Provisional translation

Press Conference by Yoshimi Watanabe,Minister for Financial Services

(Excerpt)

June 17, 2008

[Opening Remarks by Minister Watanabe]

Good morning.

At today's cabinet meeting, I reported on my attendance at the World Economic Forum on East Asia (in Kuala Lumpur, Malaysia). At the forum, I explained Japan's views on the current condition of the global financial markets, the lessons the country has learned from its past financial crises, and the direction of reforms to be implemented in the future. I also had a frank exchange of opinions with experts from around the world, making my attendance at the forum a very meaningful experience.

In informal talks following the cabinet meeting, I reported on the analysis of a survey on the current status of financing for small and medium-size enterprises (SMEs). As a result of the analysis, we have found that business conditions for SMEs have become tougher against the backdrop of surging prices for crude oil and raw materials. The DIs (diffusion indexes) showed that the construction industry faces a particularly tough situation. Due to an increase in unsold stocks of condominiums and delays in construction starts attributable to the revision of the Building Code, real estate companies saddled with bad inventories are struggling to secure necessary funds. Financial institutions have tightened their loan screening criteria for companies whose business conditions have deteriorated. When conducting the survey, we heard about a rumor that the FSA (Financial Services Agency) had instructed financial institutions to restrict loans to specific industries. This rumor is quite groundless. As a countermeasure against the worsening business conditions for SMEs, we will first conduct a campaign to promote the use of a special hotline for consultations on how to ensure smooth financing, so that we can better canvass the opinions of SME managers and understand their problems. I have instructed FSA staff to continue their efforts to keep track of the ongoing situation. It is also necessary to resolve the misunderstandings of borrowers, so we will publish a notice on the FSA website to the effect that the FSA never instructs financial institutions to restrict loans to specific industries. We will remind financial institutions of the need to provide appropriate explanations to customers and conduct a voluntary review of their operations. I have instructed FSA staff to take appropriate steps in this regard, too. Ensuring smooth financing for SMEs is one of the most important tasks of financial institutions. The FSA will keep a close watch on the trend of loans by financial institutions.

Meanwhile, I was strongly requested to attend a meeting of the National Vision Project Headquarters after the cabinet meeting. At the headquarters' meeting, there were discussions on how to implement the reform of the civil servant system from now on. In particular, a decision was made on the staffing of the secretariat of the headquarters for the promotion of the civil servant system reform. According to this decision, the secretary-general should be selected through public invitation. Other staff members should also be selected partly through public invitation, with more than half of the staff to be appointed from the private sector. If the total number of staff is 50, 20 to 30 should be appointed from the private sector. Since one of the centerpieces of the basic act for this reform is to use a public invitation system in order to appoint personnel, irrespective of whether they are from the public sector or the private sector, the secretariat's pioneering move in this regard will be the first step toward reform under the basic act. The selection of the secretary-general and other staff members must not be left to bureaucrats. The minister in charge of the civil servant system reform should assume responsibility for the selection process and oversee personnel appointments. The delegation of the authority for personnel appointments to the minister in charge can be implemented by cabinet decision under Article 55 of the National Public Service Act. These are the matters recommended and decided by the National Vision Project Headquarters. This morning's meeting ended after it was agreed that Mr. Sugiura, secretary-general of the headquarters, will report these matters to the Prime Minister's Office.

I do not have any other statements to make.

[Questions and Answers]

Q.

In parallel with the World Economic Forum on East Asia, which you mentioned, a meeting of the G-8 Finance Ministers was held in Osaka and an ASEM meeting (meeting of the Finance Ministers of Asia and Europe) was held in South Korea. At these meetings, I understand that a consensus was formed regarding matters such as inflation, the surging prices of primary products, and exchange rate issues such as the weakness of the dollar. What are your views on these matters? Also, as a result of your exchange of views with officials from various countries in Kuala Lumpur, do you think that there is a widespread consensus regarding these matters?

A.

As you might expect, there was a consensus among Asian countries that the surging prices of foods and resources are having very serious effects. As to the cause of this situation, the views of Asian countries and those of Europe and the United States appeared to be different. The Finance Ministers and other officials of Asia - India in particular - expressed strong opposition to the argument that the price surge has been caused by increased demand in Asia. In my view, although the rising prices of resources and foods may be partly attributable to increased demand, they are mostly related to the instability of the financial and capital markets. For crude oil, for example, my impression is that there is a vicious circle wherein the weakness of the dollar leads directly to surges in the crude oil price. The dollar has renewed its record low in terms of the effective exchange rate. Therefore, although the G-8 apparently did not discuss how to keep the dollar strong, I think that it is necessary to form a consensus regarding this issue.

This forum also keenly reminded me that the problem of capital shortages at LCFIs (large and complex financial institutions) caused by the subprime mortgage problem is the underlying cause of the instability of the financial and capital markets, which in turn has disrupted the commodities markets.

Q.

