Provisional translation

Press Conference by Minister for Financial Services Yoshimi Watanabe after a Consultative Meeting with Regional Business Managers, etc.

(Excerpt)

May 19, 2008

[Opening Remarks by Minister Watanabe]

This is my second opportunity to exchange opinions with regional business managers under the Financial Services Agency's (FSA) regional tour initiative for the purpose of soliciting local voices. We chose Tottori as our destination as we wanted to visit a region very much afflicted, as we did on the previous occasion. Even an afflicted region, if looked at in a different light, has ample potential for growth. We picked Tottori as it is a region that perfectly fits our concept of “Turning adversity into opportunity.”

[Questions and Answers]

Q.

In your lecture earlier today, you said it is necessary to empower Japan's pension fund reserves, which total 150 trillion yen. What does this mean? You also mentioned SWFs (sovereign wealth funds). Could you elaborate on your thoughts regarding SWFs?

A.

As for the management of pension fund reserves, Minister (of Health, Labor and Welfare) Masuzoe has already started deliberations, so I would like to avoid making any comments that could be construed as interference in his area of responsibility. I would welcome active debate on whether passive investment, which has until now been the standard investment strategy for pension funds, is sufficient, or whether pension funds should adopt an activist approach like the one adopted by CalPERS (California Public Employees' Retirement System). Regarding sovereign wealth funds, the Financial Markets Strategy Team, which is my advisory group, has been continuing debate, and its findings will be presented in its second report.

Q.

When will the second report be issued?

A.

We hope to issue it before the current Diet session ends. We will compile this report while paying attention to a series of reports expected to be issued this month through the international framework.

Q.

I would like to ask you about regional financial institutions. Last week, Shonai Bank and Hokuto Bank announced a business integration plan that crosses prefectural borders. In February of this year, the Bank of Ikeda and Senshu Bank agreed to start negotiations aimed at integrating their business operations. I suppose that a regional economic slump and weakening fund demand are behind these moves. Do you expect that the realignment of regional financial institutions will accelerate?

A.

The current situation is characterized by individual banks acting based on their own management decisions, in a manner quite different from that of the era of the national “one prefecture, one bank” policy, which was enforced in the wake of the Great Financial Crisis of the Showa era. Now, a monster in the form of the Japan Post Bank has arrived on the scene and the financial industry is entering an era of fierce competition, prompting financial institutions to consider survival strategies, as I understand it. Some banks have opted for business integration as a survival strategy, and I welcome such decisions.

In any case, I believe that there are various strategy options. For example, some banks may adopt the approach of relationship-based banking, which enables various financial businesses, while others may focus on their areas of specialty. In my view, the ratio of direct financing to indirect financing, which I referred to in my lecture earlier today, remains little changed in Japan from the level seen in the era of tight controls on the financial sector.

So, I hope that regional financial institutions will engage in financial services well suited for the new era, and should they opt for business integration as a strategy, I would welcome such moves.

Q.

Today, another computer system problem occurred, this one at Sumitomo Trust & Banking, disrupting some ATM operations and causing inconvenience to users. What is your view the recent spate of computer system problems, including the one that occurred today?

A.

I have not received a detailed report concerning the problem in question. It is inappropriate for systems glitches like this to occur frequently. I wonder why problems like this are happening. As the financial industry relies heavily on IT (information technology), banks must check their systems on a usual basis in order to prevent system problems and avoid inconveniencing customers.

Q.

In your lecture, you pointed out that the public sector accounts for a very large proportion of the Japanese economy, which places a squeeze on the private sector. Shinginko Tokyo, which the FSA began inspecting on Friday (May 16), has become a sort of public bank inasmuch as it is almost fully owned by the Tokyo Metropolitan Government, following the injection of additional capital worth 40 billion yen. Please explain to us again your outlook on the future of this bank and your view of its business model. I would like you to discuss the future of this bank, including the possibility of its being forced out of business, should the results of the ongoing inspection necessitate this.

A.

First of all, the inspection has just begun, so I cannot talk about its results for now. The inspection is likely to continue for more than a month, and the results thereof will not be known until much later.

I understand that the original concept of Shinginko Tokyo was to establish a local government financial scheme in the form of a private bank as specified by the Banking Act. This concept was probably useful to a certain degree when this bank was founded in order to cope with such problems as banks' reluctance to provide fresh loans and their efforts to cut back on outstanding loans due to an erosion of their capital base. Also, the business model of pursuing a “middle risk, middle return” approach was very unique at that time. Now, it is necessary to explore why this business model has not worked. We should avoid jumping to the conclusion that the pursuit of this new “middle risk, middle return” approach was a flawed business model. This field has been mostly neglected as a result of the tight controls that used to stifle the financial sector. As we consider how to develop the business domain of “middle-risk, middle return,” we should study the case of the bank's failure.

Q.

At the beginning of this press conference, you stated that you had come to Tottori because of its status as an afflicted region. What are the problems particular to Tottori that led you to pick it out of the numerous afflicted regions? Also, while you may not yet have sufficient information to do so as you have not yet visited companies operating in this region, could you explain Tottori's “growth potential,” to which you have referred? My third question is this: what kind of role can regional financial institutions play in Tottori?

A.

I had no specific figures in mind. Tottori, along with Miyazaki, is frequently cited as a region where expressways are absent. Moreover, those parts of the Chugoku region that face the Sea of Japan (where Tottori is located) conjure up images of chronic economic slump. Therefore, there is a tendency to view this region as symbolic of the gaps that are present in the Japanese economy.

However, as I stated in my lecture, Tottori has accumulated outstanding know-how regarding exports of agricultural products. Therefore, it will be possible for Tottori to take advantage of this “treasure trove (otakara)” of know-how and its strength in agricultural products suited to its climate and geography, as represented by the sand dunes, which are similar in climate and geography to some nations in the Middle East. For example, the shallot, grown in Tottori's sandy terrain, can also be grown in Dubai, and such cultivation plans are actually being considered. This is a prime example of how Tottori's “treasure trove” can be utilized. Discovering hidden treasures and using them to great advantage in order to achieve regional revitalization - this is what Tottori is capable of doing, and this region has unlimited potential for revitalizing itself and surviving in the era of drastic change. That is why I have come here.

As for the role of financial institutions in this context, it is impossible for them to take risks as long as they remain content to be subject to the system of tight controls. Recognizing that a new era has arrived, they must stop thinking within the obsolete framework of tight controls on the financial sector, which used to be referred to as “the convoy system” of regulations. Unfortunately, Japan was hit by a financial crisis just as it was starting to abandon the convoy system and promote financial deregulation. The FSA has made a drastic shift in its financial administration, from the ex-ante system to the ex-post system. However, financial institutions were struck by the financial crisis when they needed to make a drastic change of course. If this has caused some banks to remain reluctant to take risks and unwilling to follow the guidance of the FSA, they must change their mindset. Even if they are willing to follow the guidance of the FSA, the FSA is no longer what it used to be and can do little to help apart from telling them to think for themselves. If some regional banks have not yet changed their mindset in adapting to the new era, they must do so quickly. As I told you earlier, those of you with a mind to look for them will have unlimited opportunity to discover hidden treasures in Tottori. Financial institutions must assist efforts aimed at discovering treasures by taking risks. I believe that it is essential (for regional banks and businesses) to build a “win-win” relationship that benefits all sides.

(End)

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