Provisional translation

Press Conference by former FSA Commissioner Takafumi Sato and new FSA Commissioner Katsunori Mikuniya

(Excerpt)

July 14, 2009

[Question Items]

1. Remarks by Minister Yosano (Mr. Sato and Mr. Mikuniya)
2. Comments on the experiences of financial administration and progress in the Better Regulation initiative (Mr. Sato)
3. Future policy for administration and tasks (Mr. Mukuniya)
4. Cooperation with the Ministry of Finance and the Bank of Japan (Mr. Mikuniya)
5. Handling of financial institutions under the Act on Special Measures for Strengthening Financial Functions (Mr. Mikuniya)
6. Tasks for New FSA Commissioner (Mr. Sato)
7. Changes in financial administration (Mr. Sato)
8. Future approach to international debate (Mr. Mukuniya)
9. Message to the financial industry (Mr. Sato)
10. View on how administrative actions should be taken in the future (Mr. Mukuniya)
11. View on the description of the current crisis as a “once-in-a-century” crisis (Mr. Mikuniya)
12. Exit strategy from unconventional measures (Mr. Mikuniya)
13. Another extension of the period of the restriction on short selling (Mr. Mikuniya)
14. How the Better Market initiative should be pursued (Mr. Mikuniya)
15. Handling of the Democratic Party of Japan's (DPJ's) policy proposals (Mr. Mikuniya)
16. Review of the supervisory framework (Mr. Mikuniya)
17. DPJ's campaign pledge concerning Shinginko Tokyo (Mr. Mikuniya)
18. Comments on the two years of the term of office (Mr. Sato)

[Opening Remarks by FSA Commissioner]

I do not have any particular statements to make.

[Q&A]

Q.    I would like both of you to answer this question. Did Minister Yosano have any words for you regarding your succession?

Mr. Sato:    He gave me a few words of thanks for my service during my term of office, and otherwise, we just made idle talk.

Mr. Mikuniya:    I just listened to his instructions.

Q.    This is a question for Mr. Sato. You have engaged in financial administration for many years, since before the Financial Supervisory Agency was established. Could you tell us how you feel about the period and about particularly memorable events? How much do you think that the Better Regulation (improvement in the quality of financial regulation) initiative that you have emphasized has taken root in the financial sector?

Mr. Sato:    First of all, I would like to thank you for your cooperation during my term of office. As the FSA (Financial Services Agency) is conducting financial administration for the interests of the people, it is essential for us to seek their understanding. In this sense, appropriate dissemination of information is vital. I would like to reiterate my thanks for your kind cooperation.

Since 1996, I have consistently engaged in financial administration. Although I have experienced many difficulties, I feel honored to have done my service in this field.

As for your question, let me talk about a matter that is related to both the past 10 years or so of my experience and the current issues.

That is the description of the current global financial crisis as a “once in a century” crisis, to which I have an objection.

For me, or for Japan, this is the second crisis in a decade, rather than a once in a century crisis. As you know, Japan experienced a serious financial crisis in the late 1990s, and in my opinion, the previous crisis was more serious than the current one. The previous crisis resulted from the economic bubble created by Japan itself. Banks were deeply involved in the creation of the bubble. Complicated webs of credit-debt relationship, including an arrangement called “tobashi,” were formed. From the viewpoint of borrowers, the bad-loan problem was a problem of excessive debts. In this sense, that crisis was an internally-generated one.

On the other hand, the current crisis was triggered by the subprime mortgage problem and the moral hazards involved in the spread of the originate-to-distribute business model using financial engineering. Japan was affected by the current crisis through external factors. Although Japanese banks had exposures to non-performing assets that were originated in other countries, the scale of the exposures was relatively limited.

In this sense, the previous crisis was a serious internal disease. Diagnosis was difficult, but also various treatments, including surgical operations and the provision of nutrients, as well as a long period of recuperation, were necessary. In contrast, the current crisis may be likened to an external injury. Therefore, what we have been doing may be likened to a treatment intended to prevent an external wound from developing into an internal disease.

