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

(Excerpt)

December 22, 2005

Q.

Today, the Financial System Council is due to submit a report on the Investment Services Law. This bill is extremely important in protecting investors and stimulating the economy. Please explain once again how the Financial Services Agency (FSA) will improve the lives of the Japanese people through this bill.

A.

Firstly, we will conduct various studies within the FSA in response to recommendations made to us, put them together in the form of a bill in concrete terms, submit the bill to the Diet as quickly as possible, and seek a wide range of opinions in Diet deliberations.

One aspect of the Investment Services Law is to protect investors, as investment vehicles are expanding into fields that were not foreseen by the existing laws. The other aspect of this law is based on the idea of ensuring the freedom of permissible investment activities, that is, to prevent overregulation and excessive restrictions on freedoms with respect to such investment activities.

However, its purpose--which is to keep a sharp eye on malicious solicitation and malicious investment vehicles as a government responsibility--is extremely important in view of investor protection.

Q.

The next question relates to the comprehensive reform of government revenue and expenditure. As a means of administrative reform and expenditure cutbacks, the division of operations has been advocated recently, and the New Komeito and think tanks are actively calling for cuts in unnecessary expenditure by introducing perspectives of people from the outside. Do you agree with this approach? Or is there any room to take this up in the discussions of the task force?

A.

This has been an issue since my days as Chairman of the Policy Research Council, and it has been strongly advocated by the New Komeito, which is part of the ruling coalition. As the Government requested the party to discuss this issue at the time, I presume discussions have been held within the party. Even if this approach is to be taken, we need to look into whether it is possible or not by adopting a part of it rather than spreading it across the board. Further, the Diet is a place to deliberate on the budget, so in my personal opinion, members of the Diet who represent the people of Japan should not abandon their main duty, which is to deliberate on the budget, check the content of the budget and check the financial results. The Diet is a checking organization for that purpose.

However, there are cases in which the budget needs to be scrutinized by introducing opinions of people from the outside. In my days as Chairman of the Policy Research Council, I was in favor of doing it experimentally with respect to certain items in certain fields, if the Liberal Democratic Party (LDP) and the New Komeito thoroughly discussed it and decided to go ahead with it on a trial basis.

Q.

How will the Investment Services Law change and affect, for example, the world of finance or the financial sector in the future?

A.

In the financial sector, banks, life insurance companies, non-life insurance companies, shinkin banks and shinyo-kumiai (credit cooperatives) have their businesses regulated by their respective business laws. The Investment Services Law is undoubtedly a cross-sectional law, but my vision is that its top priority is to prepare against pitfalls that are not expected by investors, and my understanding is that it does not directly regulate the existing financial world.

An example of a typical malicious case involves foreign exchange margin trading, in which many people who have no knowledge of this field lose money. These kinds of businesses that maliciously solicit for investment should be eliminated in the interests of the nation.

Q.

The enactment of the ''Financial Services Law'' was hotly debated around 1999, only to be crushed subsequently as a result of a tug of war between government ministries and agencies. In the meantime, some investors suffered losses while liberalization progressed. Reflecting on this, what are your views on the fact that it was seven years too late, or what are your thoughts on the responsibilities of the ruling parties, having had discussions on the Investment Services Law?

A.

Scams such as those that solicit for investment and promise high rates of interest have actually been around since 1945, and malicious businesses have been punished by applying laws that were effective at the time. It is the demand of the times that a law with universal coverage--that is, an investor protection law--has become necessary due to the diversification of investment vehicles of late. On the other hand, the law also incorporates the idea that opportunities to make investments freely should not be destroyed by investor protection.

Please excuse me for not being able to answer your question about the law being discussed previously, because I actually had no knowledge of it.

Q.

Japan is now entering an era of declining population. While it is understood that the task force is studying a macroeconomic scenario of this phenomenon, measures to tackle the falling birthrate causing the dwindling population have lagged behind, in that the phenomenon had already begun about thirty years ago. What are your thoughts on this?

A.

The falling birthrate is caused by an extremely wide range of factors, and the fertility rate is, surprisingly, extremely low not only in Japan but also, for example, in its neighboring country South Korea.

Causes of the falling birthrate can be explained in economic terms and even in the context of women's empowerment in society. Various factors are in play here, and budgetary and institutional problems are also important in tackling the falling birthrate. Actually, LDP freshmen compiled a report on measures to deal with the falling birthrate this spring. The conclusion drawn by the five freshmen is that, unsurprisingly, the most important issue is people's attitude, and that at the most fundamental level, measures to tackle the falling birth rate must address people's values of raising children in their lives. I agreed with their point of view in many aspects with respect to this problem.

However, if we look at the declining population in relation to the economy and government finance, it has extremely serious problems, one of which is the problem of estimating what will happen to the population on the whole. This includes the question of how big a workforce we could secure. Another problem is the impact of the increasingly aging society on the social security system, including pensions and medical care. Politicians must bear in mind that these will be extremely serious problems to those belonging to the generation present here today, rather than our generation.

''Give birth, more children'' was the slogan between the late 1930s and the early 1940s, a time in which the government campaigned to increase its population. Instead of resorting to such direct tactics, the government needs to improve the workplace environment, make infrastructural improvements including nurseries and daycare centers, and properly tackle the economic aspects of the problem such as soaring education costs and the costs associated with giving birth. Unless people's attitudes or values change bit by bit, the diminishing birthrate problem cannot be solved.

