Provisional translation

Press Conference by Yoshimi Watanabe,Minister for Financial Services

(Excerpt)

July 15, 2008

[Opening Remarks by Minister Watanabe]

Good morning.

I would like to talk about the framework for the regulation of credit rating agencies.

The subprime mortgage problem has prompted calls for credit rating agencies to make sure to prevent conflicts of interest and enhance information disclosure. Regarding international developments in this respect, the IOSCO (International Organization of Securities Commissions) revised its basic code of conduct for credit rating agencies in May. Meanwhile, the U.S. SEC (Securities and Exchange Commission) announced a comprehensive set of proposals for regulatory reforms in June and July. In Europe, the EU (European Union) decided to introduce a registration system at a meeting of Finance Ministers this month. I have instructed FSA staff to investigate an internationally consistent regulatory framework, including a registration system, while paying attention to market developments such as the effects of the subprime mortgage problem and the activities of the U.S. and European authorities. For details, please consult the FSA staff responsible for this matter.

I do not have any further statements to make.

[Questions and Answers]

Q.

The U.S. government announced a package of rescue measures for Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corp.), including injections of public funds. First, please tell us about your views on the rescue package.

A.

This package was apparently decided as an emergency measure to cope with the critical situation represented by the halving of stock prices in just one week. I have spoken about the lesson Japan has learned in the past - that the issue of solvency lies behind a liquidity crisis - and this lesson applies perfectly to this case. It is appropriate that a quick decision was made in response to this crisis.

Japanese financial institutions hold a large amount of bonds issued by GSEs (government-sponsored enterprises). A substantial portion of the bonds issued by GSEs are held by the public and private sectors of Japan and China. Therefore, we cannot ignore this issue as something unrelated to us. Rather, we will keep a close watch on it, with heightened vigilance.

Q.

I have a related question. Mortgage-backed securities guaranteed by these two enterprises are integrated into many investment trusts sold in Japan, and there are worries that this issue could affect such investment funds. What measures will the FSA consider in order to deal with this issue, including the handling of such investment trusts?

A.

I would like to refrain from commenting on specific products. However, I believe that it is very important to take emergency measures quickly to deal with this issue and to avoid fueling a sense of anxiety and uncertainty in the market and among investors. Disclosure is essential. From this viewpoint, we will pay proper attention to this issue, with heightened vigilance.

Q.

I would like to ask you about TCI's (The Children's Investment Fund's) plan to acquire additional shares in J-Power (Electric Power Development Co.). TCI has announced that it will not file a complaint against the government's order to abandon the plan. Now that this issue has been sorted out for the time being, could you tell me about your assessment of the series of incidents related to it?

A.

I would like to refrain from commenting on a specific investment decision. In any case, since Japan is an open country and welcomes investments by domestic and foreign investors equally, it is important that the government continue to perform its accountability obligation properly.

Q.

Regarding the issue of GSE bonds that you spoke of earlier, could you tell me the value of such bonds held by Japanese financial institutions?

A.

Please consult the FSA staff for such details. I understand that individual financial institutions have disclosed the relevant figures in their IR (investor relations) materials and the like. Although we have not yet grasped the full extent of their exposures, we are conducting hearings and exchanging information with them regarding the amount of GSE bonds that they hold.

Q.

I understand that the headquarters for the promotion of the reform of the national civil servant system held its first meeting today. What do you expect from its discussions?

A.

Earlier today, I attended the first meeting of the headquarters. The Prime Minister serves as the chief of the headquarters, and the Chief Cabinet Secretary, the Minister of Internal Affairs and Communications and I have been appointed as his deputies. A secretariat was established at the headquarters and commenced operation with the line-up of staff already announced. One of the main pillars of this reform is eliminating compartmentalized ministerial administration and eradicating ministerial sectionalism, so we are working hard to prepare for the enactment of a legislative revision to establish the proposed cabinet personnel affairs bureau in next year's ordinary Diet session. I asked for the support of the relevant ministers at today's meeting. I was also very much encouraged by the Prime Minister's expression of strong support for this.

Q.

With regard to the regulation of credit rating agencies that you talked about at the beginning of this press conference, when would you like to work out the details by? Also, could you tell me again about what the problems of credit rating agencies are, in your view?

A.

The Financial System Council will deliberate on the regulation while paying attention to relevant developments in the United States and Europe. Although I would like to start the deliberations as soon as possible, autumn would be the earliest possible time to do so.

Q.

What are the problems (of credit rating agencies) for now?

A.

A sense of anxiety and uncertainty has spread because of a number of sudden downgradings of ratings, and a variety of explanations have been offered as to why a situation like this has arisen. There would be a number of options to take in order to avoid such a situation, including a registration system. However, it would be useless for Japan to tackle this issue alone, so it is important to establish an internationally consistent framework.

Q.

You said earlier that GSE bonds are held by the public and private sectors of Japan and China. I understand that the amount of such bonds held by the public and private sectors of Japan stands at tens of trillions of yen - I forget the exact amount - and you said you are investigating the amount of the private sector's holdings. How have you been able to grasp the amount of the public sector's holdings?

A.

The amount of such bonds held as part of the government's foreign exchange reserves is not subject to disclosure, so I would like you to ask the Finance Minister about that. According to an examination by the Financial Markets Strategy Team, my advisory group, of data compiled by the U.S. Treasury Department, GSE bonds held in Asia - these are not limited to bonds issued by Fannie Mae and Ginnie Mae (Government National Mortgage Association) - amounted to around 800 billion dollars. This data is more than one year old, as it represents the figures as of June 2007. The total amount of outstanding GSE bonds amounted to around 1.3 trillion dollars, more than half of which was held in Asia, with Japan accounting for around 228 billion dollars and China for around 376 billion dollars. Singapore held only around 5 billion dollars. In short, Japan and China hold huge amounts of GSE bonds, so we cannot look at this problem as bystanders.

Q.

Does the figure for Japan that you spoke of cover the holdings of both the public and private sectors?

A.

That is correct. This data represents the region-by-region holdings, compiled on the basis of disclosed figures, U.S. securities, stocks, U.S. Treasury bonds, agency bonds, GSE bonds, ABS, non-ABS, corporate bonds, etc.

Q.

Do you have any information regarding the holdings of RMBS (residential mortgage-backed securities) guaranteed by the GSEs?

A.

We are investigating various matters, including that.

Q.

If I remember correctly, the Ministry of Finance announced the amount of the government's holdings of GSE bonds when it began to purchase such bonds as part of its asset diversification efforts. However, although the total amount of foreign securities holdings is disclosed, a breakdown is not provided. As you said, Japan cannot ignore this problem as something unrelated to itself, so it is keeping a close watch on it with heightened vigilance. I believe that market players would like to know the amount of GSE bonds held by the public sector. What do you think about the government's information disclosure in this respect?

A.

Please ask Minister of Finance Nukaga about this. If the amount of such bonds held by the private sector is identified, the amount of public-sector holdings can be worked out through a simple calculation.

(End)

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