Press Conference by Tadahiro Matsushita, Minister for Financial Services

(Excerpt)

(Friday, August 10, 2012, from 9:33 a.m. to 10:05 a.m.)

[Opening Remarks by Minister Matsushita]

I will report on the status of Debt assuming a character of Equity use.

Last November, the Financial Services Agency (FSA) announced “Regarding Active Use of Debt assuming a character of Equity” in order to promote the active use of Debt assuming a character of Equity, and it has been striving to raise awareness about it and requesting financial institutions to consider using it.

Recently, the FSA conducted a questionnaire survey on regional financial institutions across Japan concerning their use of Debt assuming a character of Equity, and summarized the results. As for the details, the staff of the Inspection Bureau's Inspection Coordination Division will hold a briefing later. The number of cases of Debt assuming a character of Equity use in fiscal 2012 is expected to reach 409, a 6.7-fold increase compared with fiscal 2010, so I believe that measures to promote the use have been effective.

In light of the scheduled expiry of the SME (Small and Medium-Size Enterprise) Financing Facilitation Act at the end of March 2013, the FSA intends to continue efforts to promote the active use of Debt assuming a character of Equity as part of an exit strategy.

[Questions & Answers]

Q.

You said that the number of cases of Debt assuming a character of Equity use will reach 409. How do you evaluate that figure?

A.

As I mentioned, Debt assuming a character of Equity is expected to be used in 409 cases, and I believe that the use of Debt assuming a character of Equity is steadily increasing due to the clarification of how the Financial Inspection Manual will be applied and awareness-raising activities.

In light of the scheduled expiry of the SME Financing Facilitation Act at the end of March 2013, the FSA intends to create a favorable environment for providing strong support that leads to a true improvement of the business management of SMEs. As part of this effort, the FSA would like to promote the active use of Debt assuming a character of Equity so as to improve the balance sheets of companies facing a capital shortage and their business management, and we aim to steadily increase the use.

Q.

I would like to ask several other questions.

First, in response to the insider trading cases related to public offerings of new shares, on August 7, 12 securities companies announced the results of their voluntary review and corrective measures. Could you comment on the results and tell me about actions that may be taken in the future?

A.

Regarding their systems for managing corporate information, on August 3 (Friday), the companies reported, first, on their organizational structure, second, on the status of managing corporate information and, third, on challenges and countermeasures. On August 7 (Tuesday), they voluntarily announced the results of their review.

I would like to refrain from commenting on the specifics of their reports and the announced results. While the companies have developed systems, including internal regulations, for managing corporate information, to a reasonable degree, I understand that they have identified new challenges in light of the series of insider trading cases and they intend to make improvement efforts, such as enhancing the monitoring of their sales divisions.

The FSA will continue to closely monitor such activities with strong interest and if a problem is recognized as a result of the examination of their management systems through inspection and supervisory processes, we will naturally take strict actions in accordance with laws and regulations.

Q.

The next question concerns the temporary suspension of derivatives transactions on the Tokyo Stock Exchange on August 7 due to a system glitch. What do you think of the recurrence of system glitches on the TSE?

The TSE is scheduled to integrate business operations with the Osaka Securities Exchange (OSE). Do you intend to ask the TSE to take some measure or other in relation to the integration of their computer systems?

A.

The FSA regards the system glitch as a very regrettable incident. The latest glitch followed the one that occurred in February this year. It could undermine investors' trust or may have already undermined it, so we regard it as very regrettable.

First of all, to prevent the recurrence of a system glitch, the FSA hopes that the TSE will conduct an adequate investigation. It is very important for the TSE to examine the cause of the glitch and work out recurrence prevention measures.

On August 7 (Tuesday), the FSA issued an order for the submission of a report based on Article 151 of the Financial Instruments and Exchange Act. If a problem is recognized, the FSA will consider what actions need to be taken.

Regarding the business integration with the OSE, the FSA hopes that the TSE will proceed with the integration with the OSE with a sense of urgency. We will urge the TSE to remain alert and make every possible effort to prevent the latest system glitch from impeding the integration process.

