Provisional translation

Press Conference by FSA Commissioner Takafumi Sato

(Excerpt)

February 16, 2009

[Opening Remarks by FSA Commissioner Sato]

I do not have any particular statements to make.

[Questions and Answers]

Q.

GDP data for October-December, which were announced today, showed a sharp contraction, and there have been media reports that the government and the ruling parties have started considering additional economic stimulus measures. While I suppose that the facilitation of financing for small and medium-size enterprises (SMEs) in the period up to the end of the fiscal year will be the focus of debate, I would like to ask you whether you are considering any additional measures. Also, regarding the credit guarantee scheme, SMEs strongly hope to use it to refinance from outstanding loans. Could you tell us about what measures you are considering, including with regard to this point?

A.

The rapid deterioration of Japan’s economy is evident in the preliminary GDP data for the October-December period, which were announced today. In this situation, I recognize that SMEs are facing very severe fund-raising conditions. I expect that the appropriate and active exercise of the financial intermediary function by financial institutions is becoming increasingly important in the period up to the end of the fiscal year, when fund demand is strong.

So far, the FSA, together with the Small and Medium Enterprise Agency, has exchanged views with the representatives of approximately 1,000 SMEs in 153 locations across the country so as to precisely grasp the state of financing for SMEs, and we will continue this effort. In addition, as you know, the FSA has taken such measures as requesting financial institutions to facilitate financing for SMEs and, from the viewpoint of creating a favorable environment for financial institutions to provide funds with a sense of security, quickly putting into force the revised Act on Special Measures for Strengthening Financial Functions, expanding the scope of loans not treated as restructured loans and partially relaxing the capital adequacy ratio requirement. Moreover, the Small and Medium Enterprise Agency has taken various measures, including launching and expanding an emergency guarantee scheme. As for what should be done from now on, it will be important to first grasp the current state precisely, and it is also important to examine how effective the various measures so far taken have been.

As for the relaxation of the way the credit guarantee scheme is operated, which you asked me about, I think you should ask the Small and Medium Enterprise Agency, which has jurisdiction over it. Generally speaking, I basically believe that refinancing from outstanding loans to guaranteed loans is not in accordance with the purpose of this scheme and the emergency guarantee scheme and I understand that it is illegal, in principle. It is allowed as an exception if there is a special circumstance that makes the repayment terms more favorable for the borrowing SMEs and if the credit guarantee association grants approval, as I understand it.

In any case, providing smooth financing for SMEs is one of the most important roles of financial institutions, so I hope that individual financial institutions will strive to actively exercise their financial intermediary function. For its part, the FSA will continue to carefully monitor and keep track of the actual state.

Q.

I would like to ask you about the G7 meeting that was held last weekend. Apart from the contents of the meeting, Minister Nakagawa’s speech appeared to be slurred at a press conference after the G7 meeting and he appeared to be very ill. Although it is the Ministry of Finance that is directly, or more closely involved in the G7 meeting, FSA staff were also there, so did you hear anything important about matters like his health condition?

A.

As you know, Minister Nakagawa attended the meetings of the G7 Finance Ministers and central bank governors that were held in Rome, Italy, on Friday, February 13, and Saturday, February 14, and held a joint press conference with the Bank of Japan’s governor after the meetings, from around 4 p.m., at a location within the hotel where he stayed, as I understand it. I understand that at a Diet session and on other occasions today, Minister Nakagawa explained that he had taken a large dose of cold medication, as he was ill with a cold at the time.

As for the G7-related affairs as a whole, they are under the jurisdiction of the Ministry of Finance. Therefore, there is nothing particular to say about this case on the part of the FSA in addition to the explanation given by the Minister himself.

Q.

Video images of the press conference have been broadcast by various media. If you have seen these, do you have anything to say about them?

A.

As for my impression, his explanation that he was ill with a cold sounds rather convincing. In any case, I was told by Ministry of Finance staff that the Minister had made appropriate statements regarding Japan’s recognition of the current situation and its points of argument.

Q.

In relation to this, Mr. Nakagawa has sometimes appeared to be ill in Diet sessions in the past. I think that the FSA, as well as the Ministry of Finance, is responsible for supporting the Minister so as to enable him to perform public duties in good health. Did he receive inadequate support or could something more have been done?

A.