As for the response of the financial authorities, in the previous crisis, there was neither a safety net nor a scheme for dealing with failures. Nor was there a yardstick to measure financial soundness or a framework for preventing failures. In a situation like that, a trial and error process was inevitable. In contrast, we are dealing with the current crisis under a fairly-well-developed regulatory framework concerning financial soundness. In this situation, we have been able to provide early diagnosis and treatment, conduct stress tests and disclose information concerning the results of monitoring. Moreover, we placed emphasis on the exercise of the financial sector's financial intermediary function, as Japan's real economy deteriorated rapidly despite the relative soundness of the financial sector.

Looking back at this situation, I would like to express my deep appreciation for the people who devoted efforts to the development of the scheme for dealing with failures and the regulatory framework concerning financial soundness.

Of course, the current crisis is more serious than the previous one in some aspects. The current crisis originated in the market and spread widely throughout it. Whereas it was relatively easy to identify the previous crisis because it was limited to Japan's financial and banking sectors, the current crisis has developed into a global recession, dealing a heavy blow to Japan's real economy, which heavily depends on external demand.

In any case, improvements have been made over the past 10 years or so in both financial institutions' risk management and the authorities' regulation and supervision, making Japan's financial system far more resilient to shocks than before. I think that what we need to do now is to make further improvements based on the lessons learned from the current global financial crisis.

As for your question concerning dialogue related to the Better Regulation initiative, the results of a survey that we announced yesterday indicate that some progress has been made with regard to dialogue.

In any case, progress to be made in relation to the Better Regulation initiative as a whole will probably be uneven, rather than uniform. I expect that sooner or later, there will be a wide gap in business performance and corporate value between financial institutions that are willing to proactively take advantage of the FSA's regulatory initiative and those that sit on their hands and concentrate on protecting themselves.

Q.    I have a question for Mr. Mikuniya. Since the breakout of the global financial crisis, Japanese financial regulators have had to pay more consideration than ever to overseas developments. On the other hand, the domestic political situation is very fluid, with the possibility of a change of government growing, so the FSA is in a more difficult position than ever from various viewpoints. How do you intend to manage the FSA and what do you think are the challenges for the FSA?

Mr. Mikuniya:    My name is Mikuniya. I took office as FSA Commissioner today, and I would appreciate your kind cooperation.

Let me answer your question in some detail.

There are three broad viewpoints. First, I believe that the FSA has three missions. The first mission is stabilizing the financial system, the second is protecting users and improving their convenience and the third is establishing a fair, transparent and vibrant market. These missions will always remain unchanged, so I believe that our basic task is doing our utmost to accomplish them.

Second, as Mr. Sato mentioned just now, the FSA is engaging in various activities to facilitate financing in the difficult economic situation. At the same time, the FSA is implementing the Better Regulation initiative and the Better Market initiative. We will continue efforts to carry them out.

Third, we will perform our duties while keeping in mind the following matters.

First, we have been making efforts to develop various institutional frameworks and improve financial administration based on our experiences of the financial crisis of the 1990s. This was explained by Mr. Sato. Specifically, we have taken appropriate actions with regard to the disposal of non-performing loans and the failures of individual financial institutions, developed various safety net schemes, established financial infrastructures as part of a forward-looking approach, including settlement systems and the Financial Instruments and Exchange Act and developed and managed various institutional frameworks from the standpoint of consumers. While we performed these tasks, there have been changes in the environment surrounding the financial industry, including an increase in the complexity of financial transactions. In light of this situation, we intend to review the various frameworks and schemes and their management from the viewpoint of the forward-looking approach.

Second, the relationship between the real economic sectors, including the household and industrial sectors, and the financial sector is becoming increasingly close. In addition, the population of children is shrinking and the aging of society is advancing. We intend to realize the development of both “financing that supports households and industries” and “financing as an industry” and achieve a positive cycle of these two functions complementing each other.

