Press Conference by Shozaburo Jimi, Minister for Financial Services

(Excerpt)

(Tuesday, December 27, 2011, from 9:49 a.m. to 10:15 a.m.)

[Opening Remarks by Minister Jimi]

At the beginning, I would like to make statements regarding two matters. First, I will make a statement regarding the final extension of the period of the SME (Small and Medium-size Enterprise) Financing Facilitation Act.

Since the SME Financing Facilitation Act was extended in March this year, the Financial Services Agency (FSA) has closely monitored the status of its enforcement, its effects and impacts, and I have directly listened to the opinions of regional associations of SMEs and financial institutions. In light of the situation as grasped until now, it is presumed that the efforts made in accordance with the SME Financing Facilitation Act have been taking root. On the other hand, some people have pointed out such problems as an increase in re-modification of the loan terms.

In light of those factors, it is necessary to encourage financial institutions to better exercise the consulting function and to aggressively promote support measures that actually lead to the improvement of the management of SMEs while taking measures to ensure financial discipline.

To do so, we must shift emphasis to supporting the business rehabilitation of SMEs by implementing a comprehensive “exit strategy” while maintaining cooperation with external organizations and relevant parties.

To ensure a “soft landing” that facilitates such a shift, I have concluded that it is appropriate to extend the SME Financing Facilitation Act again for one year for the last time and intensively implement support measures for SMEs, including business rehabilitation support.

By implementing such measures, the FSA will facilitate financing and aggressively support the improvement of the management of SMEs while taking care to ensure sound and appropriate management of financial institutions' business operations.

Second, I will make a statement regarding the extension of the period of share purchase by Banks' Shareholdings Purchase Corporation and the extension of the government subsidy for the Life Insurance Policyholders Protection Corporation of Japan.

The purchase of banks' shareholdings by Banks' Shareholdings Purchase Corporation, which is intended as a safety net to ensure the financial soundness of banks, is scheduled to expire at the end of March 2012. Meanwhile, the government subsidy that is given when the cost of financial assistance provided by the Life Insurance Policyholders Protection Corporation of Japan to a failed life insurance company cannot be covered by private funds alone is applicable only to failures that occur before the end of March 2012.

Japan's financial system is relatively stable and yet, in light of the impact of the Great East Japan Earthquake and the continuing turmoil in global financial and capital markets that has been caused by the European debt crisis, it continues to be important that Banks' Shareholdings Purchase Corporation play the role of a safety net by absorbing shares sold by banks, and that the Life Insurance Policyholders Protection Corporation of Japan fully exercise its safety net function in order to prevent a negative spiral of the economy and the stock market dragging down each other.

Therefore, I believe that it is appropriate to extend the period of share purchase by Banks' Shareholdings Purchase Corporation and the government subsidy for Life Insurance Policyholders Protection Corporation of Japan for five years and I would like to submit relevant bills to the next ordinary session of the Diet.

[Questions & Answers]

Q.

Regarding the SME Financing Facilitation Act, I understand that this will be the final extension. Could you elaborate further on why you have decided not to extend it another time despite the possibility that the economic condition could deteriorate.

A.

Basically, I believe that the efforts made in accordance with the SME Financing Facilitation Act are taking root.

On the other hand, some people have pointed out such problems as an increase in re-modification of the loan terms, which is referred to as rescheduling.

In light of that, it is necessary to ensure a “soft landing” that facilitates a smooth shift in emphasis to supporting business rehabilitation while implementing a comprehensive “exit strategy,” including support for the improvement of the management of SMEs, so I have decided to extend the act for one year for the last time.

By implementing such measures, the FSA is resolved to facilitate financing and aggressively support the improvement of the management of SMEs while taking care to ensure the sound and appropriate management of financial institutions' business operations. We are not considering extending the act again another time.

Q.

In your latter statement, you mentioned a five-year extension. I understand that these measures have so far been extended every three years. Why have you decided on a five-year extension this time?

A.

In light of the current economic and financial situations, including the impact of the Great East Japan Earthquake and the continuing turmoil in global financial and capital markets that has been caused by the European debt crisis, it continues to be important that Banks' Shareholdings Purchase Corporation play the role of a safety net by absorbing shares sold by banks in order to prevent a negative spiral of the economy and the stock adversely dragging down each other, and that the Life Insurance Policyholders Protection Corporation of Japan fully exercise its safety net function so as to ensure appropriate protection of policyholders, so I believe that a sufficient period of extension is essential.

