In order for the Japanese financial system to restore domestic and foreign confidence, thereby contributing to the revitalization of the economy, we cannot procrastinate coming to grips with the bad debt issue. Financial institutions will be required to abandon their tendency to follow each other and develop more distinctive business style. Similarly, regulators will also have to do away with "convoy-style" regulation in favor of clearly articulated rules and more transparent administration.

The Financial Reconstruction Commission advocates that the following measures be put in place quickly and intensively. The goal of these measures is aiming to ensure a substantial completion of disposition of the bad debt, at least at the largest banks, by the end of March 1999, and to rebuild the financial system into a strong, unshakably competitive system during the period ending March 2001.

(provisional translation)

Financial Reconstruction Commission
January 20, 1999

Finance plays an important function in the economy by smoothly supplying the funds required for economic activities. For it to adequately fulfill this role, however, the financial system must be stable and enjoy the confidence of domestic and foreign participants. The facilitation of financial functions is therefore an indispensable prerequisite to the revitalization of the economy, which itself is one of the most pressing needs facing Japan.

Financial institutions sustained heavy damage during the collapse of the bubble economy and have been left with large amounts of non-performing debts. These debts have yet to be adequately disposed of, but institutions are already faced with even more severe economic conditions. This has been undermining domestic and foreign confidence in the financial system. We cannot procrastinate coming to grips with the bad debt issue any further. It must be dealt with as quickly as possible.

Meanwhile, international financial transactions are becoming more active and financial institutions are experiencing stiffer international competition. Japan must respond to these developments by moving forward with its financial system reform that will create dynamic financial markets on which free, market-based competition reigns. Accomplishing this will require financial institutions to abandon their tendency to follow each other and develop more distinctive business styles. Similarly, regulators will also have to do away with “convoy-style” regulation in favor of clearly articulated rules and more transparent administration.

The Financial Reconstruction Commission advocates that the following measures be put in place quickly and intensively. The goal of these measures is aiming to ensure a substantial completion of disposition of the bad debt, at least at the largest banks, by the end of March 1999, and to rebuild the financial system into a strong, unshakably competitive system during the period ending March 2001, i.e., during which the thorough protection for depositors is legally committed to.

• Building firm trust in the financial statements of financial institutions is the first step to restoring domestic and foreign confidence. Rigorous assessment of asset quality and reserve provisions at financial institutions, coupled with timely and appropriate disclosure, will ensure the soundness of the financial positions of financial institutions.
  
  
• Financial institutions will be asked to clarify the exact situation of their bad debts and carry out appropriate write-offs and provisioning so as to complete the bad debt clean up as quickly as possible.
  
  

• Institutions must have sufficient capital to proceed with the write-offs of and the provisioning against bad debts, provide smooth flows of credit, and cope with risks that may be encountered in the future. When it is difficult for institutions to raise this capital on their own from the private sector, they will, under the provisions of the Early Strengthening Law, be encouraged to use government guarantees to seek capital injections of sufficient size.
  
  
• Restoring domestic and foreign confidence in the financial system will require the rebuilding and restructuring of businesses and the realignment of financial institutions. Financial institutions that fail to make these efforts will not be provided with capital injections, while those that do endeavor to boldly rebuild their businesses and rationalize their management will be given priority in the size and terms of capital injections. This will improve the competitiveness and profitability of individual financial institutions so that the government will be able to recover invested funds by selling preferred shares and other capital instruments in the markets.
  
  
• One means of taking bad debts off balance sheets is to relinquish the credit, and there are cases in which this is rational because it will help the borrowing company to rebuild and therefore improve the certainty with which remaining credits can be collected. The Commission will therefore allow capital injections to be furnished to financial institutions that relinquish their credits, provided this is done in such a way as to clarify the locus of managerial responsibility at the borrowing company.
  
  

• Financial institutions that are judged on the basis of objective inspections by the authorities to be unable to achieve sound management will not be allowed to continue to exist and, as mandated under the Financial Reconstruction Law, will be resolved in a precise and transparent manner that conforms to global standards.
  
  
• In doing this, care will be taken to protect depositors and sound borrowers in good-faith. Steps will also be taken to maintain the efficiency of the financial system by transferring the financial functions and corporate value of the failed institution to other sound financial institutions, and financial advisors as intermediaries will have a significant role to play in this process. Meanwhile, the management of the failed institution and bad-faith borrowers will be held to strict responsibility for their actions.

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