Third, we will follow the lessons learned in the current global financial crisis. The first lesson is that we should quickly and accurately identify risks involved in the entire financial system. At the same time, we intend to strengthen cooperation with the Bank of Japan and overseas authorities. As for the second lesson, in addition to having experiences of dealing with a crisis, we are ahead of the United States and European countries in the development of institutional frameworks, including various safety net schemes and a supervisory framework that places various financial services under central supervision as a way to deal with systemic risks. We have also managed such frameworks appropriately. Meanwhile, the current global financial crisis has spread across various business sectors and is complicated in nature. Therefore, the second lesson is that we should conduct a forward-looking study in light of international developments. The third lesson is that we should actively participate in international debate and make efforts to establish a regulatory framework with balanced emphasis on domestic and foreign considerations.

Q.    I have a question for Mr. Mikuniya. The FSA's presence is growing now that it is more than 10 years since it was separated from the Ministry of Finance. On the other hand, while it maintains independence in terms of personnel affairs, the FSA needs to strengthen cooperation with the Ministry of Finance and the BOJ (Bank of Japan). What are the challenges for the FSA now, if any?

Mr. Mikuniya:    What I said just now provides an answer to some parts of your question. I believe that the FSA is charged with very clear missions. What we should do is to do our utmost to achieve those missions while maintaining neutrality and independence. While devoting efforts to those missions, we should strengthen cooperation with relevant authorities, including the BOJ and overseas authorities, as I said earlier, and develop and secure necessary human resources.

For the past 10 years, the FSA has focused on the three missions I mentioned earlier. We will continue to do so.

Q.    This is a question for Mr. Mikuniya. Some financial institutions apparently mistrust the FSA in relation to the utilization of the amended Act on Special Measures for Strengthening Financial Functions. What do you think is the reason for their mistrust and how do you plan to resolve it?

Mr. Mikuniya:    First, let me talk about the Act on Special Measures for Strengthening Financial Functions. Until now, I have been involved in the establishment of institutional frameworks, and I believe that each framework is based on the circumstances and needs of the time. The establishment of the Act on Special Measures for Strengthening Financial Functions and the increase in the number of financial institutions utilizing it reflect the circumstances of the time. I hope that individual financial institutions will consider actively utilizing this act as part of their various efforts to strengthen their capital bases under the “forward-looking management” approach.

While calling for them to consider using this act, we will need to narrow our differences with financial institutions concerning the recognition of various matters by explaining the contents of the capital injection scheme in a conscientious manner and by continuing dialogue and disseminating information based on the Better Regulation initiative.

In any case, although there may be various views about the capital injection scheme, we are providing appropriate explanations concerning the scheme and hoping that it will be utilized in an appropriate manner.

Q.    I would like to ask Mr. Sato about the implementation of the Better Regulation initiative. Are there any tasks that you have left unfinished and that you would like Mr. Mikuniya to devote efforts to in relation to important themes of recent international debate?

Mr. Sato:    An administrative organ constantly faces new tasks as time passes by, so the important thing to do is to tackle them as they arise. There are not any particular tasks that I regret leaving unfinished. There are a pile of tasks that must be tackled continuously.

The FSA should conduct administration in an appropriate manner so as to meet the needs of the time based on the broad direction of financial administration, as represented by the Better Regulation initiative and the three major administrative objectives that Commissioner Mikuniya mentioned. The Better Regulation initiative is a package of measures to promote the improvement of the way of administration, and he indicated that further improvement efforts will be made. I also hope that further improvement efforts will be made.

In any case, the important thing to do is to ensure high-quality administration so as to meet the needs of the time while firmly keeping in mind the major objectives of financial administration. I understand that specific policy themes will be determined by the new leadership team.

As for the themes that must be tackled continuously, although it is important to pursue the traditional micro-prudential policy, which seeks to stabilize the financial system by checking the soundness of individual financial institutions, there is a growing recognition that this policy alone is not necessarily sufficient in light of the lessons of the current global financial crisis, as Commissioner Mikuniya mentioned earlier. The FSA has been strongly aware of the growing importance of the so-called macro-prudential policy, which looks at the entire market, monitors the market to check whether there are any common risk factors, uses the results of the monitoring for specific supervisory activities, takes into consideration how such factors affect the behavior of individual financial institutions and how their behavior and market developments are related to each other and, from a broader perspective, pays attention to how the real economy and the financial sector are related to each other. Improving the way financial administration is conducted through the macro-prudential approach may be cited as a typical example of tasks that must be continuously tackled.