In particular, the European debt crisis is not only affecting the financial system but also shaking confidence in governments, so it will take time to achieve a fundamental solution.

Therefore, I have concluded that it is necessary to extend the period of share purchase by Banks' Shareholdings Purchase Corporation and the government subsidy for Life Insurance Policyholders Protection Corporation of Japan for five years.

Q.

I would like to ask you about the Olympus case. An examination committee established by Ernst & Young ShinNihon LLC will later announce an interim report. What will be the points of attention?

A.

As the Olympus case is an issue that concerns an individual company, I have refrained from making comments. However, I will keep a close watch on it from the perspective of ensuring the fairness and transparency of the market, as I have repeatedly mentioned.

In any case, when a problem has arisen in relation to the Certified Public Accountants Act, we have conducted necessary investigation and taken strict actions in accordance with laws and regulations, and we will continue to take appropriate actions in the future.

Q.

While Ernst & Young ShinNihon LLC established its own examination committee, KPMG AZSA LLC, which was Olympus's previous auditing firm, said it will not establish such a committee but will leave the matter to the Japanese Institute of Certified Public Accountants. Which do you think is a more desirable approach?

A.

As I mentioned earlier, I would like to refrain from commenting on that.

Q.

I am Inoshita from Toyo Keizai.

Regarding the SME Financing Facilitation Act, you explained why you have decided to extend it again even though many financial institutions say that their stance will remain unchanged even if the act expires next March as the efforts made in accordance with it are taking root. Could you elaborate further on the reason why?

A.

Certainly.

That is a very important point. To be sure, some people at financial institutions say that this act is no longer necessary because such efforts have taken root. However, other people say that such efforts are being made because this act exists.

From the various opinions I heard from various people at financial institutions, including Shinkin banks, credit cooperatives, regional banks and megabanks, frankly speaking, I have the impression that the opinions are almost evenly divided. While I suppose that you have heard of various opinions, the law has a symbolic significance. Amid the impact of the Great East Japan Earthquake and the continuing financial instability due to the European sovereign debt crisis, the yen's appreciation has reduced exports.

When I visited Osaka, the leader of the association of SMEs there strongly warned of the impact of the yen's appreciation. That was probably because Osaka is highly dependent on exports. As this is a very important matter, I have also listened to the opinions of various people, including FSA officials. I will appreciate your understanding on the decision I have made.

Q.

In the second page of the press release (PDF:86KB) distributed today, there is Item (2) 2 “Appropriate categorization of debtors and loan loss provision suited to the actual circumstances of debtor companies” and it is stipulated there that loans whose terms have been modified do not necessarily have to be categorized as non-performing loans. Does that mean that you will focus your attention more than before on whether the categorization of debtors for whom the loan terms have been modified is appropriate?

A.

Regarding that question, when we look at the status of the efforts made in accordance with the SME Financing Facilitation Act in the past two years, we see that a very large number of loans have undergone modification of their terms. However, the ratio of the balance of those loans to overall loans is limited.

Therefore, regarding efforts to ensure financial discipline, I am sure that individual financial institutions are appropriately categorizing debtors and setting aside loan loss provisions in a manner suited to the actual circumstances of debtor companies.

Q.

In relation to the previous question, am I correct in understanding that you will change your approach somewhat and conduct supervision and inspection so as to ensure that non-performing loans are categorized as such?

A.

As this is a liberal economy, the actual circumstances vary widely from SME to SME, including the capability of managers, employees' motivation, business sector, and geographic area of operation. There are 4.2 million SMEs, and there is no doubt that they are the source of the vitality of the Japanese economy. As I often mention, 28 million people are employed by SMEs.

As I stated at a previous press conference, I have heard from people in the financial industry about the polarization of debtors for whom the terms of loans have been modified into those who have requested a second re-scheduling of their loans and those who have not. As I presume that such is the state of affairs, I hope that private financial institutions will make appropriate and timely judgment in accordance with the spirit of the law.

Q.

Am I correct in understanding that both the enforcement of the act and the supervisory approach will change?

A.

I hear that basically, the guidelines for inspection and supervision will not change.