I have a question about a domestic market issue. Yesterday, the BOJ (Bank of Japan) announced data on the Flow of Funds Accounts, including data on financial assets held by individuals. The data showed that as of the end of fiscal 2007, funds were flowing from stocks and other risk assets to government bonds and deposits, which may be an inevitable trend given the stock market downturn. How do you view this situation? Do you have any plans to promote a flow of funds from savings to investments, such as tax measures, as you consider requests for tax system revisions this autumn?

A.

I have not yet examined the data on the Flow of Funds Accounts. Generally speaking, investors curb investment in stocks during a stock market downturn and shift their funds into cash holdings and deposits. If the stock market is in a slump, the total market capitalization shrinks, leading to a decline in the value of financial assets held by individuals. Tax measures are a centerpiece of the various measures necessary to promote a flow of funds from savings to investments, as you pointed out. Thus, we will proceed quickly with deliberations on the necessary tax system revisions for the next fiscal year.

Q.

I would like to ask you about the National Vision Project Headquarters' decision concerning the staffing of the secretariat of the headquarters for the promotion of the civil servant system reform, which you mentioned earlier. Could you tell me about your hopes for what has been decided in the face of opposition from some people to the idea of making appointments through public invitation? You said that requests related to the decision will be submitted to the Prime Minister's Office. What actions do you hope for in response to these requests?

A.

As I said at the meeting of the National Vision Project Headquarters, the enactment of the basic act (for the civil servant system reform) was quite symbolic, in that it was achieved through political initiative. The bill proposed by the government has undergone a drastic revision, carried out through an initiative that extends across the boundary between ruling and opposition parties. A resolution adopted by the House of Councillors' Committee on the Cabinet is attached to the revised bill. This resolution requires efforts to ensure that personnel with sensible judgment are appointed for the post of secretary-general of the headquarters for the promotion of the reform of the national civil servant system and other posts of the headquarters, by selecting people from the private sector if necessary. In order to meet this requirement, we have concluded that using public invitations for personnel appointments will be the best option, and instructed working-level officials to do the necessary work. Unfortunately, as opinions within the government have not been coordinated, a final decision has yet to be made. Nevertheless, I have been greatly encouraged by the decision of the LDP's (Liberal Democratic Party) National Vision Project Headquarters. Now that it has been decided that either Mr. Sugiura, secretary-general of the headquarters, or Mr. Nakagawa, an adviser, will submit requests concerning the decision to the Prime Minister's Office, I will wait for a response to the requests.

Q.

Yesterday, an agreement was signed on a 5.3 billion dollar project finance scheme, led by Japanese banks, including the Japan Bank for International Cooperation, for the Sakhalin II project for developing resource off Russia's Sakhalin Island. Could you tell me about your views on the role of Japan's financial sector in efforts to secure energy resources and strengthen relations with resource-rich Russia?

A.

I would like to refrain from commenting on the financing deal you mentioned because I was not aware of it until now. Generally speaking, Japan must ensure through ''resource diplomacy'' that it is not left behind in the race to secure supplies of foods and resources. From this viewpoint, efforts to promote resource development through cooperation between the public and private sectors will be welcome.

Q.

Regarding financing for SMEs, you stressed that the FSA never instructs financial institutions to restrict loans to specific industries. In your view, is there a growing move among some financial institutions to curb lending?

A.

As you can see in the reference sheets distributed to you, the DIs show that some industries face tough financing situations. According to a questionnaire survey conducted with members of chambers of commerce and industry, the construction industry faces a very severe situation, with its DIs putting the current business conditions and future outlook at minus 85% and minus 83%, respectively. The DIs for the retail and transportation industries are also worse than minus 50. Reference Sheet (6) shows that the business sentiment DI for the real estate industry is very unfavorable. Thus, the survey results have shed fresh light on the fact that the stance of financial institutions on lending has become very restrictive. Although we could have surmised that such a situation might be arising, these figures have now confirmed its existence, and we have issued instructions on how to deal with it.

Q.

I would like to ask you again about the public servant system. You said earlier that although you have issued instructions for working-level officials regarding the public invitation of candidates, opinions within the government have not been coordinated. Why is the coordination process still unfinished, and is it possible that the establishment of the headquarters for the promotion of the reform will be delayed as a result?

A.

It is stipulated (by the basic act for the reform) that the headquarters should be established within one month (from the enactment of the act), so there will be no delay. Opinions within the government have not been coordinated purely because there are people who oppose the public invitation plan.

Q.

I have another question about this issue. Although the headquarters must be established within one month, I suppose that a failure to fill the post of secretary- general within the month would not be illegal. Will you seek to use a public invitation system in order to select the personnel of the headquarters even if the post of secretary-general remains unfilled at the time of its establishment?

A.

As the headquarters must be established within one month under law, we will establish it accordingly. If the secretary-general is not appointed within the one-month period, the headquarters will be established with the post of secretary-general unfilled.

(End)