Q.    I have another question for Mr. Sato. It is more than 10 years since the Financial Supervisory Agency was separated from the Ministry of Finance in 1998 and started conducting financial administration as an independent agency. You headed the General Coordination Division at that time, and have been engaging in financial administration almost consistently since then. Do you think that Japan's financial administration, which was viewed with distrust by the people when it was conducted by the Ministry of Finance, has changed over the 10-year period? If so, could you tell us how it has changed?

Mr. Sato:    Administration should be primarily conducted for the interests of the people and for the development of the national economy, and in this sense, there has not been any change since when the Ministry of Finance was responsible for financial administration. I expect that there will not be any change in this basic principle and that there will not be any significant change in the FSA's stance of maintaining the stability of the financial system while keeping that in mind as an objective.

Meanwhile, the development of an appropriate framework of administration roughly coincided with the establishment of the Financial Supervisory Agency. I believe that significant progress has been made in that the framework has been well developed, that it has become possible to make clearer judgment based on more objective criteria and that a mechanism for communicating the judgment thus made to the public with as much transparency as possible.

Q.    I have a question for Mr. Mikuniya. International debate about post-crisis financial regulation has started in earnest. At the FSB (Financial Stability Board), I expect that Japan, as a member of the Steering Committee, will actively participate in efforts to create a new regulatory environment. As examples of such efforts, various specific themes have been proposed, including the introduction of a new capital adequacy requirement and dynamic provisioning. What points do you think Japan should argue for and how do you think it should make contributions to the debate?

Mr. Mikuniya:    First, Japan has made efforts to develop various institutional frameworks and improve the supervisory technique in our own ways based on the lessons it learned in the 1990s. This is one element of our financial administration.

Meanwhile, we now face the issues of how an international framework should be established amid various ongoing international financial crises, how Japan should tackle that task and what Japan should do domestically. This is another element of our financial administration.

I believe that establishing a framework with balanced emphasis on domestic and foreign considerations is critical. It is important to respect the frameworks and the way of managing them that have been effective in the past when dealing with various incidents and explain their usefulness and, at the same time, review them in light of the circumstances of the time and express our opinions as necessary.

Q.    I have a question for Mr. Sato. Earlier, Mr. Mikuniya said the relationship between the household and industrial sectors and the financial sector is becoming increasingly close. Could you tell us what role you hope the financial sector, comprised mainly of banks, will play for the entire Japanese industry?

Mr. Sato:    Broadly speaking, the role of the financial system, the financial sector, is to perform the fund settlement function and the financial intermediary function. Fund settlements are made in relation to the purchase and sale of goods and services and are essential for the establishment and dissolution of credit-debt relationship, so the fund settlement function is equivalent to the circulation of blood throughout the entire national economy, so to speak. It is essential that this function works properly, efficiently, at low cost and with high reliability. In normal times, we are not conscious of the importance of this function. However, in the event of an incident like a major computer system breakdown that occurred at a megabank several years ago, we are reminded of the importance.

Another important role is to perform the financial intermediary function. This is activity to link people who have cash on hand but no use for it at the moment with people who want to start a business or improve their lives by making investments but have no cash on hand. There are various intermediary channels, including indirect finance, direct finance and market-based indirect finance. I believe it is very important to ensure that more diverse, convenient and reliable financial intermediary channels are made available for companies and the people at minimum cost.

One lesson provided by the current global financial crisis that is gradually becoming a consensus is that financial business that generates added value by creating several layers of securities from the underlying assets, which may be called financial engineering for the sake of financial business, is not necessarily desirable. Although products thus created may play a significant role in some cases, it is not necessarily desirable for the general public. In short, the recognition is spreading around the world that the role that the financial sector is supposed to play is to properly support the real economy, ensure optimal allocation of resources from the perspective of the entire national economy and facilitate and strengthen this process. In this sense, I hope that the Japanese financial industry will make efforts to provide high-quality services that properly meet the needs of households and companies.

