Press Conference by Kaoru Yosano, Minister of State for Economic and Fiscal Policy and Financial Services

October 31, 2005

1. Minister's Statement

Ladies and gentlemen, I am Kaoru Yosano.

As a result of the Cabinet reshuffle today, I have been appointed as Minister of State for Economic and Fiscal Policy and Financial Services. I am committed to making the utmost efforts to fulfill the duties that have been assigned to me.

Having worked as the Chairman of the Policy Research Council until this morning, I believe full cooperation is required between the Council on Economic and Fiscal Policy, the Liberal Democratic Party (LDP) and the New Komeito. The issue at hand is what to do with government-affiliated financial institutions. The LDP has decided to first discuss the functional aspects and has sorted out the topics of discussion to a certain extent, and the Council on Economic and Fiscal Policy is expected to follow suit. Discussions on functions will be properly sorted out and functions will be divided into various categories, including functions that should be kept, functions with outdated roles and functions that can be passed on to the private sector. The focus of discussions is expected to shift from improving the efficiency of the Japanese economy and minimizing the fields subject to government intervention to determining how the organization should be.

The LDP is taking an extremely flexible approach to deal with this problem, so I believe any differences in views have already been ironed out.

In addition, the Council on Economic and Fiscal Policy is working on extremely tough issues, such as holding down the total personnel expenses in the public sector, and cutting the number of civil servants. As these issues are part of the crucial reforms for the Koizumi Cabinet, whose aim is ''small government'', I will set achievable targets and strive to fulfill them, no matter how tough they are.

From my viewpoint as a contributor to the draft, what matters in ''Basic Policies 2005'' is the execution of medical system reform. The No.1 objective of the reform is to hold down medical costs as a whole and make the medical insurance system sustainable. Further, the interim report on fiscal reform submitted by the LDP's Policy Research Council headed by Mr. Yanagisawa states that public funds injected into the social security system need to be substantially reduced, including medical costs. Towards this end, we have pushed ahead with reforms in the field of pensions and nursing care, so the next step is to work on medical reform.

In addition to the above, I engaged in preliminary discussions with the Government last year as the Chairman of the Policy Research Council. The remaining 600 billion yen in the reform package of three issues on central and local government finances is to be properly implemented as part of the election pledge made by the LDP and the joint election pledge made by the LDP and the New Komeito. What we should do with compulsory education costs and how we should generate the remaining 600 billion yen are extremely difficult questions, but I will assist Mr. Shinzo Abe, the Chief Cabinet Secretary, and strive to find answers.

As there are other various reforms on the agenda, the duty of the Council on Economic and Fiscal Policy is to work on them with as much passion as Mr. Heizo Takenaka, former Minister of State for Economic and Fiscal Policy and current Minister for Internal Affairs and Communications.

In regards to financial administration, the percentage of non-performing loans has fallen to less than 3% at major banks and to about 5% in other financial institutions, thanks to substantial efforts made by the parties concerned. As many people have had an extremely tough time in the process, the time has come for financial institutions to take on risks and resume their financial activities to bring about economic growth in Japan.

Having been a regular reader of the Monthly Economic Report and other publications, I believe the Japanese economy is generally on an upward trajectory now, and the long, dark tunnel that continued for more than a decade since the burst of the Bubble is finally coming to an end. As financial administration in itself is substantially authoritarian, I believe power should be exercised in a restrained manner and in the interests of the national economy, and for each and every citizen. Banks can now sell products of life and non-life insurance companies over the counter, and in the latest Diet session, the revision of the law on bank agencies was finally approved. In such an environment, a wide range of new kinds of investment business will emerge in the days ahead. I personally believe that certain laws will have to be amended in order to ensure that peoples' assets are safely invested.

Further, there is the question of whether there are any inadequacies in the legislation regarding corporate acquisitions. Various empirical and academic studies are being conducted, so we need to look into whether legislative amendments are required.

Thank you for listening.

2. Q & A

Q.

