Provisional translation

Press Conference by FSA Commissioner Takafumi Sato


April 7, 2008

[Opening Remarks by FSA Commissioner Sato]

Good afternoon. For my part, I have nothing to report to you.

[Questions and Answers]


I will ask you about negotiations about a plan to integrate the Osaka Securities Exchange (OSE) and Jasdaq. Jasdaq has refused to accept the integration of its system with the OSE's despite the decision by the Japan Securities Dealers Association (which owns Jasdaq) to enter negotiations with the OSE about the sale of shares in Jasdaq. The negotiations are thus expected to remain difficult. What is your assessment of the present situation and how Japan's exchanges should be realigned in order to enhance Japan's markets as a whole amid expectations that trading activity will remain sluggish on the markets for emerging companies?


My understanding is that an agreement was reached at a meeting of a special committee of the Japan Securities Dealers Association on March 31 that the negotiations with the OSE should be continued with a view to approving the purchase of a majority stake in Jasdaq by the OSE. In addition, I hear that what was agreed upon will be referred to a meeting of the (JSDA's) Board of Governors for deliberation on April 8.

Although I would not comment on an individual case like this one, generally speaking, alliances and realignment involving exchanges, including the integration of systems, are in principle matters to be left to individual exchanges to decide. Therefore, my view is that this is an issue that should be decided in an appropriate manner by the parties concerned. At the same time, I hope that the parties concerned will make efforts toward fostering public trust in, and injecting vitality into, Japan's stock markets for emerging companies as a whole. In relation to this issue, we, as the financial authorities, are bearing in mind four major viewpoints, which I will explain to you now.

The first viewpoint is to provide a marketplace that allows emerging companies with a promising future to raise funds smoothly. I think that it is important to provide such companies with a diverse range of means to raise funds in a stable manner.

The second viewpoint is to ensure that investors are given a variety of investment opportunities. Namely, it is important to make available for investors various investment vehicles with different levels of growth potential corresponding to the level of risk involved with them.

The third viewpoint is to ensure the fairness and transparency of the market. We must take appropriate measures for ensuring the fairness and transparency of the market so that prices will be determined by market forces in a fair manner based on appropriate disclosure of information.

The last, fourth viewpoint is to ensure that transactions are made in a smooth and efficient manner. I think that it is necessary to establish an efficient trading system that ensures smooth transactions so that investors can consistently make transactions at the lowest possible cost.

What I want to stress is that we are bearing in mind the four major viewpoints I have mentioned.


My question concerns a plan for the reform of the U.S. financial supervision, which was announced last week. What do you think of the U.S. reform plan, and in relation to the reform plan, how do you think the Japanese authorities should supervise financial institutions in light of necessary cooperation with the Bank of Japan (BOJ), the new governor of which is likely to be decided at last?


As you know, the U.S. system of financial supervision has a complex structure, with different supervisory bodies supervising financial institutions by business type and the federal and state governments exercising their respective supervisory powers. I think that debate on how the U.S. system of financial supervision should be structured has already been ongoing for some time. A proposal for the reform of the financial supervisory authorities presented by the U.S. Treasury Department, as I understand it, is based on the recognition of problems such as that there is not a separate supervisory body responsible specifically for overseeing systemic risks, that competition over supervisory authority between the various regulators is hampering the introduction of new products and deterring innovation, and that there are overlaps of regulatory work between the various regulatory bodies. I understand that Congressional procedures will have to be followed before the implementation of measures to address these problems, and I will keep close watch on future developments.

Meanwhile, Japan has already established a system under which the Financial Services Agency (FSA) exerts integrated supervisory authority over different business sectors. Moreover, the FSA, the BOJ, the Ministry of Finance and other relevant organizations maintain cooperation on a daily basis within an established framework for cooperation in order to ensure the stability of the financial system. The FSA will continue efforts to conduct supervision in an appropriate manner while maintaining cooperation with relevant organizations, including the BOJ.


In late March or around that time, the Japanese Institute of Certified Public Accountants (JICPA) issued a notice to audit firms to the effect that audits should be implemented "in an appropriate manner" -- I do not remember the exact wording used by the institute -- with regard to securitization products and credit derivatives and that exposure should be disclosed properly. In relation to this, could you tell us whether it is possible that Japanese financial institutions' losses related to subprime mortgages could expand further? Also, I hear that although this notice was issued to audit firms, accounting officials and other people concerned at companies and financial institutions that saw this notice were very worried that they might have to take a strict approach to such products. Should it be a "strict" or an "appropriate" approach? How does the FSA view this matter?


