Financial Sector

August 2003

Bank of Japan (BOJ) Governor Toshihiko Fukui and his two deputy governors plans to make overseas trips to outline BOJ's policy stance. In a series of trips, BOJ executives will meet with central bankers and market participants from various nations. Given the recent strength shown by the Tokyo stock market, questions posed to the three may focus "the bright signs in the Japanese economy." Iwata will kick off the travel schedule with a trip to the U.S. at the end of the month, when he will attend an annual symposium, sponsored by the Federal Reserve Bank of Kansas City, in Wyoming and rub shoulders with economists and central bankers from around the world. Then, in early September, Fukui and Muto will attend a central bank conference sponsored by the Bank for International Settlements in Switzerland. Later in September, Fukui will attend a Group of Seven gathering of central bankers and finance ministers to be held in the United Arab Emirates. Muto is also expected to visit the U.S. in September to meet with officials from the Federal Reserve and the Federal Reserve Bank of New York. There is a possibility that Muto will meet with Fed Chairman Alan Greenspan during that visit. (August 26, the Nikkei Financial Daily)

Japan's banks were on the way to solve their bad loan problems, which has stifled growth in the world's second largest economy for the past decade, according to Minister Takenaka of Economic, Fiscal and Financial Policy. Banks had come a long way in correcting a period of excessive lending that had brought about tremendous bad loans. The ratio of bank lending to grow domestic product is now at about 80%. The ratio had been out 120% during the asset inflated bubble economy years of 1990s. Japanese banks are struggling with Y40 trillion in bad loans and are under pressure to dispose them, though they also are under criticism from the public for having cut fresh loans to companies in the process. Banks are under orders, since September, to halve their ratio of bad loans to total lending by March 2005. There were worries that bad loan disposals would lead to a surge in unemployment, but with Y10 trillion in write-offs, unemployment has increased by 70,000. The Cabinet Office had at first estimated a loss of about 140,000 jobs. (August 26, the Daily Yomiuri, Reuters)

The Financial Services Agency (FSA) plans to supervise closely reinsurance deals signed by domestic non-life insurers with insurance companies overseas. Increasing concern that disasters such as large-scale terrorist attacks could result in a sudden wave of huge compensation claims, possibly causing an international financial crisis, is apparently behind the move. FSA plans to require from fiscal 2004 that domestic insurers strengthen their level of information disclosure and bolter their risk management system in relation to reinsurance deals. Non-life insurance firms disperse financial risk through reinsurance contracts with other insurance or reinsurance companies overseas. Under the scheme, non-life insurers pay a portion of the premiums paid by the insured party to other insurance houses in return for their sharing the burden of future claims. According to Standard & Poor's, the world's reinsurance market, or the total premium revenue of the world's top 150 reinsurers, amounted to as much as $96.8 billion, about Y11.6 trillion in 2001. FSA instructed Japan's insurers to manage their deals properly and avoid signing such deals with limited insurance companies overseas while requiring to disclose: 1. How much their reserves are lowered as a result of signing reinsurance contracts. 2. Types of reinsurance. 3. Reinsurance deals signed with the top five reinsurers. FSA will establish new accounting rules to help non-life insurers avoid shortages in their reserves when they sign reinsurance contracts, while requiring to create better management systems for such deals. It plans to review having overseas reinsurance subsidies established by domestic non-life insurers brought under its supervision. (August 21, the Yomiuri Shimbun, the Daily Yomiuri)

The Ministry of Economy, Trade and Industry and the Agriculture Ministry will authorize private companies to set up their own financial derivatives markets to hedge against future price fluctuations. Although trading houses, banks and other companies have been trading derivatives, they are only permitted to do so at seven public commodities exchanges. The ministries will authorize them to establish their own markets for re-hedging derivatives trades, such as Internet-based oil futures markets, which are increasingly common in the U.S. and Europe, to help them procure raw materials at stable prices. The ministries are preparing to submit bills revising the commodities trade law to the next regular Diet session in spring 2004. Companies wanting to establish their own markets will be required to obtain government approval, and then periodically report on them to the authorities after they are set up. (August 10, the Nihon Keizai Shimbun)

