Press Conference by Shozaburo Jimi, Minister for Financial Services

(Excerpt)

(Tuesday, June 21, 2011, from 10:33 a.m. to 11:11 a.m.)

[Opening Remarks by Minister Jimi]

We are now distributing to you a paper titled Considerations on the Application of IFRS (International Financial Reporting Standards). Recently, the media has been reporting a variety of news about IFRS. As the minister in charge of financial services, I have summed up my view on IFRS and would like to announce it through this paper.

Let me make brief references to the paper. IFRS was developed at the time of the EU integration, with the United Kingdom playing the central role, based on the recognition of the need for common accounting standards, as you know. A few years ago, the U.S. Securities and Exchange Commission (SEC) announced that the United States would adopt IFRS.

If both Europe and the United States adopt it, Japan, which is one of the major economies alongside the United States and Europe, must not be left behind. Apparently from that viewpoint, Keidanren has made its institutional decision to support the adoption of IFRS.

Following that decision, the Business Accounting Council, an advisory council under the Financial Services Agency (FSA), issued “Opinion on the Application of International Financial Reporting Standards (IFRS) in Japan (Interim Report)” in 2009, and since March 2010, Japanese companies have been allowed to apply IFRS on a voluntary basis. Although the voluntary application of IFRS is now allowed in Japan, we have seen various changes in the circumstances surrounding IFRS both in Japan and abroad since then.

The greatest of all was the Lehman shock, whose impact was felt after the Republican President Bush was succeeded by Democratic President Obama. Following such changes, the U.S. SEC released a staff paper (Work Plan for the Consideration of Incorporating International Financial Reporting Standards into the Financial Reporting System for U.S. Issuers) on May 26. Although it was previously indicated that the United States would adopt IFRS, this paper is very ambiguous and may be interpreted in various ways. However, as a result, I think that it represents a slight step back from the full adoption of IFRS.

In the meantime, although India once said that it would adopt IFRS, it has abandoned the full adoption of IFRS as it applies different set of accounting standards to agricultural accounting and financial product accounting, according to news carried by a certain newspaper today. I hear that India is also wavering as to the planned start of application in 2011.

In light of those circumstances, the Japanese industrial sector has issued a letter of request on May 25 (“Requests on how to deal with IFRS in Japan”). This was issued by major Japanese manufacturers and other companies, such as Nippon Steel, Toyota Motor, Panasonic, Hitachi, Toshiba, Mitsubishi Electric, Mitsubishi Heavy Industries, Asahi Kasei, Mitsubishi Estate, Sumitomo Metal Industries, JFE Holdings, Mitsubishi UFJ Lease & Finance - lease accounting will become very complicated - and Canon, from which Mr. Mitarai, the former chairman of Keidanren hails, as well as a director of the Japan Chamber of Commerce and Industry. As the Minister for Financial Services, I also received this letter of request on May 25.

Following this letter of request, Rengo (Japanese Trade Union Confederation) requested that it should be promptly made clear that mandatory application of IFRS to the consolidated financial statements of listed companies should not take place for the time being in its Priority Policy Actions 2011–2012 under the section titled “Reforming corporate related legal framework and realizing accounting standards, that would benefit a wide range of stakeholders such as workers.”). On March 11, the Great East Japan Earthquake occurred, which was an unprecedented disaster, disrupting supply chains, and leaving the economy in a very severe condition until now.