I remember that the JICPA issued a notice concerning the approach that should be adopted in audits relating to securitization products and the like. Financial institutions are now set to start earnestly working on their financial statements for the fiscal year that ended in March, undergo the process of auditing by external auditors, and announce their financial results. Naturally, the process of auditing by public certified accountants and audit firms is very important. It is important to ensure that during the auditing process, various portfolios held by individual financial institutions -- I think this was referred to in the aforementioned notice issued by the JICPA -- are assessed in ways to reflect the proper value of securitization products and the like, which have been the cause of the turmoil rocking the U.S. and European markets in particular. As financial statements are compiled through such an elaborate process, I hope that in this process, individual listed companies and audit firms and certified public accountants responsible for auditing the companies will engage in close communication and discussion with each other and reach an appropriate conclusion.


In relation to the stock of J-Power (Electric Power Development Co.), there was a media report that the Ministry of Economy, Trade and Industry has decided not to approve a plan by TCI (the Children's Investment Fund) to acquire additional shares in J-Power. I would like to ask you once again how you think this kind of move to tighten regulation on foreign capital will affect Japan's financial and capital markets.


Since the case of J-Power is a matter that concerns the enforcement of the Foreign Exchange Act (Foreign Exchange and Foreign Trade Act) and is outside the jurisdiction of the FSA, I would like to refrain from directly commenting on it.

Generally speaking, as I have already told you, it is quite natural that there be a need to impose varying degrees of restrictions on foreign investment in Japan depending on the public nature of the business and project concerned. On the other hand, it is also important to reconcile the need to impose restrictions with the need to strengthen the competitiveness of Japan's financial and capital markets and reinvigorate the markets, which is a top priority task for the government. Anyway, in enforcing such restrictions and rules, it is essential to provide clear explanations so as to avoid creating the impression that Japan is a closed country in the eyes of market players both in and outside Japan.


Could you be more specific as to what clear explanations would be?


I would like to refrain from commenting on this specific case. Regarding the need for restrictions I mentioned earlier, we may, for example, explain which sector or project has a public nature, clarify the public nature, and explain that minimum restrictions suited to the public nature are necessary. I assume this would be an answer to your question. This would be one answer to your question. Meanwhile, from the viewpoint of strengthening the competitiveness of Japan's financial and capital markets and reinvigorating the markets, I think that it is important to provide explanations in ways to avoid creating the impression, for example, that Japan's markets lack transparency and are rather incomprehensible.


I will ask you about Japan Post Bank. I understand that Japan Post Group has requested the abolition of the 10-million-yen ceiling on the amount of liquid deposits and an increase in the maximum coverage of the "Kampo" insurance to 20 million yen (from 13 million yen). What do you think of the appropriateness of this request, which I understand would require a revision of the relevant cabinet order? Also, from what specific viewpoint do you intend to consider this matter?


As you know, a transition period of up to 10 years is set for the full privatization of Japan Post. In the early part of the transition period, Japan Post must operate within its existing range of businesses, whereas after the end of this period, it should no longer face any regulation not applicable to private-sector financial institutions. This is the general framework of the privatization of Japan Post. Moreover, it is important to ensure that during the transition process, the privatization of Japan Post will be carried out in ways to achieve the goal of enabling Japan Post to be absorbed into the private sector without causing disruptions to Japan's financial system and to enhance the quality of Japan's financial services, thereby contributing to an improvement in the convenience for users.

Regarding your question about the abolition of the ceiling on the amount of liquid deposits taken by Japan Post Bank and an increase in the amount of additional coverage to be allowed four years after buying insurance from Japan Post Insurance from the current 3 million yen to 10 million yen, we have just received written requests for revision of the relevant cabinet orders. The FSA will first need to seek explanations from the Japan Post Group companies with regard to the details of their requests.


What about criteria or viewpoints to be used as a reference by the FSA when it makes judgment after receiving explanations regarding the requests?


I think that your question has already been answered when I explained the major viewpoints earlier. The committee on the privatization of Japan Post has indicated how to address the issue of an expansion of the range of Japan's Post's businesses during the transition period. In my opinion, critical viewpoints for the FSA include whether an "equal footing" between Japan Post, still partly owned by the government, and private-sector financial institutions is ensured within the framework of the privatization of Japan Post and whether Japan Post is well prepared to execute business properly when it starts new business.


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