective and well-balanced regulation. This means:

  • i) best mix of rule-based regulation and principle-based regulation;

  • ii) striking the right balance between fairness and efficiency, and

  • iii) good combination of consumer protection and self-responsibility.

Circumstances surrounding the financial system are always changing, and regulatory resources are always limited compared to entire needs. But we financial regulators have to do our duty continuously in a forward-looking and effective manner. This is the reason why we are promoting ''Better Regulation''. In my view, ''Better Regulation'' itself is evolving in accordance with changes in circumstances.

(7)Some thoughts for the future

Historically, we have seen lots of bubbles and economic crises. And going forward, we cannot prevent the recurrence of crises completely. The crises will emerge again changing their shapes. Drawing on the lessons from the past crises domestically and internationally, we have to recognize that, whether it is in the banking sector or the market sector, excessive risk taking is always the root cause of the crises. At the same time, each financial structure or instrument has both positive and negative side. We should not deny everything by focusing only on negative side. We should always keep a well-balanced viewpoint. As a Chinese philosopher said, ''Excess is as bad as shortfall.''

There is no single statutory regulation that can work as a silver bullet. No regulatory measures can address all kind of bubbles. We should also not forget that market participants have a tendency to be greedy. In order to realize sound and steady economic growth, market participants' adequate risk control is of course the most important. At the same time, robust and consistent regulation and supervision is indispensable. We regulators have to train ourselves and strengthen our abilities. This is the universal subject for all regulators and supervisors in the world.


Japan is now facing the aftermath of the Great East Japan Earthquake. In the medium-to-long-term perspective, we are also facing aging and shrinking of population. In this situation, we need to make our economy and financial system stable, elastic and strong.

Let me reiterate here again that we have overcome many crises in the past. Earlier in my presentation today, I have mentioned our 3 missions; financial stability, protection of users, and fair and effective market. When looking at the disaster this time, you will find that, even in the midst of turmoil, financial sector has been playing its role as smoothly as possible, markets have been keeping their function, and people in devastated areas as well as across our nation are showing great solidarity. These are what we are pursuing through our 3 missions. We will absolutely overcome this crisis, and the FSA will contribute to the restoration and reconstruction work through our 3 missions. I hope you will convey this message to your colleagues in your home countries.

It is very important to pay attention to the international harmonization of regulation and supervision, and ascertain global economic situations. Therefore, I would like to conclude my speech by stressing the importance of our communications with people here. I hope that the FSA and foreign financial institutions will continue to work together to contribute to the development of financial and capital market. We appreciate your continued cooperation, and you are always welcome to contact myself or my colleagues whenever you want.

Thank you very much for your kind attention.

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