Next let me quote briefly from the paper distributed to you. “While the ‘Interim Report' indicated a certain direction, I would like to call before the end of June a joint meeting of the plenary and the Planning and Coordination Committee of the Business Accounting Council, after adding new members to represent diverse views, and seek a discussion taking into account the changes since the release of the ‘Interim Report,' the fact that the voluntary application has been made possible for the business years ending on or after 31 March, 2010, the progress in the equivalence assessment by the European Union and the impact of the Great East Japan Earthquake and tsunami.” As the minister in charge, I hope that the discussion pays due attention to the fact that the “accounting standards” are not merely technical issues, but much broader issues highly relevant to the status of Japanese firms based on the country's history, business culture, and national heritage- there are differences in economic culture between countries like the United Kingdom, which started the Industrial Revolution from scratch, and countries like Japan, which adopted development-oriented capitalism, as often seen in Asia, led by the government in order to strengthen its military power and develop industries after Commodore Perry arrived in Japan around 150 years ago - as well as related legal systems including the Companies Act and the tax system, and Japanese firms' global competitiveness. The tax system and accounting are very closely related to each other, and the current Japanese accounting standards are very well suited to the tax system. I hope that while paying due attention to those points, the council will take account of the views of a wide range of stakeholders and at the same time carefully pay close attention to domestic developments and the situation in other countries, the United States in particular, which is the world's largest economy, so that the discussion will be comprehensive and mature.

Third, I hear that there is a widely spreading view in some corners that mandatory application of IFRS could be introduced for the business year ending 31 March 2015 (i.e., BY2014), at the earliest, but I would like to clarify that mandatory application would not take place from the business year ending March 2015, at the very least. Also, a sufficient time period of five to seven years would be provided for preparation if and after mandatory application is decided. Yesterday, Keidanren held a seminar on political affairs, and I attended a related social gathering. When I met Chairman Yonekura yesterday, he told me that he had requested a sufficient period of time for preparation in the case of mandatory application, although he did not specify the duration of the period. Thus, we will allocate a sufficient period of time for preparation.

Regarding the US GAAP, the use of which will be terminated for business years ending on or before March 31, 2016, both the Japanese standards and the US GAAP are now applicable to Japanese companies because there are global Japanese companies listed on the New York market in accordance with the U.S. listing requirements. We will remove the termination date of the treatment to allow the use of US GAAP for disclosure purposes in the interim, namely up to the business year ending on or before March 31, 2016, so that the firms will be able to continue their use of US GAAP.

That is because if the use of US GAAP is to be prohibited, it will become necessary to automatically shift to IFRS, and that would be contradictory to our stance that we should spend a substantial amount of time on discussing this matter. In this respect, there is a significant misunderstanding in the industrial sector. As I am going to convene an expanded Business Accounting Council by the end of June to conduct debate on IFRS, I summed up my opinion in this report, expressing my intention to remove the termination date of the treatment to allow the use of US GAAP for disclosure purposes, namely up to the business years ending on or before March 31, 2016, so that the use of US GAAP can continue.

Although I could do that on my own authority, I held a discussion with the Chief Cabinet Secretary and obtained his understanding. Although accounting standards may appear to be a minor matter, they have a major impact on such issues as employment and economic revitalization, so I briefly explained this matter at today's informal meeting of cabinet ministers. As there was no objection from other ministers, I take it that I have obtained their understanding.

That is all I have to say.

[Questions & Answers]

Q.

You have expressed an intention to put off the application of IFRS. What is your assessment of IFRS?

A.

Basically, regarding the concept of IFRS itself, there should be no doubt about the need for the internationalization of accounting standards in a broad sense, since convergence between the Japanese accounting standards, the U.S. GAAP and IFRS has been promoted, which means that there are many common features. However, I believe that we must deal with this issue carefully and flexibly while sufficiently taking account of domestic and overseas circumstances.

Q.

As for the stance of Chairman Yonekura of Keidanren, whom you mentioned, he said at a press conference yesterday that more time should be spent on discussion on this matter. While it is required for now that a decision on mandatory application be made by the end of 2012, how much time should be spent on decision-making?

A.

The interim report requires the decision to be made in 2012 at the earliest, so if we take a period of preparation into account, we have only around a year left. This has to do with corporate accounting, and companies have complained that one year is too short. Moreover, the economy is weak and the Great East Japan Earthquake and tsunami and the nuclear power plant accident occurred, greatly damaging the supply chains. In light of those circumstances, I believe that it is important to spend an appropriate amount of time on decision-making.