Q.    This is a question for Mr. Mikuniya. Cases of misconduct at financial institutions are continuing. While the FSA has sometimes been criticized for what is seen as its excessive willingness to take administrative punitive actions, the people hope that the FSA will deal with misconduct in a strict manner. Could you tell us about your idea or stance on misconduct and administrative punitive actions?

Mr. Mikuniya:    All we should do is to deal with each case impartially. There will not be any change in the principle of dealing with various cases in an appropriate manner on a case-by-case basis by accurately grasping facts.

Q.    Mr. Mukuniya, what do you think of the description of the current crisis as a “once-in-a-century crisis?”

Mr. Mikuniya:    Like Mr. Sato, I have been engaging in financial administration since around the time of the crisis that occurred 10 years ago. When the Financial Supervisory Agency was established, Mr. Sato was assigned to the agency, while I was responsible for supporting financial administration in terms of institutional frameworks at the Ministry of Finance's planning bureau. As for the description of the crisis, it may be described as a “once-in-a-century” crisis from the global perspective. However, Japan overcame a greater difficulty than the one we are experiencing now. At that time, we made efforts to establish a safety net and develop infrastructure while studying the case of the crisis of 1929 and the case of the savings and loan crisis in the United States.

I presume that Japan has been able to properly deal with various incidents during the current crisis partly because institutional frameworks and the way of managing them have been fairly well developed. Nevertheless, it is true that although our mission remains unchanged compared with 10 years ago, the surrounding environment has changed considerably — this is true not only for the financial sector but for the entire economy. When economic transactions are made instantly around the world via the Internet, they always entail fund settlements and credit-debt relationships. That is how the current crisis has spread worldwide. The situation was different 10 years ago or so.

Therefore, we intend to respect the lessons learned through our experiences and use them in combination with new measures to be taken in the future.

Q.    The FSA has taken and is continuing extraordinary measures that were not taken during the crisis of 10 years ago, including those related to the calculation of the capital adequacy ratio and the treatment of restructured loans. Could you tell us about your view on an exit strategy from those extraordinary measures?

Mr. Mikuniya:    First, if we compare the current situation and the situation of 10 years ago, we can say that the FSA's mission basically remains unchanged. However, as for the surrounding environment, economic demand has now dropped sharply around the world. In a situation like this, the stability of the financial system cannot be secured through the efforts made in the financial sector alone. We are now trying to ensure that the financial system and the economic system are stabilized through cooperation between the financial sector and the economic sector. If we look at the international situation, we can say that a similar approach is being pursued around the world.

On the other hand, if temporary, extraordinary measures are continued for a long time, they will no longer be temporary or extraordinary. They may produce negative side effects. The timing of an exit from such measures was discussed at the summit meeting. However, when we consider what to do in practice, I believe that it is necessary to make careful judgment while taking into consideration the current conditions and future outlook, the effects of individual measures and international developments as well as the issue of market discipline.

Q.    I have a related question. The period of the restriction on short selling will expire this month. Do you think it is necessary to extend the period again in light of the market condition?

Mr. Mikuniya:    The restriction on short selling, as well as other measures, was adopted as a temporary measure to remain in effect until the end of July in light of the current stock market condition. As for short selling, we banned naked short selling (selling shares short without first borrowing the shares), and regarding the repurchase of own stocks, we raised the limit on the volume of shares that may be repurchased per day.

As I already said, we should make a final decision as to what to do with these temporary measures while taking into consideration the condition of the domestic stock market and the state of regulation abroad. For the moment, I would like to refrain from saying when they will be lifted.

Q.    I have a question for Mr. Mikuniya. The FSA adopted the Better Market initiative in 2007, making clear its policy of strengthening the international competitiveness of the markets in Tokyo or in Japan. It seems that as a result of the financial crisis that occurred soon after, a negative view of this initiative emerged in reaction to excessive confidence in market capitalism or in market forces. Could you tell us whether you think it is necessary to continue efforts to strengthen the competitiveness of the markets despite the prolonged crisis and how you intend to tackle this task?

