Press Conference by Shozaburo Jimi, Minister for Financial Services

(Excerpt)

(Friday, July 16, 2010, from 11:47 a.m. to 12:15 p.m.)

[Questions & Answers]

Q.

In connection with the Incubator Bank of Japan (Nihon Shinko Ginko), against which the Financial Services Agency (FSA) has filed charges with the Tokyo Metropolitan Police Department for alleged inspection evasion, the Tokyo Metropolitan Police Department arrested five executives yesterday, including former Chairman Kimura. Former Chairman Kimura is a person who was deeply involved with financial administration, one example being serving as the Advisor to the FSA. I would like to hear what you think of this matter.

A.

I understand that on July 14, based upon an allegation that the Incubator Bank of Japan and its senior officers evaded an inspection, the Tokyo Metropolitan Police Department arrested a total of five persons, including former Chairman Kimura and incumbent President Nishino. The fact that people who were engaged in important tasks as part of the executive team of a bank, an institution that should carry out functions of a highly public nature, have been arrested is extremely regrettable. We as a governmental authority are committed to watching closely how the criminal investigation proceeds and to thoroughly following and strictly overseeing the implementation status and effectiveness of the business improvement plan that the Incubator Bank of Japan has developed and is going to carry through.

Q.

You just mentioned following the progress of its business improvement plan - I would like to ask if there will be any repercussions on the Incubator Bank of Japan's operation or progress of its improvement plan, from the sweeping arrest of executives that has just happened.

A.

Excuse me for repeating what I've just said, but the FSA is intent on watching how the investigation will unfold and also on thoroughly following up on and strictly overseeing the implementation status and effectiveness of the business improvement plan of the Incubator Bank of Japan, which is subject to administrative measures. Given that the bank has a business improvement plan out, what we are intending to do first is to strictly monitor whether or not it is going to be carried out in a scrupulous fashion. In any case, I find this matter to be very regrettable.

Q.

I am Kataoka from Hoken Ginko Nippo.

I would like to bring your attention to an insurance topic. President Suzuki of Aioi Insurance Co., Ltd. has just assumed the office of chairman of the General Insurance Association of Japan (Sonpo Kyokai). If you have any message for new Chairman Suzuki, please let us know.

On an additional note, new Chairman Suzuki stated in his inauguration speech that he would like to have even closer dialogue and communication with the FSA than in the past - could you please provide a reply to his statement?

A.

He became the new chairman of the General Insurance Association of Japan - well, being a non-life insurer naturally comes with the corresponding social role and, for that reason, the FSA is also eager to maintain close mutual contact. In the non-life insurance industry, participating businesses (non-life insurers) are all experiencing the severe economic conditions that have hit Japan. On an international front, the global financial market has also posed difficulties since the Lehman crisis two years ago. Domestically, we are also faced with grim employment conditions reflected in the fact that the unemployment rate is 5.2% and one million people are receiving the Employment Adjustment Subsidy. Although there are some signs that a path toward economic recovery is appearing, to a modest degree, we are still on a seesaw ride. As you know, events like the Greek crisis have made it necessary to seek international policy coordination in the G7 and G20 forums. Among other domains, the financial area particularly has a strong cross-border nature. On the other hand, the way a country's economy is run differs from one country to the next. I hope that he, in his capacity of chairman of the General Insurance Association of Japan, will properly fulfill his responsibility for what non-life insurers have as their mission, with the points I've just made in mind. Naturally, I would like him to work hard for the people's welfare and growth of the economy as he maintains close contact with the FSA.

Q.

Back to the arrest of Mr. Takeshi Kimura. Mr. Kimura's work record includes serving as the Advisor to the FSA, and he was also a person who was once deeply involved in the work of formulating FAS's Financial Inspection Manuals. This is, therefore, an incident in which someone who has been closely associated with financial administration in the past was arrested for allegedly evading an inspection - I would like to ask once again about your view on this, the view that you have as the Minister for Financial Services.

A.

I am aware that Mr. Kimura had served in the post of the Advisor to the FSA for a period of time before he became engaged in the management of the Incubator Bank of Japan, and for this reason I find the recent turn of events to be extremely regrettable, where such a person was arrested for evading an inspection. The FSA will watch closely how the investigation proceeds and, having already issued a business improvement order against the Incubator Bank of Japan, we are also hoping to scrupulously follow up on the implementation status and effectiveness of its business improvement plan. On the subject of his involvement in Financial Inspection Manuals formulation that you mentioned, it is true that he participated in the deliberations on the development of our Financial Inspection Manuals and Financial Revitalization Program. That said, he was just "one of the team," so to speak, and our inspection manuals and the likes of them are products of the participation of and discussions by a large number of well-informed people from various quarters, and not only Mr. Kimura, against the backdrop of economic conditions and financial conditions that existed at the time. My understanding is that they were developed in a proper process, drawing on a broad range of views provided by all members.

Q.

I believe that the meeting of the Basel Committee on Banking Supervision was just wrapped up. Is there any report that has been brought to your attention on this?

A.

The Basel Committee on Banking Supervision met in Basel, Switzerland, until last night, which was already dawn, Japan time. Discussion on the proposed regulatory reform package is still in full swing and is likely to face a number of hurdles down the road. The Committee is currently analyzing comments from the public and the results of its quantitative impact study, but we have yet to obtain accurate information on the details of its discussion in Basel and I hear that no press release has been issued yet, either. Therefore, I would like to refrain from making any comments about the details of its discussion.

Q.

I am Namikawa from Toyo Keizai.