The previous system glitch occurred only this February, so the TSE has apparently failed to learn from that. I hope that the TSE will deal with the latest system glitch so as to avoid creating confusion.

Q.

Next, regarding the illegal manipulation of the London Interbank Offered Rate (LIBOR), the U.K. financial authorities are investigating employees of the London office of Bank of Tokyo-Mitsubishi UFJ for suspected involvement in illegal activity. Could you tell me about the facts related to this case and how the FSA will deal with it?

A.

I am aware of the media report to which you are referring. As this is a matter concerning an individual financial institution, I would like to refrain from making comments.

Generally speaking, the FSA has already been checking individual financial institutions' internal control systems related to the submission of interest rates through inspection and supervision. We will continue to check the systems through inspection and supervision, and if a problem is recognized through inspection and supervision, we will take appropriate actions in accordance with laws and regulations.

Q.

I am Shinryo from Magazine X.

As the bill to raise the consumption tax rate is about to be passed in the Diet, the people's financial burden is set to continue increasing. As for matters related to the FSA, premium rates on non-life insurance such as fire and automobile insurance are expected to be raised in the next fiscal year. In addition, regarding compulsory automobile liability insurance, which is under the FSA's jurisdiction, a consultative group on the future of compulsory automobile liability insurance under the Ministry of Land, Infrastructure, Transport and Tourism held an annual meeting last week, and the Compulsory Automobile Liability Insurance Council under the FSA will be held at the beginning of next year, and it is already decided that the premium rate on compulsory automobile liability insurance should be raised. While the people's burden is increasing, I hope that the government will reduce various expenditures and minimize the margin of the increase in the insurance premium rates. Could you offer your thoughts on that?

A.

As I remember it, I was asked a similar question at the previous press conference.

As I said on that occasion, the appropriate procedure is that the Compulsory Automobile Liability Insurance Council should determine the premium rate on compulsory automobile liability insurance after conducting deliberation, so I would like to refrain from making comments.

Regarding voluntary automobile insurance, non-life insurance companies set their respective premium rates based on their management judgment in light of the reference loss cost rate, a benchmark premium rate calculated by the Non-Life Insurance Rating Organization of Japan on the basis of the circumstances of the insurance companies' contracts in force as well as drivers' characteristics. I would like to refrain from commenting on a specific level of the premium rate.

In any case, insurance premium rates are determined by taking comprehensive account of various factors, including the status of insurance claims payment and fairness among policyholders.

The FSA will take appropriate actions regarding the revision of insurance premium rates from the perspective of the protection of policyholders, including car users, as I stated previously.

Q.

During the tenures of the four most recent ministers of finance and ministers of land, infrastructure, transport and tourism, reserve funds for compulsory automobile liability totaling 600 billion yen have been accumulated and remained in the general budget account on loan. Are you aware of that fact?

A.

As I am not familiar with the details, I will study the matter again.

Q.

In relation to LIBOR, it has been argued in the United Kingdom that the LIBOR calculation method should be revised. I suppose that debates will be held at international conferences on what kind of benchmark interest rate will be suitable. Could you tell me about how the Japanese authorities intend to be involved in such debates?

A.

As I already mentioned, I am aware of media reports about overseas authorities' ongoing review of the benchmark.

On the other hand, regarding TIBOR (Tokyo Interbank Offered Rate), the Japanese Bankers Association (JBA), which compiles and publishes TIBOR, has asked all banks that submit the TIBOR rates to review their status of compliance with the guidelines for the publication of TIBOR by August 10. I understand that the JBA will consider making revision if necessary in light of the results of the review and the status of British Bankers' Association's deliberation on the reform of LIBOR.

As I explained, the management of TIBOR is a matter on which the JBA is primarily responsible for conducting deliberation as an organization that compiles and publishes TIBOR, so I hope that the JBA will appropriately deal with the matter.

However, the illegal manipulation of interest rates is an important matter that could undermine trust in the fairness and transparency of the financial market, so the FSA will also keep a close watch on the JBA's activities with strong consciousness of this matter.