The first question relates to economic and fiscal policies.

In regards to the reform of policy-based finance you just mentioned, it appears that there are still discrepancies between the plan submitted by the LDP's Joint Policy Division and the views of private-sector members of the Council on Economic and Fiscal Policy, judging by the wording. According to what you just said, the LDP is taking a flexible approach and there are no longer any differences in views. Is it fair to assume that the differences will be ironed out through the LDP adapting to the Council's plan?

A.

Or the Council's plan may be adapted to the LDP's plan. I think both parties should resolve the matter by making a rational judgment with respect to each problem. As there is no need for either party to compromise, I think the right thing to do is for both sides to put forward their respective points based on reasoning and draw a conclusion from this process.

Q.

This has been scheduled to take place in November. Are there any changes to the schedule?

A.

When I met Mr. Takenaka two weeks ago as Chairman of the Policy Research Council, we informally talked about having it done some time in November. I also confirmed this at a later date, when I saw Mr. Takenaka together with Mr. Sonoda, Chairman of the Joint Policy Division, and Mr. Hayashi, Chief Secretary. I intend to properly coordinate this matter between the Government and the ruling parties, including the content and the timing, to ensure that there is no misunderstanding.

Q.

You just mentioned the pressing issues concerning policy-based finance, the medical system and the reform package of three issues on central and local government finances, which ultimately boils down to the crucial challenge of carrying out comprehensive reform in government revenue and expenditure. What do you think will be the optimal measures and steps for executing such reform?

A.

Japan's fiscal situation can no longer be solved by simply slashing expenditure. Having said that, we cannot gain people's understanding by simply resorting to measures to increase revenue. Expenditure must be slashed and revenue-increasing measures must be taken simultaneously.

The fiscal rehabilitation measures recently announced by the LDP are aimed at ideologically distinguishing between money needed for social security and other general expenditure. Harsh forecasts have been presented by the Council on Economic and Fiscal Policy, but the numerical values used by the Council seem to be extremely optimistic from my point of view as former Chairman of the Policy Research Council. For example, the LDP assumes that the elasticity of tax revenue is about 1.1, whereas the Council on Fiscal and Economic Policy assumes 1.8 in its calculations, so differences are understandable to a certain degree. However, as stated in the report, achieving a primary balance is just the starting point; unless we think about ways to reduce debt after achieving the primary balance, fiscal soundness cannot be achieved in the true sense of the word. That is the conclusion drawn in the LDP's report, and I continue to believe that this is the case.

The point is to cut expenditure as much as possible. Areas that will be affected the most will be social security and local government finance--how should the relationship between the central government and local governments be fixed? Without properly addressing these two major areas, we can neither achieve fiscal rehabilitation nor reduce expenditure. Another thing that needs to be done is to hold down the total personnel expenses in the public sector, which is an immediate challenge in other general expenditure. In my opinion, the conclusion drawn in the report is to work out measures to increase revenue based on such a vision.

Q.

I have two questions regarding financial administration. At the beginning, you stated that the financial administration has started to overcome the non-performing loans problem, especially for major banks. With this in mind, what is your understanding of the current status of the financial system, including regional financial institutions?

A.

Firstly, the primary mission or business of a financial institution is to take risks. Without risk-taking, the financial sector cannot stimulate the economy.

In regards to your question relating to the financial system, my approach is always based on the assumption that the Japanese financial system is extremely well-developed. Indeed, there are problems such as those relating to over-banking, but they will naturally have to be solved.

This may not be a pressing issue for the Japanese financial system, but I imagine the biggest challenge that the system will have to face is how the postal bank will enter the financial system.

Q.

The other question relates to financial administration in general: is there any particular area in which you intend to concentrate your efforts?

A.

Financial administration requires transparency, and inspections need to be conducted properly in order to protect peoples' financial assets. I am not particularly worried about financial institutions in general, but for financial administration in the broad sense, the Financial Services Agency (FSA) must constantly be on the lookout, to determine ways to prevent innocent consumers being caught up in bad situations due to new financial products and to determine whether securities transactions are performed in a fair and transparent manner.

