The Advanced Reform Program (Provisional translation) 26 October, 2001

(Extract: -Financial Sector -)

1.  System reform and environment building to create new industries, challengers and employment as well as to revitalize the whole economy

(1)  Active pursuit of regulatory reform

(2)  Structural reform of securities market and financial system

Effective resource mobilization into growing sectors through financial and securities markets is necessary to revitalize Japanese economy. For this purpose, we will revitalize financial sector by implementing comprehensive measures for structural reform of securities markets and financial system.

1)  Structural reform of securities market

In Japanese financial market, hitherto, a large weight has been put on the indirect finance thorough banks. It is necessary, however, to shift toward direct finance to diversify financial assets held by households as well as to support entrepreneurial activities and restore economic dynamism.

To this end, highly fair and transparent securities markets in which general people can participate with confidence should be created. To be concrete, based on 'Program for Structural Reform of Securities Markets' set out by Financial Services Agency in August, infrastructure development to enhance the individual investors' confidence in securities markets is to be pursued. In addition, investment trust is to be made more attractive and investor education be advanced. Furthermore, after examining at the Financial System Council a bill on reform of securities settlement systems including realization of paperless trading of government and corporate bonds. The bill is to be submitted to the next regular session of the Diet at the latest, and a definite plan on measures to improve contents listed in a prospectus of investment trust is to be formed promptly.

Regarding tax system on securities transactions, considering the change in what finance ought to be from preferential treatment of saving to that of investment, the necessary legislation for the following measures is to be submitted to the current extraordinary session of the Diet from the viewpoint of contributing to the development of highly transparent and fair securities market, measures for unification of taxation on capital gains from listed stocks and others into a ''separate self-assessment taxation'', reduction in tax rate, and introduction of carry over system of capital loss exemption from January 2003, as well as tax exemption for capital gain from stocks newly purchased by the end of 2002 up to ¥10 million under certain conditions as an urgent and exceptional measure.

2)  Strengthening disposal of non-performing loans(NPLs) and revitalization of financial sector

Financial sector revitalization as well as strengthening of disposal of NPLs is to be advanced by urgently implementing the following measures. Resolution of NPLs problems will be attained at the latest in 3-year period of intensive adjustment, by promoting simultaneous structural reform in other sectors.

(a)  Smoothening supply of financial resources

• Private and governmental financial institutions are required to make every effort to smoothen supply of necessary funds all the more, to their sound counterparties including small and middle-sized enterprises (including the treatment of the special guarantee at the time of redemption).

• With respect to banks which received public capital injection, rigorous follow-ups to ensure sound and responsible management and appropriate lending in line with their business rehabilitation schemes are to be conducted.

(b)  Prompt and rigorous responses to ensure soundness of banks

• We strengthen inspections of major banks to have a good grip of the status of non-performing loans (NPLs) by raising frequency of comprehensive inspections from every two years to annual basis as well as conducting follow-up inspections semi-annually.

• Furthermore, we conduct special inspections against major banks during the periods of their self-assessment of assets, mainly focusing on borrowers whose market reputations are remarkably changing. The purpose of these inspections is to secure accuracy of the borrower classification and sufficient level of write-offs and provisioning by banks according to borrowers' business performance and market signals on a timely basis. Special inspections are to be conducted from October.

  In implementing them, by collaborating with external auditors, appropriate accounting treatment will be done at the next accounting period.

• Borrowers classified as ''in danger of bankruptcy'' at the special inspection are to be required to take any of the following measures promptly; (i) establish a through restructuring plan based on the Guideline on Voluntary Workout, etc, (ii) corporate rehabilitation through legal procedures including the Civil Rehabilitation Law, (iii) sell loans to the Resolution and Collection Corporation (RCC), and others.

• To ensure sufficient provisioning for listed companies within borrowers classified as ''need attention'', major banks are to be required to conduct internal rating, etc which reflects market signals on a timely basis and to take account of recent increase in loan losses and bankruptcy.

• Major banks are to be required to make necessary arrangements for a quarterly disclosure of their relevant information as soon as possible.

• At this moment, capital injection is considered to be unnecessary. In response to systemic risks, 15 trillion yen has been made available for capital injection or other measures under the amended Deposit Insurance Law.

(c)  Disposal of NPLs and Corporate Reconstruction by the RCC, etc

• The DIC (Deposit Insurance Corporation) and the RCC will continue to purchase NPLs intensively, with granted flexibility in deciding purchase prices (purchase at fair value) and with ability to participate in auctions, until the end of FY2003. In addition, the DIC and the RCC make efforts to diversify methods of disposing the NPLs they purchased, and to resolve NPLs expeditiously within about three years after purchase of the assets to the extent possible, taking account of such factors as economic situations and conditions of borrowers. The DIC and the RCC are to work on corporate reconstruction aggressively by establishing the Headquarters for Corporate Revival in the RCC on November 1 and striving for prompt revival of debtors who can be revived. As for real property held by the RCC, appropriate cooperation with relevant institutions is to be sought from the viewpoint of contributing to revitalization of urban areas.

• To smoothen corporate reconstruction by the RCC, loans by the Development Bank of Japan (DBJ), etc are to be utilized to finance necessary funds during reconstruction.

• The Development Bank of Japan (DBJ), private investors and the Resolution and Collection Corporation (RCC) are required to establish funds for corporate reconstruction (deleveraging funds) or participate in this initiative. The funds will strive to realize reconstruction plans by purchasing stocks of those who have established rigorous restructuring plans and which banks have acquired through ''debt equity swap''. In order for early establishment of the funds, cooperation among relevant institutions is to be reinforced and a necessary budget is to be afforded for investment by the DBJ in these funds.

• The RCC is required to work on corporate reconstruction of large enterprises as well as small and medium ones aggressively by utilizing these new frameworks.

(d)  Points to be Considered in Removing NPLs from Balance Sheet

In removing loans to borrowers classified as ''in danger of bankruptcy'' and below from major banks' balance sheets within 2 years for existing NPLs and 3 years for newly-generated NPLs, they are requested again to fully consider the following points;

• Accurately judge the possibility of borrower reconstruction, and make the best of this means where its reconstruction is considered to be possible.
• Give further deliberations to the characteristics of small and medium sized enterprises, and make a detailed and accurate judgement on their possibility of reconstruction and normalization of loans.
• Pay thorough attention so as not to induce systemic bankruptcies of sound small and medium sized enterprises, which are the counterparties of borrowers.