Let me remind you that the FSA will continue to check individual financial institutions' internal control systems related to the submission of interest rates through inspection and supervision, and if a problem is recognized, we will take appropriate actions in light of laws and regulations.

Q.

Although you say Debt assuming a character of Equity has been actively used, there are various concerns. For example, it is necessary to draw up 3,000 plans for the rehabilitation of SMEs and to consider how regional financial institutions should treat loans in the future. There are also concerns that regional financial institutions may become weaker and that the number of SME failures may increase. You mentioned the progress in the use of Debt assuming a character of Equity that has been made ahead of the expiry of the SME Financing Facilitation Act at the end of March 2013. Could you tell me what will need to be done and what activities should be strengthened?

A.

The FSA, together with relevant ministries and agencies, has formulated a policy package. We are now drawing up a roadmap. The FSA must convey its way of thinking through Local Finance Bureaus and help to strengthen the foundation of SMEs so as to make them sustainable, as the SME Financing Facilitation Act is scheduled to expire next March. Modifying the loan terms to postpone repayment will not necessarily strengthen their business foundation, so we are considering various measures to strengthen the foundation of SMEs so as to make them sustainable. In addition, we are closely communicating with relevant organizations over how banks should exercise their consulting function. Therefore, we hope that regional financial institutions will take appropriate actions in line with that policy. In any case, there are concerns over problems related to the strengthening of SME's business foundation, as you mentioned, so we must work hard with regard to various matters, including the use of Debt assuming a character of Equity.

Q.

Let me ask you one more question, which is relating to the difficulty that regional financial institutions face in supporting business rehabilitation. I think that cooperation with relevant organizations is very important. Do you think that regional financial institutions are making sufficient efforts in that respect, or do you regard their efforts as insufficient?

A.

I suppose that the situation varies among individual financial institutions. While I refrain from making comments, I strongly hope that they will make sufficient efforts.

In particular, the expiry of the SME Financing Facilitation Act marks a shift from one policy to another. Meanwhile, we are facing a serious situation, as exemplified by domestic manufacturing industries' move to transfer operations to foreign countries because of the yen's rapid appreciation, the delay in forming economic partnerships, an energy supply problem and tax system problems facing domestic companies. In addition, some companies are trying to switch to new businesses as a result of an energy revolution or their defeat in competition with emerging countries in such fields as production of TV sets and semiconductors. In line with such moves, SMEs must transform their business operations. How should they do that? For their part, financial institutions should consider how new businesses will develop and what risks they will involve. In that sense, I believe that Japanese industry faces a critical turning point. If manufacturing industries move out of a region, relevant industries in the region, including SMEs as well as small shops, agriculture and tourism, will suffer a serious blow. As this problem concerns the issue of how to promote regional vitality, it is very important from the viewpoint of regions that relevant ministries and agencies work together to do their utmost, although financial institutions should naturally play a major role. Therefore, I hope that financial institutions will work with the Ministry of Economy, Trade and Industry and the Cabinet Office to deal with this situation with a sense of crisis. The expiry of the SME Financing Facilitation Act should be considered in that context, and there is also the issue of how to rehabilitate SMEs. I am working on this issue while recognizing the need to give a more in-depth consideration to it from a broader perspective.

Q.

Let me make sure about the JBA's investigation concerning TIBOR, which you mentioned earlier. The deadline arrives today for the review by banks, and although I know that the review was voluntarily initiated by the JBA, could you tell me about what has by now been reported to the FSA, if any, as a supervisory agency

A.

I am aware that the JBA has asked all banks that submit the TIBOR rate to review their status of compliance with the guideline on the publication of TIBOR and submit the results by August 10.

I expect that the JBA will report on the review results to the FSA in an appropriate manner as needed. That will be a natural course of action. In any case, the management of TIBOR is a matter on which the JBA is primarily responsible for conducting deliberation as an organization that compiles and publishes TIBOR, so I hope that the JBA will appropriately deal with the matter.

Thank you very much.

(End)