Provisional translation

Press Conference by FSA Commissioner Katsunori Mikuniya

(Excerpt)

August 3, 2009

[Question Items]

1. Financial results of major banks and securities companies in the April-June quarter
2. Stock market conditions, the extension of the period of the restrictions on short-selling and an exit strategy
3. Regulation of FX (foreign exchange margin) transactions
4. Exercise of voting rights in relation to the conversion of preferred shares in Chuo Mitsui Trust Holdings into common shares
5. Public disclosure of the contents of discussions at the Financial System Council's consultative group on basic issues
6. Leakage of information from Alico Japan

[Opening Remarks by FSA Commissioner Mikuniya]

I do not have any particular statements to make.

[Questions and Answers]

Q.

Major Japanese banks and securities companies have announced their financial results for the April-June quarter. Many of them have swung back into the black. How do you assess the results?

A.

By last week, most major banks and securities companies had announced their financial results for the April-June quarter, and I understand that they generally posted profits.

As for major banks, although interest income and fee income remained weak, trading income, such as profits from the sale of government bonds, increased and credit costs were limited, enabling many banks to post net profits.

Regarding major securities companies, I recognize that the stock market has recently shown stable movements, the flow of money into investment trusts is increasing and there are signs of a recovery in the securities-issuing market, with the issuance of securities increasing.

Consequently, major financial institutions generally posted profits. However, while there are signs of a recovery in the Japanese economy, the economic situation is still difficult. We will keep a close watch on the financial results of financial institutions, as there are various risks, including the risk of an economic downturn, despite some favorable economic data.

Q.

In relation to securities companies, it is said that the stock market is stable and is on the path of recovery. In the meantime, attention is being focused on an exit strategy from the various emergency measures that are now in place. How do you view the current condition of the stock market? Also, could you tell us how you will continue the emergency measures? Will you extend the period of the restrictions on short selling for three months, for example? If you discontinue these measures, how will you do so? Regarding short-selling, there is an argument that the information disclosure obligations should be made a permanent measure. What do you think of this argument?

A.

Let me answer your questions in three parts. First, the Nikkei stock average was at a level close to 10,000 in early July but continued to decline thereafter, dropping to 9,050.33 on July 13. The following day, it started recovering, and rose above 10,000 on July 27 for the first time in about one and a half months. It continued to rise thereafter and closed at 10,356.83 on July 31. Today, it closed at 10,352.47.

There are a variety of views on the stock price trend, so I would like to cite some views as examples, rather than offering any definitive assessment. As for the factors behind the stock price rise, first, there are hopes for an economic recovery in both the United States and Japan because of improvements in some economic data. Second, the financial results announced by major U.S. companies were relatively strong and the results announced by Japanese companies contained data that raised hopes for a bottoming-out of corporate earnings. Third, as foreign stock and commodities markets are generally firm and interest rate movements are stable around the world, there are hopes that foreign investors' risk tolerance will grow, leading to an inflow of funds into Japanese stocks.

On the other hand, some people are concerned that as the stock market has risen steeply in a short period of time, stocks may have been overvalued and may be ripe for profit-taking. In addition, there is uncertainty over the movements of foreign exchange rates, and there are concerns that unfavorable changes in the conditions of the global stock and commodities markets, which are on an uptrend now, could have a negative impact on Japan, too.

As market movements depend on the actions taken by market players based on their own judgments, I would like to refrain from making any definitive comments from the standpoint of an administrative authority. Generally speaking, there are still a variety of problems with regard to the financial and economic conditions resulting from the global financial turmoil, so the FSA will keep a close watch on developments in Japan and abroad.

As for your second question, which concerns temporary measures related to the restrictions on short-selling, we have decided to extend the period of the temporary measures until the end of October of this year, as we concluded that it would be appropriate to continue them for a while in light of stock market conditions and the economic situation.

There was a media report about the argument that the information disclosure obligations should be made a permanent measure. However, we believe that we should decide what we should do in the future after taking into consideration developments in other countries and other factors in a comprehensive manner.

Regarding your third question, which concerns an exit strategy, I believe that the various extraordinary temporary measures we have taken since last autumn are necessary for supporting the economy as a whole.

On the other hand, these extraordinary temporary measures have negative side effects. With this in mind, we should consider the timing of ending each measure while taking into consideration various factors, including the economic situation. We should make a decision carefully while closely analyzing the current situation, examining the effects of each measure and making sure to keep our actions in line with other countries' moves, depending on the circumstances at the time.

Q.

Strengthening of the regulation of FX (foreign exchange margin transactions) was formally promulgated on August 3. Regarding this, most of the opinions that were expressed in response to the solicitation of public comments were opposed to the strengthening of the restrictions on leveraging. Could you tell us why it is necessary to strengthen the restrictions and why you decided to strengthen the restrictions despite the opposition?

A.

Regarding FX transactions, the use of high leverage has been increasing in both over-the-counter transactions and exchange-based transactions because the gap between domestic and foreign interest rates has recently been narrowing. FX transactions using high leverage are problematic because even a small exchange-rate change could cause unexpected losses for customers. We will prohibit business operators from making both exchange-based and over-the-counter FX transactions unless they receive margin deposits equivalent to 4% of the notional value. In response to the solicitation of public comments, both support and opposition were expressed. Opponents--mainly FX business operators and investors--argued that the restrictions are not necessary as investors make transactions on their own responsibility. There were also arguments that the maximum allowable leverage of 25 times is too low and that the restrictions would only encourage investors to make FX transactions outside Japan. On the other hand, supporters, including the Japan Federation of Bar Associations, argued that as transactions using high-leverage are highly speculative and could cause unexpected losses for customers and increase the possibility of business operators failing, transactions using leverage of more than 25 times should be prohibited or even stronger restrictions should be introduced.

