Press Conference by the Minister for Financial Services

(Excerpt)

1 April, 2002

Q.

Minister Yanagisawa, you have said that the ''Soundness of all financial institutions operating April 1 will have been secured.'' Does this mean that the financial health has been achieved for all of the financial institutions, including medium-to-small sized ones?

A.

At present, they are all healthy. You can certainly rely on this point.

However, the economy is a changeable creature by nature and the recent economic situation has been going through a period of extremely rapid changes. In order for financial institutions to go well in the future, close observation by depositors will be important and the supervision by the FSA will bear a heavy responsibility as well. Above all, it is strongly expected that the management of these financial institutions will become fully aware of their responsibilities, secure the soundness of their operations, and make appropriate managerial judgments when they can no longer be confident in their institutions' conditions.

That's exactly what structural reform means. Under circumstances where strict surveillance, supervision, and criticism are given to financial institutions and the management of the financial institutions in turn has to strive to meet people's expectations, further progress can be expected in the structural reform of each financial institution and in the financial community itself. Such progress will be highly encouraged to achieve stability in Japan's financial system. At the same time, we expect that the financial institutions or the function of the financial system itself will play its expected role in the national economy and further vitalize and strengthen the financial sector as a vibrant industry.

Q.

There has been some controversy over the last few months that the resumption of removal of blanket deposit insurance should be postponed. Minister Yanagisawa, weren't you ever indecisive about the judgement on this issue?

A.

No, I haven't.

It is my belief that unless much stricter business management is exercised at financial institutions and the structural reform of the financial sector is realized, the future of Japan's financial industry will be bleak. The resumption of the ''pay-off'' scheme leads to more critical eyes on the banks' management. This means heavier responsibilities for the management at each financial institution. Needless to say, our responsibilities will also become heavier. More critical eyes and stronger opinions will force financial institutions to enhance their vigilance, and this will urge the management to meet people's expectations. Under these circumstances, the structural reform of Japan's financial sector will be accelerated and thus the strength of our financial sector will be enhanced.

Q.

Regarding the special inspections that were scheduled to be completed in March, I understand that these on-site inspections have been completed. What do you think about the timing for disclosing the results?

A.

As I stated earlier, discussions among inspectors, banks, and accounting auditors were completed by the end of March, and I hope to compile and disclose the results within no more than two weeks.

Q.

Do you think that the disposal amount of non-performing loans (NPLs) at banks will hit the peak during this term?

A.

Well, we don't expect the amount to reach 10 trillion yen and looking back to the FY1998, which ended in March 1999, NPLs of 10 trillion yen were disposed of during that term, making it the peak. Since then, the disposal amount of NPLs has decreased to the level of 4 trillion yen. I'm saying that the NPLs to be disposed of during this term will be higher than that level.

Q.

It will increase again, and then decrease from the this fiscal year?

A.

Yes, that's my view.

Q.

The Governor of the Bank of Japan (BOJ) sometimes mentions that public funds will still be necessary from the perspectives of some people inside and outside Japan, in consideration of concerns such as the weakness of core capital. It may be just a matter of the time period - one is talking about the present situation and the other is talking about the future - but from the viewpoint of depositors, I'm afraid that depositors inevitably think there is a discrepancy between the Financial Services Agency and the BOJ. Would you explain this?

A.

I know, from the press reports and so on, that the Governor of BOJ has given opinions on various occasions. However, at least when I've been with him, he has not mentioned any views that are different from mine.

Governor Hayami mentions two points, one of which is the level of capital. He says, ''I don't mean that capital injection is necessary right now.'' I understand that he is basically saying ''When it becomes necessary, however, it will be better to do it as soon as possible.''

Also, he sometimes talks about the quality of capital. He says, ''The quality of capital is never sufficient,'' and then adds, ''that's why profitability is important.'' This is virtually the same thing that I'm always saying.

In this regard, I believe that regardless of how he expresses his thoughts, his core ideas are not different from mine and it is just a matter of differences in expression.

Q.

A large amount of NPL disposal is expected again and I think that financial institutions have to strive to further improve their profitability structure. You have stated that a capital injection by public funds will be made if a threat of undercapitalization should arise. However, you have a negative stance with regard to the capital injection by public funds if it may ruin the potential strength of financial institutions. Is my understanding correct?

A.

In other words, I'm concerned about a moral hazard - a situation in which the management is not sufficiently alert. It would not be difficult to expect that the lack of discipline would come out.

Another thing I'd like to point out is that if we were to decide to inject capital, we would need to think about the implications on profitability. I think this depends on the conditions of the capital injection, but generally speaking, if we were to do it, reasonable dividends would be required from the general public's point of view. This means earnings would be taken back in return to the public. From a different point of view, this would result in dilution. That is, the source for the dividends of existing shareholders would be diluted accordingly. These are the main reasons.

In the end, I think this is concerned with one's own basic philosophy toward the economy but there has long been a controversy about whether or not the government should intervene in the private sector. My philosophy is that although it is not desirable to leave them at taking too much time, it is better to demand that the private companies' management make their own judgments persistently as well as strictly. I believe that it is better to utilize market principles. This is a fundamental issue.

Of course, I'll make judgments promptly and decisively if any threat of a financial crisis should arise. Unless such a situation should occur, I believe that the policies we are adopting now are the right course of action from the perspectives of preventing a moral hazard, avoiding dilution, and maintaining the stance against the undue government's interference.