There are countries in which women's empowerment in society has been accompanied by a growing population and increasing birthrate, such as the United States and France. We need to properly understand why this is happening in those countries.

In the context of government finance, even if a primary balance can be achieved in the early 2010s, subsequent changes in the working population and further aging of the population might instantly push the primary balance back into negative territory. My understanding is that the population problem, demographic composition and trends will be serious problems that cannot be averted by Japanese society in the years ahead.

Q.

In relation to this, it has been revealed that the fall in population will occur a year or two earlier than forecasted. Will this bring about any changes in economic policies?

A.

Just because it will occur a year or two earlier does not mean that there will be a direct major impact on economic policies.

Q.

Last night, the Prime Minister and members of the LDP Research Commission on the Tax System reportedly dined together and discussed how tax reform should be carried out. Will their actions affect the discussions on the comprehensive reform of government revenue and expenditure due to commence next week?

A.

Not at all. I have the excerpt of ''Basic Policies 2005'' with me here, which states that comprehensive and radical review will be continued on the basis of ''Basic Policies 2004'' and the outline of tax reform by the ruling parties, and conclusions will be drawn within the ''concentrated consolidation period'', that is, within fiscal 2006. The ''Basic Policies 2005'' also state that the size of government expenditure, the medium-term targets in major areas of expenditure through national and local governments, and revenue aspects will be examined uniformly within a year or so, and through discussions at the Council on Fiscal and Economic Policy, the options and the reform process will be clarified with respect to the directionality of the reform.

The LDP's manifesto states the party's commitment to realizing radical tax system reform in fiscal 2007, including consumption tax, in order to make all generations share the tax burden in a broad and fair manner, in consideration of the outlook for necessary expenses associated with social security benefits in general.

On September 4, during the election, the Prime Minister stated that even if efforts are made to carry out tax reform and determine the nature of the tax system in fiscal 2007, it is impossible to implement it in fiscal 2007. That is what the Prime Minister said as at September 4.

It cannot be done within the next year or two. It will be done in a few years time. There is a long way to go before we draft a plan and enforce it in practice. That was his comment during the election.

Judging from the Prime Minister's press conference held on September 12 after the election, it should be obvious that fiscal rehabilitation cannot be achieved just by expenditure cuts. With this in mind, it is a problem that needs to be addressed comprehensively, including not only consumption tax but also income tax, corporation tax, tax on assets and so on. Thorough discussions must be held on this matter from this autumn onwards.

The Prime Minister's statement at the Diet on September 28 revealed his intention to look into the tax system as a whole in a comprehensive manner, including consumption tax, income tax, corporation tax and tax on assets, deepen the national debate and draw a conclusion on tax reform within fiscal 2006.

The outline of tax reform by the ruling parties resolved on December 15 states that efforts will be made to realize radical reform of the tax system including consumption tax in fiscal 2007, in consideration of the outlook of pensions, medical care, nursing and other social securities benefits in a longevity society with a falling birthrate and the expenses required to tackle the falling birthrate, in order to make all generations share such expenses in a broad and fair manner.

These were the developments over the past six months, and work will be carried out along these lines. On the other hand, in regards to the outline of tax reform mentioned at the end, my position is to gain a proper understanding of its meaning and get things done by carefully listening to Mr. Yanagisawa, Chairman of LDP Research Commission on the Tax System, who actually wrote the text.

Q.

With respect to the primary balance briefly mentioned earlier, the primary balance of national and local governments combined is expected to go into positive territory in fiscal 2012, according to the Structural Reform and Medium-Term Economic and Fiscal Perspectives. However, you said that even if the primary balance becomes positive once in fiscal 2012, further birthrate reduction and aging demographics in the future might ''instantly push'' it back into negative territory, even when the ongoing various reforms in the social security system are taken into account. Are there concerns that the primary balance might become negative again after fiscal 2012?

A.

After achieving primary balance, the global climate might change. We need to bear in mind that government finance is affected by external issues, including whether or not Japan could maintain its international competitiveness, whether necessary resources and energy could be secured, and how much progress is made in the World Trade Organization (WTO) and with respect to the Free Trade Agreement (FTA). What I meant to say was that various options need to be considered, while taking such dynamically-changing parameters into account, including how big the workforce or the working population including potential workers will be at that time in Japan, and how the falling birthrate will progress.

Q.

The next question relates to crucial policies for administrative reform, which are expected to be approved by the Cabinet soon. What does the Council plan to discuss in order to ensure their effectiveness, while acknowledging that Mr. Chuma, Minister of State for Regulatory Reform, may do the same one-sidedly?

A.

Firstly, the basic law to be submitted by Mr. Chuma will probably mention the reform of policy-based finance decided this year, and the issues concerning total labor costs of civil servants, special account and management of assets and liabilities. As for the depth of the content as a basic law, necessary provisions for the basic law must be decided by then, which is a challenge. On the other hand, taking the issue concerning the management of assets and liabilities as an example, it has been decided that the Ministry of Finance will prepare a plan within fiscal 2006 and report it to the Council. It would be natural for the Council to constantly monitor such an issue, while Mr. Chuma will, one-sidedly from the standpoint of administrative reform, keep an eye on other issues and on the progress of administrative reform as a matter of course. It is quite natural for the Council, which made the proposal in the first place, to monitor the progress with serious interest.

(End)