Provisional translation

Press Conference by FSA Commissioner Katsunori Mikuniya

(Excerpt)

July 23, 2009

[Question Items]

1. Consultative group on basic issues under the Financial System Council's Sectional Committee on Financial System
2. Financial stability
3. Strengthening of regulations abroad and Japan's response
4. FSA's response to an inappropriate incident involving foreign exchange margin transactions and the regulation of such transactions.
5. FSA's handling of the IFRS
6. FSA's response to leakage of customer information at Resona Bank and Alico Japan
7. General election
8. Conversion of preferred shares issued by Chuo Mitsui Trust Holdings into common shares and the repayment of public funds

[Opening Remarks by FSA Commissioner Mikuniya]

We decided to hold a general assembly meeting of the Financial System Council and a joint meeting of subcommittees of the Sectional Committee on Financial System next Wednesday, July 29, and we issued a notice regarding these meetings today. I would like to talk about these meetings.

We believe that in response to the current global financial crisis, it is necessary to properly analyze its cause and hold in-depth deliberations on how financial regulation should be conducted in the future based on the lessons of the crisis.

Since the financial crisis of the 1990s, Japan has engaged in various activities related to financial regulation in order to strengthen the financial system. We believe it is necessary to review these activities and consider what activities Japan should engage in from now on.

Therefore, the Financial System Council needs to conduct deliberations on what Japan's financial and capital markets should be like from various viewpoints.

In order to hold broad-based discussions on the vision of a future financial system, we will propose at the meeting of the Financial System Council the establishment of a consultative group on basic issues, which will be comprised of the chairpersons of subcommittees of the Financial System Council and their deputies. If approval is given, this group will hold its first meeting after the meeting of the Financial System Council.

For further details, please consult with the Planning Division of the Planning and Coordination Bureau, which is in charge of this matter.

I hope that constructive discussions will be held at the general assembly meeting of the Financial System Council, the joint meeting of subcommittees of the Sectional Committee on Financial System and the meeting of the consultative group on basic issues.

I do not have any further statements to make.

[Questions and Answers]

Q.

I suppose that the basic issues that will be discussed by the group will include a variety of matters, such as the strengthening of regulations and easing of regulations to enhance the competitiveness of financial markets. Could you tell us for what purpose this consultative group will be established now?

A.

For one thing, since the 1990s, Japan has made efforts to improve various institutional frameworks related to financial administration and the ways of managing such frameworks. This is one major element of our financial administration.

On the other hand, it is necessary to review the existing frameworks because the current global financial turmoil has brought to the surface a variety of problems, and such a review is another element of our financial administration. Although we have already taken various measures to deal with those problems, we believe that now is the time to consider what additional measures may be taken in the future. Therefore, we would like the Financial System Council, too, to discuss this matter.

Q.

When will the group reach its conclusion?

A.

I do not yet have any deadline for the conclusion in mind. While discussing basic issues, this group as well as other groups will need to consider various matters as necessary.

As I believe that discussions like this should start now, we decided to establish this consultative group.

Q.

Will the discussions of basic matters lead to the establishment of some kind of broad framework before next year's ordinary Diet session, for example, or will the consultative group discuss the vision of a future Japanese financial system from a longer-term perspective, as did a consultative group on the vision of the Japanese model of the financial system and administration under Mr. Yanagisawa (former Minister for Financial Affairs)?

A.

The group will discuss a variety of issues. It will not only review the outcome of past discussions but also consider the vision of future institutional frameworks, depending on how its discussions will develop.

In any case, there is not any specific predetermined theme. Rather, the group will discuss a broad range of issues from various viewpoints and consider the vision of the future based on the recent experiences, and we will take actions as necessary.

Q.

Some major U.S. financial institutions reported their earnings for the second quarter. As there are hopes for an end to the financial crisis and signs of financial stability being restored, Japanese stock prices have been rising recently. Could you comment on the current situation, including whether you see favorable signs that point to financial stability?

A.

First, regarding developments in the United States, major U.S. banks reported their earnings for the second quarter last week and this week, and I understand that each of them posted net profits.