As for this case, as I already said, the Ministry of Finance has jurisdiction, so I would like to refrain from making any further comments.

We, FSA staff, are striving to conduct financial administration under the guidance of the Minister. It is natural that we should strive to maintain communication with the Minister on a daily basis and provide as much administrative support as possible.

Q.

I suppose that looking at the video images of the press conference, you had the impression that he was ill. I think that the fact that the person who doubles as Japan’s Minister of Finance and Minister for Financial Services has behaved in an inappropriate manner at a press conference has become an international issue. Don’t you think that this has had widespread effects, including on the international reputation of Japan?

A.

As I said earlier, the G7-related matters are under the jurisdiction of the Ministry of Finance. As the Ministry of Finance handles such matters as a whole, I would like to refrain from making any further comments on the part of FSA staff.

Q.

I would like to ask you about the Act on Special Measures for Strengthening (Financial Functions). Three banks have already announced their intentions to consider filing an application. It has been said that two months or so will be needed for procedures like revisions of the articles of incorporation and screening, which means that dates around February 10 would have been the deadline for the application. However, we have already entered the latter half of February, so am I correct in understanding that there will not be any more banks beyond those three that will receive the injection of public funds within the current fiscal year? Or if more applications are filed, can the FSA process them by shortening the screening period? Could you tell us about your thinking in this regard?

A.

Although I understand the intent of your question well, we financial regulators are not considering this matter in terms of how many banks should receive capital injection by when. The most important thing is that financial institutions, mainly regional ones, properly and actively exercise their financial intermediary function for SMEs. In this sense, we would like to continue requesting an active exercise of the financial intermediary function while remaining conscious of the end of the fiscal year as you mentioned in your question. Banks should use the Act on Special Measures for Strengthening Financial Functions based on their own management judgment if they find their capital bases inadequate as a result of efforts to actively exercise their financial intermediary function or when they are about to make such efforts and if they have difficulty in raising necessary capital from the market or on a commercial basis alone or face very tough terms. Thus, we are requesting all deposit-taking financial institutions to consider applying for the use of this act and making detailed explanations of the capital injection scheme as a premise of our request as we would like them to exercise the financial intermediary function. Having them receive capital injection under the Act on Special Measures for Strengthening Financial Functions is not our policy goal, but it would be a result of the achievement of the goal. In this sense, we do not have any particular idea of how the situation will develop.

As for the revision of the articles of incorporation, which was also mentioned in your question, I believe it is very important as a preparatory measure as it would enable individual banks to take quick action based on the judgment of the management team if a capital increase becomes necessary. Therefore, I would like to welcome moves to revise the articles of incorporation.

Q.

Although I understand that the necessary period of time for procedures such as holding a shareholders’ meeting to revise the articles of incorporation and screening by the FSA is determined by physical factors, can it be changed?

A.

I overlooked that question. I think that it is possible that when we receive specific applications, we will decide, on a case-by-case basis, to carry out screening procedures as quickly as possible in light of applying financial institutions’ requests regarding the timing, the size and other terms of capital injection so that we can meet the requests as much as possible. Therefore, we do not intend to stop accepting applications across the board for the rest of the fiscal year by reason of a minimum necessary period of time for the screening procedures. Of course, it would be physically impossible for an application filed today to lead to capital injection tomorrow as there is also the process of deliberations by the Examination Board. However, we are prepared to make efforts to quickly implement procedures on a case-by-case basis.

Q.

In relation to the G7, while G7-related matters are basically under the jurisdiction of the Ministry of Finance, Minister of Finance Nakagawa doubles as the Minister for Financial Services. If foreign people who do not know of the circumstances look at that kind of video image, some of them may be worried about Japan’s financial authorities. You said earlier you had been told that he made appropriate statements regarding Japan’s recognition of the current situation. Am I correct in understanding that you do not think the international credibility of Japan’s financial authorities has been undermined by that incident?

A.

I would like to answer your question in general terms. As you know, in the current financial crisis, financial risks have spread world-wide in the form of securitized products and a variety of problems have arisen across national borders, so international cooperation is essential in both improving the current situation in the short term and in rebuilding the regulatory framework in ways to prevent a recurrence of the crisis in the medium term. In this situation, major regulatory authorities have had very frequent and close communications and exchanges of views about this matter since the autumn of 2007. The FSA is cooperating with foreign authorities in establishing an international framework and working on measures that should be implemented through international cooperation and, in Japan, it is of course cooperating with the Bank of Japan and other financial authorities.

