Provisional translation

Press Conference by FSA Commissioner Katsunori Mikuniya

(Excerpt)

July 13, 2009

[Question Items]

1. Stock prices
2. U.S. program for purchasing troubled assets
3. Effects of a general election on financial administration
4. Progress status of the Better Regulation initiative and the FSA's recognition of the current situation and problems
5. Progress status of relationship-based banking and future challenges

[Opening Remarks by FSA Commissioner Mikuniya]

I do not have any particular statements to make.

[Questions and Answers]

Q.

First, I would like to ask you about stock prices. Stock prices (as measured by the Nikkei stock average), which temporarily rose close to 10,000, fell to around 9,050 at the closing today. Uncertainty is growing again over the prospects of the Japanese economy, and there are also concerns over the future course of the U.S. economy. Could you tell us how the FSA (Financial Services Agency) views the current situation and whether it is considering any measures to deal with the situation?

A.

The government's view on the state of the Japanese economy is indicated in the Monthly Economic Report. Regarding the assessment of the economy, the report for the previous month stated, ''While the economy is in a difficult situation, movements of picking up are seen in some areas.'' Among positive factors cited by the report was support provided by a further reduction of adjustment pressure on inventory and the effects of the policy packages. While also noting an improvement in external economic conditions, the report cited such negative factors as the risk that the employment situation will worsen further due to an extremely low level of production activities. It also pointed out the risk that that the Japanese economy will be depressed by concerns over a slowdown in overseas economies.

As for the U.S. economy, the report stated, ''Although the economy is in recession and remains in a serious condition due to a vicious circle of the financial crisis and the economic downturn feeding each other, there are signs that the downturn may slow down.''

I understand that the Monthly Economic Report for July will be announced around 6 p.m. today. The FSA will examine the report closely and continue efforts to gather information concerning economic and financial developments in Japan and abroad.

As I have been saying, the FSA recognizes that it is increasingly important for the financial sector to exercise the financial intermediary function amid the current difficult economic situation and it has taken several measures to support corporate fund-raising.

While some people say that Japan's financial markets and real economy have been stabilized somewhat compared with some time ago, there is still downside risk, as I mentioned earlier. Moreover, the volatility of stock prices and exchange rates has grown recently. The FSA needs to keep a careful watch on developments in the financial and capital markets and the state of corporate financing.

Q.

I have a related question. The outline of the U.S. program for the purchase of troubled assets that was recently announced is different from the original plan. For example, the purchase amount has been reduced from the initially expected level. What is your view on this?

A.

I understand that this program is intended to remove troubled assets from the balance sheets of financial institutions, thereby facilitating the flow of credit. When this program is applied to securitization products, it will help to stabilize the financial system and enhance the functions of the system, by restoring the functions of the securities market in particular.

Of course, I believe that this program is part of the series of measures taken to ease the financial turmoil in the United States. As I have mentioned in my speeches, Japan learned from its bad-loan problem that it is important to eliminate the risk of additional losses arising in the future by removing non-performing assets from banks' balance sheets. I think that the U.S. program may be regarded as reflecting that lesson.

Some people argue that the reduction of the scale of the U.S. program reflects a decline of the need to remove troubled assets from the balance sheets because financial institutions have made some progress in raising capital, including public funds. This program will probably be evaluated during the process of the stabilization of the U.S. financial system.

Q.

Today, the schedule for the dissolution of the House of Representatives and a general election was decided. Amid this uncertain political situation, how do you expect financial administration will be affected?

A.

I am not in a position to comment on the political situation.

In any case, I believe that it is important for the FSA to tackle the various immediate problems so as to achieve the three major objectives of its financial administration, namely, stabilizing the financial system, protecting users and improving their convenience and establishing a fair, transparent and vibrant market.

Q.

This is your last press conference as FSA Commissioner. In relation to a summary report concerning the Better Regulation initiative that was announced earlier today, could you comment on the two years of your term of office, which was a period that required unprecedented financial administrative activities?

A.

I would like to provide the overview of my term of office at a press conference tomorrow which will be attended by both me and my successor as FSA Commissioner.

Let me talk about the third progress report concerning the Better Regulation initiative that was announced today.

The FSA has been implementing the Better Regulation initiative as a major task for financial administration since I took office as FSA Commissioner in the summer of 2007. We are implementing a variety of measures. One typical such measure, taken in April last year, was sharing the recognition of the 14 major principles that form the basis of the principles-based supervisory approach through discussions between the FSA and financial services business operators, and we publicly announced these principles.

As for financial inspections, in relation to the second pillar of the Better Regulation initiative, ''prompt and effective responses to high-priority issues,'' we are striving to improve the quality of the conduct of inspection in line with the five basic themes indicated at the beginning of the Financial Inspection Manual, including focusing on important risks and gaining understanding on the inspection results. As a result, I feel that the FSA has been gradually building relations with financial institutions that enable frank and constructive discussions.