As for the details of the earnings, while their trading revenues were strong, credit costs dragged down their profits. I understand that one-time profits, such as profits from the sale of businesses, also contributed to their earnings. Therefore, the FSA (Financial Services Agency) will continue to keep a close watch on the trend in the earnings of foreign financial institutions.

As for the state of the Japanese economy, although there are some signs of a recovery, I think that the economy is still in a difficult condition. While Japan's financial system is stable compared with the U.S. and European financial systems, there are concerns over the deterioration of the real economy. Therefore, I believe that it is very important for Japan's financial sector to support the real economy by facilitating financing.

Based on this recognition, the FSA has taken a variety of measures in order to improve the environment for financial institutions to exercise their financial intermediary function, including putting into force the amended Act on Special Measures for Strengthening Financial Functions, partially relaxing the capital adequacy ratio requirement, expanding the scope of loans exempted from being treated as restructured loans, holding special hearings and conducting intensive inspections. We will also continue to keep a close watch on the trends in financial and capital markets in Japan and abroad and in corporate financing while maintaining cooperation with relevant domestic and foreign authorities.

Q.

Also in the Untied States, there are again moves to strengthen the regulation of rating agencies. Could you tell us how you view international moves to strengthen financial regulations and how Japan will respond to them?

A.

I understand that, as you mentioned, the U.S. Department of Treasury on July 21 submitted a bill related to the reform of the regulation of rating agencies as part of the Obama administration's comprehensive financial regulatory reform.

This reform includes measures to be taken from three viewpoints. First, from the viewpoint of preventing conflicts of interest, rating agencies will be prohibited from providing consulting services to entities whose securities are rated by them and the issuers of securities rated by rating agencies will be required to disclose the fees paid to the rating agencies. Second, from the viewpoint of enhancing transparency, issuers will be required to disclose preliminary ratings they have received and rating agencies will be required to use different symbols for structured products. Third, from the viewpoint of strengthening the Securities and Exchange Commission's authority and supervision, registration will be made mandatory for credit rating agencies and a SEC branch in charge of overseeing rating agencies will be established.

As for Japan's response, the Act to Partially Amend the Financial Instruments and Exchange Act was enacted on June 17 to introduce various institutional frameworks, including a system requiring registration of rating agencies, and we are now working on relevant cabinet orders and cabinet office ordinances in preparation for the enforcement of this act.

The FSA will continue to actively participate in international debate and take appropriate actions while watching individual countries' moves related to regulations and will make efforts to establish a regulatory system with balanced emphasis on domestic and foreign considerations.

Q.

A business operator in Sapporo is under police investigation for allegedly engaging in FX (foreign exchange margin) transactions without registration. How will the FSA deal with this case and how do you think FX transactions should be regulated?

A.

I understand that your question concerns two matters, a specific case involving FX transactions and the regulation of FX transactions in general.

As for the specific case, I am aware of media reports that a business operator who engaged in business activity related to FX transactions without registration is under investigation, as you mentioned. However, I would like to refrain from commenting from the FSA's standpoint on matters related to police investigation.

Generally speaking, if the FSA learns of the presence of a business operator engaging in financial instruments business without registration through complaints from investors, for example, it will take such actions as cooperating with police and issuing a warning against the business operator. In addition, in December 2007, the FSA established a liaison consultative group on investment funds, comprised of relevant government ministries and agencies and other organizations, in order to prevent financial damage to users and stem the spread of damage. The FSA is cooperating with police and other organizations through this group and via other channels.

As for the regulation of FX transactions in general, the FSA has implemented various institutional reforms in order to strengthen the regulation of FX transactions involving registered FX business operators. The reforms include, for example, the unification of management categories into the money trust and a revision of the loss-cut rules. We will continue to take appropriate actions in accordance with laws and regulations from the viewpoint of protecting investors.

Q.

The other day, the International Accounting Standards Board announced a draft of proposals for the reform of accounting standards, which is expected to affect how financial institutions, including banks and life insurance companies, will treat their bond holdings as well as stock holdings. Although the introduction of new accounting standards is not yet imminent, could you tell us how the FSA will deal with this issue?