Therefore, we are not thinking of introducing mandatory application at least in the business year ending March 31, 2015, as I mentioned earlier.

Q.

Am I correct in understanding that the decision on the timing of introduction will be made by the end of 2012?

A.

The interim report requires that the decision on whether to introduce mandatory application for the business year ending March 2015 be made in 2012 at the earliest. As a result, there is a widely spreading view in some corners that mandatory application of IFRS could be introduced for the business year ending March 31, 2015 (i.e., BY2014), at the earliest. Therefore, I am stating that we are not thinking of introducing mandatory application, at least for the business year ending March 31, 2015.

Q.

Your paper says “if and after mandatory application is decided,” what is your view on options other than mandatory application?

A.

Voluntary application has already been introduced. If mandatory application is to be introduced, how widespread should the application be? Which listed companies should be subject to mandatory application? In France, for example, IFRS is applied to only around 200 or 300 listed companies, as far as I know, with the French standards applied to other companies. In Germany, IFRS is applied to around 600 companies, mainly listed companies, with the German standards applied to others. In Japan, various rumors about IFRS are floating, such as that it will be applied to all listed companies or it will be applied even to small and medium-size enterprises, so as the Minister for Financial Services, I have concluded that I should make myself clear and thus have made this statement today.

Q.

While the burden on companies should naturally be taken into consideration, how do you think the global capital market and other countries will view the decision to put off the application of IFRS?

A.

As I said earlier, I do not doubt the need for the internationalization of accounting standards, and in recent years, there have been major changes in the circumstances in the United States and other countries. Regarding the convergence with IFRS, the United States has made clear that it will allocate a transition period, citing a period of five to seven years as an example, while retaining the U.S. standards. The United States has shown such a stance, and naturally, I have no doubt about the need for the internationalization of accounting standards, so I am convinced that the announcement of my opinion will not make it difficult for Japanese companies to raise funds in the international markets.

Q.

Forgive me for repeatedly asking you about this, but may I understand that even though the decision on mandatory application should be made in 2012, there will be a period of five to seven years before actual application, or that the decision in 2012 itself will be delayed?

A.

While I explain such basic principles to the Business Accounting Council, which will be joined by new members who represent diverse views, I expect that the members will clearly express their opinions on specific matters.

Q.

I am Sonoda from Hokenmainichi Shimbun. How many new members will join the Business Accounting Council?

A.

Nine or ten new members will probably join it.

Q.

Could you cite examples of people who represent “diverse views”?

A.

For example, as I mentioned earlier, manufacturers, and also Keidanren, have issued such a letter of request, which naturally makes manufacturers one of stakeholders. As Japan is internationally competitive in the manufacturing sector in particular, I would like representatives of that sector to join this council.

Q.

In relation to the earthquake disaster, the Life Insurance Association of Japan has established the Life Insurance Support Network for the Orphaned Minors, which is intended to facilitate the payment of life insurance claims to minors. Could you comment on that?

A.

Regarding insurance companies' response to the great earthquake disaster, the FSA requested them to make quick and reliable payment of insurance claims, and upon this request, insurance companies have engaged in various initiatives, including encouraging policyholders to apply for insurance claims.

I hear that last Friday, June 17, the Life Insurance Association of Japan and life insurance companies established the Life Insurance Support Network for the Orphaned Minors, a network for information sharing among municipalities aimed at making appropriate insurance claims payment to minors who lost all of their parents and persons with parental authority as a result of the Great East Japan Earthquake - there are around 200 such minors according to newspaper reports - in cooperation with bar associations and other relevant parties.

The FSA hopes that the establishment of the Life Insurance Support Network for the Orphaned Minors will lead to quick and reliable payment of insurance claims to minors orphaned by the earthquake disaster, and I am very grateful for the establishment of this network. As a human being, rather than as the head of the FSA, I am grateful to the Life Insurance Association of Japan and life insurance companies for having extended support to children who lost their parents and persons with parental authority.

Q.

Let me check one point about IFRS.