While we received various opinions concerning this matter, we have concluded, as I said, that it is appropriate to prohibit business operators from making FX transactions unless they receive margin deposits equivalent to 4% of the notional value because even a small exchange-rate change could cause unexpected losses for customers.

As for the argument that the restrictions would only encourage transactions outside Japan, business operators who make FX transactions on behalf of or with residents in Japan are required to be registered as financial instruments business operators. Making FX transactions without registering is banned under the Financial Instruments and Exchange Act. In this respect, today, we put a warning on our web site for investors about solicitation by unregistered business operators based abroad. We have also asked the relevant foreign authorities for cooperation, and we intend to take appropriate actions if any problems are found.

The FSA will continue efforts to enhance customer protection by enforcing the recent Cabinet Office ordinance concerning the regulation of FX transactions.

I would like to correct what I said with regard to the warning about overseas FX business operators. The warning was issued on July 31, not today. My apologies for the mistake.

Q.

Instinctively, I understand that the restrictions are necessary from the viewpoint of protecting customers, but could you elaborate further on why they are necessary despite the principle that customers should make transactions on their own responsibility?

A.

I understand that many FX transactions use very high leverage. There are arguments that restrictions will not be necessary if the loss-cut rule is properly enforced and that restrictions are not necessary because customers make transactions on their own responsibility. However, as a very wide range of people participate in FX transactions, I believe it is necessary to ensure that transactions are made in an appropriate manner. As for the loss-cut rule, it may not necessarily function properly in the event of rapid market movements, and unexpected losses exceeding the amount of margin deposits may arise as a result. It is also problematic that transactions using high leverage lead to excessive speculative activity. Therefore, we have decided to introduce the restrictions.

Q.

Today, preferred shares issued by Chuo Mitsui were converted into common shares, and the government became the largest shareholder as a result. Chuo Mitsui is the second bank in which the government has become the largest shareholder, after Shinsei Bank. What do you think of this situation? Until now, the government has maintained the policy of not intervening in the management of a bank whose preferred shares had been converted into common shares. As Shinsei Bank was ordered to improve its business operations, I presume that a different decision could have been made. However, after all, the government decided not to intervene in the bank's management. Do you think that it really is good for the government not to intervene?

A.

As you mentioned, preferred shares issued by Chuo Mitsui Trust Holdings were converted into common shares on August 1, as prescribed under the terms of the preferred shares.

As for the exercising of voting rights, Deposit Insurance Corporation (DIC) and Resolution and Collection Corporation (RCC) published a notice entitled ''Basic Concept on the Exercising of Voting Rights.'' in December 2008. It states that DIC and RCC should exercise their voting rights properly from the viewpoint of protecting their interests as shareholders, with due consideration given to the following three points. The first point is whether the exercising of voting rights contributes to maintaining the soundness of the business operations of the bank concerned. The second point is whether it helps the bank to secure funds for the repayment of public funds. The third point is whether it is in accordance with the purposes of the law that constitutes the basis of the strengthening of the capital base, such as the facilitation of financing. I believe that the government's voting rights will be exercised from these viewpoints.

The FSA will continue to act in accordance with the rules concerning the supervision of banks into which public funds have been injected, including the so-called 30% rule, in order to encourage financial institutions to maintain the soundness of their business operations.

As for the collection of public funds, I believe it is important for individual financial institutions to continue their efforts to enhance their profit-generating power and increase their corporate value.

Q.

I would like to ask you about the Financial System Council's consultative group on basic issues, which was established after you took office as FSA commissioner and which held its first meeting last week. According to a briefing held after last week's meeting, future meetings will be closed to the public. As this group is responsible for deciding a broad framework related to basic financial issues, it is important that its discussions be open to the public. Will the group open its meetings to the public after holding several closed meetings? A group like this loses its significance if its meetings are closed to the public. Don't you plan to enhance the transparency of the process in which decisions on important matters related to financial administration are made?

A.

There have been many groups under the Financial System Council and its subcommittees that initially held closed meetings. However, these groups have gradually opened their meetings to the public. Meanwhile, I understand that some groups with a small number of members are holding closed meetings in order to facilitate frank exchanges of opinions. Whether or not a group makes its meetings open to the public depends on the themes of its discussion and the number of its members. For our part, we will let you know the contents of discussions as much as possible by holding briefings on each group's meeting.

Depending on how the debate of the consultative group on basic issues develops, the debate may be taken over by another group under the Financial System Council. If a subcommittee of the council takes over the debate, meetings will be open to the public. While the consultative group's meetings will be closed for the moment, we will let you know the contents of its discussions through our briefings. I would like you to understand that the closed-meeting format is intended to facilitate frank exchanges of opinions.

Q.

As the cause of the leakage of information from Alico Japan has not yet been determined, customers remain worried. How do you view this situation?

A.

I understand that Alico Japan is continuing its investigation in order to identify the information that leaked out. However, the company has not yet determined the cause of the information leak.

In any case, when a leakage of customer information occurs at an insurance company, it is important for the company to take quick and appropriate actions to protect the interests of the customers affected, take effective measures to prevent secondary damage, and regain the confidence of customers by determining the cause of the information leakage and making efforts to prevent a recurrence of the leakage.

Although Alico Japan is making efforts to determine the cause, the efforts have so far been unsuccessful because it is difficult to find the cause from the computer data.

(End)