I understand that achievements like these have been accumulated and international cooperation and collaboration have been maintained in various expert fields at various levels, including at the working level.

Q.

Regarding GDP, according to Minister (of Economy, Trade and Industry) Yosano, the results were the worst in the postwar period, and senior officials of the ruling parties have mentioned specific figures concerning additional economic stimulus measures. Are there any specific additional measures that you will instruct the FSA staff to consider?

A.

Regarding how to deal with the financial situation, as I said earlier, we will carefully monitor the current situation and respond to problems as quickly and carefully as possible while bearing in mind the financing condition in the period up to the end of the fiscal year in particular.

Preliminary GDP data for the October-December (2008) period, which were announced this morning, reaffirmed that Japan’s real economy is deteriorating rapidly. While it is true that in this severe situation, there have been adverse effects on the financial sector, Japan’s financial system itself is sound compared with financial institutions and the financial systems of the United States and Europe, so there is renewed importance in an appropriate and active exercise of the financial intermediary function by financial institutions. From this viewpoint, the FSA has implemented a variety of measures such as those related to restructured loans and the Act on Special Measures for Financial Functions as well as the relaxation of the capital adequacy ratio requirement, as I mentioned earlier. While evaluating the effects of these measures, we will repeat our request for financial institutions to properly exercise their financial intermediary functions in an effort to support the real economy.

Q.

I would like to ask you about the Financial Stability Plan, which was announced by the U.S. Treasury Department in the middle of last week. First, I would like to know how you assess this plan. Also, this plan calls for separating non-performing loans for transfer to a “bad bank,” based on the results of stress tests and, depending on the circumstances, injecting public funds. In a speech you made in Tokyo in January, you cited four prescriptions for the financial crisis, including recognizing losses, injecting public funds and removing (non-performing loans) off the balance sheets, and this plan is largely in line with these. However, while you cited nationalization as an exceptional measure, this is not included in the Financial Stability Plan. What do you think of this?

A.

If I mentioned nationalization in my speech, I think that I did so in the context of saying that the measures that have been taken by the United States and European countries in the past included a scheme that that may be described as nationalization or in the context of explaining Japan’s crisis response measures in the late 1990s.

At a time when the authorities of other countries are making various efforts to stabilize their domestic financial systems, I have no intention to lecture them by laying down my prescriptions. As you know, the Financial Stability Plan, which was announced last week, on February 10, called for implementing capital injection after determining losses and conducting stress tests; establishing a joint public-private investment fund that will purchase non-performing loans, thus separating the risk of losses arising in the future from banks’ balance sheets; expanding the size of the FRB’s (Federal Reserve Board’s) lending program that uses asset-backed securities as collateral; and introducing a rescue package for borrowers, including requesting participation in measures to mitigate housing foreclosures, relaxing the criteria for participation in the housing loan refinancing program and reducing interest payment burdens so as to assist mortgage loan borrowers.

The points of the argument that I have made in my speeches and on other various occasions are that it is necessary to determine the amount of losses; that it is effective to implement capital injection with public funds if necessary and that it is necessary to prevent additional losses from arising in the future by removing non-performing loans from banks’ balance sheets and thus restoring confidence in the market.

If capital injection leads to the acquisition by the authorities of a majority or 100% of the voting rights in a financial institution, it may be called nationalization in some cases. As nationalization probably means the acquisition of voting rights by the authorities, it will lead to a stronger public involvement in matters such as the appointment of the management team.

Japan has two schemes, namely, special public management based on the Financial Reconstruction Act and special crisis management based on the Deposit Insurance Act, and there are some specific cases to which they were applied. However, I do not think that the U.S. plan that was announced at this time included nationalization in this sense.

Q.

Do you expect that it will become necessary in due course?

A.

This is a matter to be considered by the U.S. authorities, which best know about the situation in the United States. Basically, I think that there is a broad philosophy that seeks to invigorate the entire economy by inducing private-sector-led initiatives while conducting economic management based on the principle of market economy, and I expect that the U.S. authorities will make judgment with this point in mind, too. I mean in no way to say that they are considering nationalization.

(End)

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