Am I correct in understanding that the decision on mandatory application may be delayed beyond 2012, that is, to 2013 or later depending on the results of discussion by the Business Accounting Council?

A.

We are working on the assumption that the decision will be made in 2012 at the earliest, so it is necessary to pay appropriate attention to the circumstances in other countries, particularly the United States, which has made clear that it will make a decision over a period of five to seven years.

To be extreme, my own opinion is that Japan does not need to jump ahead and make its decision before the United States. That is my frank opinion. After all, the United States is the world's largest economy.

Q.

I have another related question. You said earlier that you are “convinced that this decision will not make it difficult for Japanese companies to raise funds in foreign markets.” Could you elaborate on the reason for that?

A.

As you know, the differences among the Japanese standards, the U.S. GAAP, and IFRS have gradually narrowed as a result of numerous globally accepted convergence steps, and they are recognized as international standards around the world.

The United States has changed its stance as I explained earlier, and China and India are following suit, also changing their stances. That is the prevailing global trend. Since the Lehman shock, the global economy has undergone dramatic change, to put it simply. We must examine the global financial economy while appropriately taking that into consideration. Now that the United States has made a major policy change, Japan's action in the same vein will not lead to an interpretation by other countries that the Japanese market has adopted standards unique to Japan. As I said earlier, I do not doubt the need for the internationalization of accounting standards. I believe that appropriate internationalization has already been achieved.

Q.

Let me ask one more question. I suppose that usually, discussions take place before a decision like this is made, for example by convening the Business Accounting Council first. Why did you make the decision on your own before such discussions?

A.

That is because I studied this matter well and frankly speaking, I am exercising my political leadership. Previously, the FSA was following the path of mandatory application. However, as political leadership is important now, as a person elected by voters, I am acting on my own responsibility regarding matters of principle while holding frequent discussions with everyone. Corporate accounting is the basis of the economy, as I mentioned earlier, and “accounting standards” are not merely technical issues, but much broader issue highly relevant to the country's tax system, company acts, economy and cultural backgrounds, such as how companies emerged in the country, as companies are extensively related to various matters. In many European countries, industrial revolution occurred as a natural process, as in the case of the United Kingdom. Moreover, there are countries like the United States where capitalism prospered freely, and there are countries, like Japan, which have adopted development-oriented capitalism. In Asia, a relatively large number of countries have adopted development-oriented capitalism. I think that the role of companies differs from country to country, and as companies are affected by their country's traditions, history and culture, it is necessary to appropriately take those factors into consideration.

At the same time, however, I do not doubt the need for the internationalization of accounting standards, as I mentioned earlier, and as a result of internationalization, various standards have common features. Thus, we must bear in mind the economic and financial globalization.

Q.

I have two questions relating to IFRS. By when, at the latest, do you think - I am asking about your personal opinion as you are exercising your political leadership - that the decision must be made? While I understand that the decision will be made in 2012 at the earliest, which year will be the latest possible year for the decision? Also, am I correct in understanding that if a decision is made in 2012, the earliest year of application will be 2017, five years from 2012?

A.

I have stated principles appropriately. Japan now faces deflation, but the economic condition changes. It is important for me to state principles appropriately, rather than deciding specifics at this point.

Q.

You mentioned your political leadership. When summing up your opinion, did you hold hearings with investors in addition to relevant companies?

A.

I met with many experts and listened to the opinions of various people. The other day, I consulted with a former chairman of the Japan Institute of Certified Public Accountants. I talked with various people and listened to diverse opinions. I listened to the opinions of officials of securities exchanges, which are particularly involved in this matter. I spent half a year on listening to the opinions of such people, reading books and studying this matter. Because I have the final say, I have responsibilities. If I make wrong judgment, it would cause a serious problem, and so I felt like praying as I made my judgment in light of the present economic situation in Japan and the global situation surrounding the country. While it is said that it is important to have both a broad perspective and a narrow focus, this matter requires a broad perspective, and thus I made the judgment in light of Japan's relation to the world.

(End)