I've asked this question before, but I would like to ask it again: how do you see the responsibility of external board members? A person who escaped the recent round of arrests because he "knew nothing" has just assumed the presidency of the Incubator Bank of Japan, but, although he was an external board member and nothing more, he has actually chaired the bank's Board of Directors meetings. Even though he supposedly "knew nothing," I presume that serving as an external board member did earn him about 10 million yen a year, which brings me to wonder how you view the external board member system itself in the first place. Let me further point out that banks often provide their personnel to all types of businesses to serve as external board members, as a matter of fact. However, when asked in detail about how such a setup actually works, those external board members will say that as they hold concurrent offices, they are so busy that they often cannot attend meetings. This means that the board members who often do not attend meetings not only get paid such an amount as I've just mentioned, but could also claim that they "knew nothing" when something happens. In my view, a governance system like this is, in all likelihood, quite far from the way laws expect a publicly-traded company to be managed. Can you please tell us how you see such a point of view?

A.

I don't know for sure but, as far as I remember, the external board member system did not exist when I became a member of the Diet 27 years ago. To my knowledge, a system taking after Western equivalents was subsequently introduced by way of the amended Companies Act. Apparently, this system is quite common in the U.S. Especially in the wake of events like the Enron case, people start voicing strong demands for tough corporate governance. On top of that, from the perspective that, in an era of increasing globalization, corporate governance systems should be harmonized between countries, the Companies Act was amended to create the external board member system - this is how I understand what happened. I do believe that external board members in general fulfill a certain role from a viewpoint of corporate governance but, considering all the trouble it took to create the system, I hope that external board members properly serve the role expected of them in line with the original intention of the system.

Q.

I am Nakazawa from the Real Estate Economic Institute.

The Incubator Bank of Japan once applied a scoring model to provide financing for small and medium-sized enterprises but stopped using it at a quite early stage. I believe that the FSA was also promoting the use of a scoring model (at one point). If you currently have any idea about what a desirable form of SME financing should be, please fill us in.

A.

While my predecessor was in office, a law called the SME Financing Facilitation Act (Act concerning Temporary Measures to Facilitate Financing for SMEs, etc.) was established. In Japan, 99.7% of all companies are small and medium-sized enterprises, or SMEs, which employ 28 million people. Now, faced with growing economic globalization, especially since the Lehman crisis two years ago, SMEs have been suffering considerably from hardships. At the same time, though, SMEs have the advantage of being flexible and resilient and, from the viewpoint, the FSA considers SMEs to be extremely important. My hometown is the city of Kitakyushu, where Yahata Steel Works, initially a government-owned company, was founded 100 years ago, and served as the base for the creation of a large number of SMEs there. Fukuoka Prefecture, also home to factories of Toyota and Nissan, is the second-largest car-producing prefecture after Aichi, which explains the large number of modest-size companies and SMEs there. With these facts in mind, let me tell you a story that I heard from my long-time supporter, a business owner employing 100 people, half of whom are regulars while the other half are non-regulars - as we hear of quite often. He told me that the current economic slump would have made it impossible for him to maintain his business but, thanks to a revision of lending terms that his bank agreed to as a result of the SME Financing Facilitation law, his business is able to survive. Frankly speaking, the thought of closing down the business does cross the mind of this business owner at times but, having 100 employees, he or she could not easily make such a decision. He is hanging on because the thought that each of those 100 employees feeds a family prevents him from calling it quits. There are many business owners like him or her in my constituency. That's why, it is indeed significantly important to facilitate SME financing.

At the same time, speaking as one politician, Job creation is also valuable- to create more work for SMEs. I often hear SMEs everywhere desire for more work, while they are now able to maintain their companies as they have managed to have their financing needs taken care of and pause for breath. In this light, I believe that it is necessary for the Cabinet to tackle the challenge of pulling out of deflation earnestly and head-on.

Q.

I am Taguchi from Nihon Securities Journal.

With the end of the preferential tax treatment for securities approaching, I would like to have your comments on taxation systems related with this area.

A.

Securities taxation system has been longtime issue, but the FSA has not yet decided on what we discuss at the Government Tax Commission this year. I believe that many must have been ready for in this field. In addition to trading securities as briskly as possible, it is also necessary to keep transparency that is fair in the securities market, it being a market. I believe from those standpoints that the taxation system should be discussed.

This reminds me of the securities transaction tax. I know about this very well as I was vice-chairman of the Liberal Democratic Party's Tax System Research Commission. For example, some argued that it would be unfair to lower tax rates on capital gains only, while others stated that, as a basic element of capitalism, this tax measure must lead to boosting of economy and industry. While our securities taxation system has been discussed historically, I think that it should be formulated with the basic aim of suitably pursuing higher living standards for every Japanese people and ensuring economic vitalization at the same time and, naturally it also needs to be simple and fair. I will make a comprehensive judgment with all those points taken into account.

Q.

You do not change the policy objective of shifting "from savings to investment"?

A.

Japan has always been known as a country of very sizable savings and little investment. A variety of policy actions have been taken under the name of “shifting from savings to investment”, but they still have a long way to go. We have seen various markets worldwide in turmoil since the collapse of Lehman Brothers, and I also heard today that the U.S. Senate has passed a bill for the reform of financial regulation. While regulating a market too tightly would end up chilling it, giving it too loose also lead to an event such as the subprime loan crisis that we witnessed two years ago, in which not only people but also companies went out of control. That is how Lehman Brothers went bankrupt. It is very difficult to keep well-balanced, so to speak, in this respect - between growth in financial markets, which function as the kernel of the corporate sector, and how they should be managed democratically. In my view, it is necessary to properly build up in the G20 forum a certain degree of global consensus on this. I honestly think that it must be historical issue in the 21st century.

(End)