In relation to the second pillar, in order to deal with the global financial crisis triggered by the subprime mortgage problem, we analyzed this problem in an early stage and concentrate our administrative resources on tackling it. In doing so, we identified and analyzed its impact on Japan's financial system and acted carefully to prevent the system from being destabilized by the failures of major financial institutions in the United States and Europe. In addition, we took various measures to facilitate financing and support the real economy in light of Japan's unique situation; Japan's real economy was significantly damaged while its financial sector was relatively sound. Moreover, as the crisis was global, we substantially enhanced cooperation and communications with foreign authorities and held a supervisory college meeting.

As for the relationship between the Better Regulation initiative and the global financial crisis, we grew particularly conscious of the subprime mortgage problem in August 2007, roughly at the same time as we started to implement the Better Regulation initiative as an explicit package. Looking back now, I feel that this initiative was put to the real test earlier than expected because of the financial crisis.

In dealing with the global financial crisis, we took -- or were forced to adopt -- the risk-focused, forward-looking approach, improving the transparency and predictability of regulatory actions and taking concrete measures, such as appropriately grasping and overseeing market movements, strengthening cooperation with foreign authorities and enhancing the dissemination of information. In short, I feel that we put the Better Regulation initiative into practice earlier than we expected.

Q.

Last week, the FSA issued a progress report concerning ''relationship-based banking'' (regionally-focused finance), which has been promoted since 2003. Could you tell us how you view the implementation of this initiative and what, if any, are future challenges?

A.

For the past several years, we have consistently been promoting regionally-focused finance, also known as relationship-based banking.

According to the progress report, regional financial institutions are engaging in a variety of activities, including supporting improvement in the management of borrower companies, utilizing support centers for the rehabilitation of small and medium-size enterprises (SMEs), supporting corporate rehabilitation based on rehabilitation plans drawn up by the lenders and providing loans that do not rely too much on collateral or guarantee, and substantial results have been achieved, generally speaking. In addition, some financial institutions recognize that such activities are not only beneficial for borrower SMEs but are also helping to improve the financial soundness and profitability of the lending financial institutions.

Meanwhile, this report indicated that developing a ''keen eye'' is regarded as a challenge. About 50% gave a positive self-assessment regarding overall activities related to relationship-based banking. However, regarding the ''keen eye,'' or an ability to accurately evaluate a company's future prospects, technological capability and potential power, 51% gave a negative self-assessment and 23% gave a positive self-assessment, indicating that efforts in this regard are insufficient.

Therefore, I hope that regional financial institutions will further develop ''the keen eye'' and more actively engage in resourceful activities while carefully taking risks and managing risks in light of the borrowers' management conditions and characteristics.

Q.

When you talked about the Better Regulation initiative earlier, you said that the initiative has been put to the real test. What was the result of the test? How close to the ultimate goal has the initiative come?

A.

There is not any predetermined goal for the Better Regulation initiative, which sets a broad direction of how financial administration should be improved. While keeping in mind the direction of improvement, we deal with problems, take administrative measures to achieve administrative objectives and improve the way of administration as necessary. This is thus a continuous initiative, a ceaseless effort toward improvement, so it is difficult to say how close we have come to the goal.

In any case, what I meant to say was that I felt the need to indicate a specific direction of improvement efforts in the summer of last year amid the global financial crisis triggered by the subprime mortgage problem.

Q.

In relation to the Better Regulation initiative, you say that the FSA will ask financial institutions to exercise self-regulation or make voluntary improvement efforts. However, frankly speaking, some financial institutions are failing to do what should be done on a voluntary basis. There is a risk that a decrease in the number of administrative actions taken by the FSA could encourage financial institutions to think that they may continue a wrongdoing as long as it is not discovered in an inspection by the FSA. What is your view on possible flaws of the Better Regulation initiative and the lack of efforts by financial institutions?

A.

I expect that the rules-based approach will be more frequently applied to financial institutions that operate based on the idea that they may engage in wrong-doing as long as it can be covered up.

The first pillar of the Better Regulation initiative is the ''optimal combination of rules-based and principles-based supervisory approaches.'' This combination will probably be calibrated according to the nature of each supervised financial institution and each supervisory issue.

Therefore, financial administration will be conducted in the most efficient and effective manner if the business sectors and major business operators that shared the recognition of the 14 major principles with the FSA in April last year act based on those principles.

To conduct highly effective administration, it is very important to establish a framework that encourages financial institutions to create added value and pursue best practices from the viewpoint of protecting customers and improving their convenience, rather than merely observing rules.

The rules-based approach will be applied to financial institutions that operate based on the idea that rules may be violated as long as the violation can be covered up. It is desirable that financial institutions making voluntary improvement efforts be rewarded or get higher marks in assessment by financial administrators, and it is most ideal if financial institutions recognize that such efforts enable them to gain more trust from customers, attract more business and improve earnings.

(End)