I have one more question. Yesterday, Resona Bank announced the leakage of information concerning 330,000 customers, and today, Alico Japan, which is an insurance company, announced that credit card information contained in customer data that leaked out was used illegally. Could you tell us whether the FSA is considering taking actions such as requiring reports on the management of personal information by financial institutions?

A.

As for international accounting standards, the International Accounting Standards Board (IASB) on July 14 announced for public comment a draft of proposals for the reform of measurement and classification of financial instruments, as you mentioned. It is an international norm that unlike the capital adequacy ratio requirement under the Basel Accord, accounting standards in general as well as the International Financial Reporting Standards (IFRS) are deliberated and adopted by private-sector, independent bodies responsible for setting accounting standards. Therefore, the FSA should refrain from commenting on the contents of accounting standards.

However, international efforts are under way to achieve convergence of accounting standards. IFRS and accounting standards in general could have a significant impact on Japanese financial institutions as well as Japanese financial and capital markets. Therefore, I hope that relevant private-sector parties in Japan, including financial institutions and accounting standards-setting bodies, will actively express their opinions, starting at early stages of deliberations at the IASB.

Meanwhile, the appropriate execution of due process concerning the soliciting of opinions from relevant parties is important for the setting of accounting standards. It is desirable that relevant parties in Japan actively express opinions during this due process.

I am hoping that relevant parties in Japan will express their opinions and that international accounting standards revised through the IASB's due process will adequately reflect Japanese opinions and ensure appropriate provision of highly reliable financial information to investors.

As for your question about Resona Bank and Alico Japan, Resona announced yesterday that it has lost customer information. American Life Insurance Company's Japanese branch, known as Alico Japan, announced at 3 p.m. today that information concerning some of its policyholders who have signed contracts via the Internet is highly likely to have leaked out.

I believe that appropriate management of customer information by financial institutions is extremely important from the viewpoint of securing users' confidence, so it is very regrettable that the loss of customer information has occurred.

The FSA will continue efforts to properly inspect and supervise financial institutions so that they manage customer information in an appropriate manner in accordance with the Act on the Protection of Personal Information and will take supervisory actions as necessary if a problem is found.

Q.

The Diet was dissolved on July 21, and the campaign for the general election virtually started. Could you tell us what policy debates you hope will be conducted during the election campaign?

A.

As I mentioned at the previous press conference, we, as national civil servants, are devoting our efforts to the implementation of a variety of measures and daily administrative activity in order to perform the FSA's three major missions. As things move very fast in the financial sector, we have no time to sit idle. We intend to make conscientious efforts day by day to keep financial administration appropriate.

Q.

I have an additional question about customer information. The FSA took the unusual step of issuing a notice concerning the management of customer information and took administrative action against Mitsubishi UFJ Securities. I understand that the FSA has taken a tough stance on the leakage of sensitive information, such as credit card data, since you were the Director-General of the Supervisory Bureau. Nevertheless, incidents like these occurred one after another. How do you view this situation?

A.

It is very regrettable. Incidents like these should not merely be treated as a matter of individual employees' awareness, but each financial institution, as an organization, should also conduct appropriate checks to prevent such incidents through its management system.

In any case, I hope that financial institutions will make efforts to keep their business operations appropriate so as to prevent incidents like these from causing inconveniences to users.

Q.

Preferred shares issued by Chuo Mitsui Trust Holdings in exchange for receiving public funds are scheduled to be converted into common shares with voting rights on August 1, increasing the government's stake in the bank holding company to as much as 30% in terms of voting rights. There are past cases in which the government became the largest shareholder in a bank that received public funds, including the case of Resona Bank. Could you tell us how you view the situation of Chuo Mitsui, including the prospect for the repayment of public funds?

A.

It is difficult to comment on matters concerning an individual bank. Some of the banks into which public funds were injected repaid most or all of the funds. That is not true for other banks.

In any case, I hope that banks that received public funds will establish an appropriate business model now, keep their business operations appropriate and build up surplus funds with an eye to the future.

With the economy in a condition like this, financial institutions have faced a very difficult environment. However, the environment is not all that matters, but efforts by individual banks lead to differences between their business performances. Therefore, I hope that individual financial institutions will also devote strenuous efforts to this matter.

(End)