The Ministry of Finance spent F5.612 trillion to devalue the currency in the April-June period. It was the largest amount ever spent in one quarter to deflate the yen. The authorities intervened to arrest the yen's rise, which was hurting exporters, on a total of 20 occasions in Tokyo and overseas markets between May and June. Japan acted alone in selling yen for dollars and euros. Most of these interventions were implemented in mid-May, with the amount reaching F1.04 trillion on May 19, the fifth-largest figure on record. The ministry also reported that Japan's foreign-exchange reserves at the end of July rose by $11.218 billion from the previous month to $556.836 billion. The nation's foreign exchange reserves grew due to yen-selling market intervention, although a fall in U.S. bond prices and the Euro's appreciation against the dollar were factors that helped to rein them in. Of the total external reserves at the end of July, foreign currency denominated securities stood at $442.151 billion. Deposits stood at $95.507 billion, including $47.398 billion at Japanese banks. Gold reserves amounted to $8.727 billion and International Monetary Fund special drawing rights totaled $2.528 billion. (August 8, the Japan Times)

The Ministry of Finance (MOF) in October will issue \500 billion in 20-year government bonds every month, to accommodate strong investor demand, instead of the current calendar of \800 billion every other month. By nurturing 20-year JGBs into a benchmark, while continuing to issue a respectable volume of their 10-year counterparts, the MOF will increase liquidity in the fixed-income market enabling the smooth digestion of such debts. This fiscal year, the JGB issuance volume will total about \141 trillion, including rollover bonds, of which some \112 trillion must be absorbed by the market. And rollover bonds are poised to start increasing significantly in the near future. While increasing the issuance volume and frequency of 20-year JGBs, the ministry plans to reduce the two-year JGB issuance volume by \100 billion a month starting in October. Compared with the initial issuance schedules for fiscal 2003, the two-year JGB volume will decline by \600 billion to \20.36 trillion and 20-year JGBs will increase by \600 billion to \5.4 trillion. The ministry has decided to increase the 20-year issue due to its perception that demand from investors is strong because of the relatively higher yields. The yields on 10-year and 20-year JGBs ended at 0.915% and 1.47%, respectively. The ministry has opted not to increase the issuance of 30-year JGBs at this point. (August 7, the Nihon Keizai Shimbun)

The Financial Services Agency (FSA) has set up a project team to study a proposed system for public funds to bail out banks. The team will study what the FSA can do as a financial administrator after receiving various opinions and suggestions from the Financial System Council about the proposed system, as part of efforts to ensure financial system stability. In late July, the council presented a framework that includes a requirement that financial institutions set numerical targets for such things as profits when they receive public funds. (August 6, Kyodo News, the Japan Times)

Concerns that the new Bank for International Settlements (BIS) rules might hinder the growth of the asset securitization market, the Japanese Bankers Association and six overseas financial industry groups compiled proposals that call on the bank to revise a draft of the new rules, which are scheduled for implementation at the end of 2006. If the new BIS rules are introduced, banks worry that their risk-weighted assets increase as they engage in the securitization of accounts receivable and other assets. Consequently, their capital ratios could decline. Major banks purchase accounts receivable held by corporations through special-purpose companies, and they issue and market to investors commercial paper backed by such assets. Although they usually guarantee payments of the commercial paper's principal and interest, they do not have to count such commercial paper as risk-weighted assets, the denominator in calculating the capital ratio, under current BIS rules. The new rules could force banks to count double the value of asset-backed commercial paper as risk-weighted assets, according to the association. As a result, banks could be discouraged from engaging in asset securitization to prevent risk-weighted assets from ballooning, and corporations will not be able to remove accounts receivable from their balance sheets. The size of the asset-backed commercial paper market could be halved from the current \6 trillion.　(August 5, the Nihon Keizai Shimbun)