For example, when necessary, we will require lenders to meet a request for the modification of the loan terms. However, in other cases, we will require the exercise of the consulting function, such as diagnosis of the condition of companies and advice on and support for optimal solutions. There are also institutional frameworks and schemes for various other activities, such as enhancing relationship banking and strengthening cooperation with prefectural consultation forums on support for business rehabilitation of SMEs, as well as strengthening cooperation with prefectural industrial reconstruction organizations in the three disaster-stricken prefectures of the Tohoku region. The Rehabilitation Support Organization for Companies Damaged by the Great East Japan Earthquake was established on the basis of a bill jointly drawn up by lawmakers of the three ruling parties at that time, and support for business rehabilitation has been promoted. The Development Bank of Japan plays the central role in setting up funds in cooperation with private financial institutions. Basically, we hope to make every possible effort to rehabilitate SMEs by using those frameworks and schemes in an effective manner.

Q.

If you require financial institutions to meet requests for a second rescheduling on the one hand and to appropriately categorize debtors and set aside loan loss provisions on the other hand, financial institutions will likely be at a loss on which they should place emphasis.

A.

Private financial institutions should not be told to place emphasis unilaterally on one or the other. Rather, they should make judgment on a case-by-case basis.

Q.

If so, may I take it that on a case-by-case basis, you may allow lenders to refuse requests for a second rescheduling from companies which face difficulty implementing highly feasible drastic business improvement plans?

A.

As I have repeatedly mentioned, financial institutions may refuse requests for loans in the first place under the current law. As private financial institutions use deposits entrusted by the people as their source of funds, the underlying premise is that they should make repayment with interest added. With that in mind, it is essential to ensure financial discipline.

While facilitating financing for SMEs as much as possible is the main purpose of this act, requests for loans may be refused under the current law, so naturally, requests will be refused in some cases.

When we make efforts toward the rehabilitation of SMEs, their own active efforts to improve management, managers' motivation - as this is a liberal society - and support by associations of SMEs are essential, as I mentioned in my statement. Therefore, I hope that SMEs and relevant organizations will actively cooperate in such efforts.

Q.

I am Namikawa from Toyo Keizai. From this press release (PDF:86KB) and your statement, I understand that you are telling financial institutions to act appropriately based on their own judgment over the coming year so as to prevent a steep increase in corporate failures following the expiration of the SME Financing Facilitation Act in March 2013. Is that the intent of the press release?

A.

I think that that is true to some extent.

Q.

By requiring the streamlining of disclosure materials and other paperwork, are you suggesting that over the coming year, financial institutions should finalize their approach to judging what they should do, including whether to grant rescheduling and whether to support business rehabilitation?

A.

I ordered the streamlining of paperwork and procedures when I decided to extend this act, although that may not be relevant to the heart of the matter. Bureaucracy requires paperwork.

Therefore, I ordered that the necessary paperwork be reduced by two-thirds, and although the FSA staff members have apparently had great difficulty, they have managed to do somehow with the reduced paperwork. Although the staff members may think that it is better to have documents prepared, it is difficult for SMEs to complete all necessary paperwork, so I ordered the reduction of paperwork when I decided to extend the act again. We will adhere by that principle.

Q.

I see.

I have one more question, which I asked at the previous press conference of the Chairman of the Japanese Bankers Association. It has been said that yen-denominated transactions account for a very small portion of the global financial transactions. Meanwhile, there is talk about various activities, including asset sales by foreign banks to Japanese banks as well as Japanese banks' plans to advance into overseas markets. In light of that, it may be presumed that expansion of yen-denominated transactions will become a major theme of next year and beyond. What are your thoughts on that?

A.

The yen's appreciation has caused significant problems to export-oriented companies. However, the yen's appreciation also makes it easier for Japanese companies to invest in foreign resource development projects and various resource-related businesses. I have read a newspaper article about three Japanese banks' plan to provide syndicated loans to a major Russian company that holds rights to vast amounts of resources.

I understand that Japanese financial institutions are in a relatively stable condition compared with their peers elsewhere in the world. I hear that European banks are increasingly asking Japanese banks to purchase their assets. In that sense, I hope that the benefits of the yen's appreciation will be further pursued, particularly with respect to resources, as Japan is unfortunately a resource-poor country.

(End)