Mr. Mikuniya:    The revisions and improvements of institutional frameworks always entail positive effects and negative side effects. However, Japan is facing the trends of a declining population of children and an aging of society. Japanese individuals have a vast amount of financial assets, and how Japan as a country or as individuals themselves should make use of those assets is an important issue. Of course, it is necessary to constantly check excesses like those that occurred in relation to the subprime mortgage problem. On the other hand, it is necessary for Japan to play a suitable role in the global market.

As I said at the beginning of this press conference, we have until now made various institutional reforms, and some measures included in the reforms were forward-looking. The reform of the settlement system, the enactment of the Financial Instruments Exchange Act, and the Better Market Initiative may include world-leading measures. If such measures are found to be excessive, they will have to be reviewed. Given that the household and industrial sectors are closely related to the financial sector, we intend to debate how we should realize the development of both financing as the supporter of the household and industrial sectors and financing as an industry and achieve a positive cycle of these two functions complementing each other while taking into consideration the need to revitalize the Japanese economy and deal with the shrinking population of children and the aging of society.

This debate will need to be conducted from various aspects, including planning, management and international considerations. Therefore, we intend to conduct the debate across different bureaus and divisions of the FSA.

Q.    The possibility of a change of government has grown, and it will be impossible to ignore policy proposals made by the Democratic Party of Japan (DPJ) and other opposition parties. Could you tell us what you think of and how you intend to deal with proposals for expanding and upgrading the Securities and Exchange Surveillance Commission and for placing commodities futures, which are now under the jurisdiction of the Ministry of Economy, Trade and Industry and the Ministry of Agriculture, Forestry and Fisheries, under the FSA's jurisdiction?

Mr. Mikuniya:    All we should do is to perform the FSA's mission steadily. Therefore, we intend to conduct daily administrative activity steadily with the stance that I mentioned at the beginning of this press conference.

Q.    Mr. Mikuniya, you said that a variety of problems have occurred across different business sectors during the current financial crisis. Although you did not say you will reform the FSA's supervisory framework, you acknowledged that the extent of the authority of the Supervisory Bureau over various business sectors, such as banks, securities companies and insurance companies, differs from sector to sector. There are even some sectors over which the FSA does not have strong supervisory authority. In this situation, are you planning to reform or review the supervisory framework in light of the various cross-sectoral problems that occurred in the United States?

Mr. Mikuniya:    I do not have any predetermined conclusion in mind. As you can see from the institutional reforms made in the past, we formerly applied different regulatory approaches according to respective types of entities, such as banks, securities companies and insurance companies. However, as the trend of selling cross-sectoral services and products has strengthened, we have tried as much as possible to apply the same rules to entities that have the same functions, including market-related rules and disclosure rules.

As that trend is growing further, we will consider how well the existing regulatory framework has dealt with the trend and whether it is necessary to review the framework and conduct a more forward-looking study, so I do not have any specific conclusion in mind for the moment.

Q.    Following the election to the Tokyo Metropolitan Assembly, the DPJ has become the largest party in the assembly. One of the DPJ's campaign pledges was to withdraw from the management of Shinginko Tokyo at an early date. What do you think of this situation and how will the FSA deal with it?

Mr. Mikuniya:    Shareholders of a bank have their own standpoint and administrative authorities have their own. The FSA has been dealing with this matter from our standpoint as an administrative authority. Therefore, we have taken action as necessary in accordance with an appropriate administrative approach. This stance will remain unchanged.

Q.    I have a question for Mr. Sato. Looking back at the two years of your term, do you have anything that you regret?

Mr. Sato:    When I took office two years ago, I expressed my resolve to do my best. One thing I feel regrettable about personally is that I was unable to communicate with FSA staff in a more cordial atmosphere. When I had to deal with one problem after another or when I was presented with irrelevant analysis or plans by the staff, I may have allowed my irritation to show on my face.

The leader of an organization must create an environment that enables the members of the organization to exercise their abilities as much as possible. In this respect, I have much to reflect upon.

Mr. Sato:    Thank you very much for your kind cooperation during my term.

Mr. Mikuniya:    I am hoping to receive your kind cooperation.