In addition, financial institutions must have a proper vision or screening system that enables them to take risks as mentioned previously, although this is at their managerial discretion. Further, in the reform of government-affiliated financial institutions, I am concerned about what may happen to the financing framework for small and micro enterprises in the future. As politicians, we should be concerned about this in the context of social policy, separate from the so-called market mechanism.

Q.

In relation to economic and fiscal policy, Mr. Takenaka has routinely expressed his reform priorities: the first being the privatization of postal services, the second being policy-based finance and the third being the management of government assets and liabilities. He has stated the order of priority for numerous policy issues. In the face of this and many other issues, do you intend to get things done based on such a priority order?

A.

What was the third priority?

Q.

His third priority was the management of governments' assets and liabilities.

A.

Regarding the second priority--the challenge concerning government-affiliated financial institutions--I believe the LDP will make greater progress than you initially expected, as the LDP has been more receptive than originally anticipated from my viewpoint as Chairman of the Policy Research Council.

Let me also mention that calculations associated with the management of assets and liabilities are extremely difficult. In the case of assets, how should we treat assets that cannot be disposed of? What is fair value accounting? In addition to such a problem, there are numerous technical issues.

Although the amount of liabilities can be calculated by adding up outstanding Japanese government bonds or the actual liabilities, such as liabilities and debts in special accounts, there are technical problems: how should we treat future liabilities--liabilities that are accrued in the future? Moreover, it is extremely difficult to calculate assets, as you may be well aware. Consider the value of an airport: you may be able to work out the costs of construction, and determine its worth as an asset based on the construction costs. But there is a technical problem: the price of disposal is unknown. Notwithstanding such a problem, I think it is necessary to determine whether assets and liabilities are well-balanced on the whole.

Q.

This means the Council on Economic and Fiscal Policy is currently aiming to prepare the basic policies for the aforementioned assets, policy-based finance and civil servants next month, that is, in November. Is that correct?

A.

In actual fact, the LDP has not yet started working on the management of assets and liabilities. Although I have been given an explanation on an individual basis, nothing has yet been done in the LDP. It will be addressed in the days ahead, so I will inform you if there is any progress. The new Chairman of the Policy Research Council is not inclined to avoid various problems, so it is likely that the Government's preferred course of action will be approved with respect to this problem as well.

Q.

At the press conference held at the Prime Minister's Office, you stated you have never been conscious of the ''post-Koizumi administration''. You are well-known for being a policy expert, and now that you have been appointed to this post in which the key lies in policy management, people can see your presence being part of the ''post-Koizumi administration''. Can you meet people's expectations in this regard?

A.

Some people encourage me to think about such things, but to be honest, I have hardly made any political moves, despite my love for work. If such things are being said, I now consider myself fortunate.

Q.

In regards to financial administration, you mentioned the problem of over-banking, but what is construed as over-banking?

A.

I think this problem has largely been sorted out over the past decade. It has been sorted out through mergers and closure of branches, and a considerable number of branches have been shut by managerial decision. Yet, the number of financial institutions remains higher than in other countries. The question is whether it is fair to simply compare it with other countries. It depends on Japan's economic culture, business relationships stemming from the past and various other factors. Nevertheless, I think we must look at the fundamentals of the economy to see whether it can sustain so many financial institutions.

Q.

Does that mean that the number of banks and financial institutions should be reduced in the long run?

A.

It will probably come down to the number of financial institutions that is appropriate for the size of the Japanese economy, but this should be subject to the situation at each financial institution. It is not a matter for the FSA to dictate that individual institutions go out of business or scale down.

Q.

Final question: changing the subject completely, Ms. Kuniko Inoguchi stood out in the photograph taken to commemorate the formation of the new Cabinet today due to her blue dress. Having been a member of the Cabinet three times, what was your impression?

A.

I cannot comment on this because I have little interest in women's clothes.

(End)