Financial Sector

July 2003

The Bank of Japan (BOJ) will open a representative office in Beijing by the end of the year, to strengthen ties with financial circles in one of the world's most dynamic economies. The central bank will compete with the bank of Korea which is also eyeing a similar move to become the first foreign central bank to set up an office in the Chinese capital. The Beijing office will help it better understand economic and financial developments in China and broaden channels of communication with members of the financial community, including the People's Bank of china. China is enhanced its presence in the global economy and at the same time, its relations with Japan also have become increasingly close. (July 31, Kyodo News, the Japan Times、the Nihon Keizai Shimbun)

Government advisory panel on financial affairs approved subcommittee draft report that offered conflicting opinions on the establishment of a new legal system for injecting taxpayers' money into ailing banks but was unable to agree on bank fund infusion. The Financial System Council also put off a decision on the issue of whether to cap the amount of banks' deferred tax assets, or future tax credits, and simply included two opposing opinions in the report. The report said that a new system should be crafted to legitimize public fund injection into troubled yet still viable banks as a preemptive measure, but at the same time urges them to strengthen their corporate governance as a precondition for receiving the funds. Numerical targets should be set for a bank that receives such taxpayers money in order to carry out bailout measures more effectively. Panel members are concerned that a new legal framework might see crippled banks use public funds only to muddle along with little hope for a turnaround of their financial health. The Financial Services Agency is planning to submit a bill for the new system to the next extraordinary Diet session in the hope of enacting it by end of March next year. The report also urges the banks to step up the disclosure of information on their deferred tax assets, including data to back up the assets' inclusion in capital. Resona Bank requested a government bailout after its capital-adequacy ratio stood at 2.07% as of March 31, below the 4% required for banks operating domestically as its auditor refused to recognize some of the deferred tax assets counted by the banks as capital. The report indicated that there is vulnerability in deferred tax assets being counted as capital, and that banks need to improve the quality of their capital. Among other issues, the repot proposed revising the trust business law so that business corporations outside the trust banking industry would be able to enter the trust business. Patent and other intellectual properties also should be included in the scope of the trust business under a revised law. (July 29, Kyodo News, the Daily Yomiuri, the Nihon Keizai Shimbun)

The Bank of Japan （BOJ）will launch a program to purchase asset-backed securities (ABS) to give a financial boost to small and midsize businesses. The BOJ will release the names of financial institutions that seek to sell their loans to smaller companies to the bank, and will explain the program's administrative procedures to these institutions. BOJ will purchase securities backed by such underlying assets as bank loans and trade receivables held by small and midsize businesses. By bundling loans and securitizing them, banks can clear the loans from their balance sheets, thus opening up room to make new loans. The fact that the central bank will buy the loans will likely encourage private-sector banks to bundle loans. Midsize and small companies can turn trade receivables into immediate cash by selling securities backed by such receivables. Large banks are expected to participate in the BOJ's new program, with Mizuho Corporate Bank and Mizuho Bank planning to sell ABS worth several tens of billions of yen. The launch of the program will mark the BOJ's first outright purchase of risky assets from the private sector as part of market operations. This bold step was prompted by the fact that the bank's quantitative monetary easing has failed to produce a positive impact on the economy as expected by the central bank. Since the BOJ's introduction of quantitative easing measures in March 2001, the balance of current accounts deposited at the central bank has ballooned from about Y5 trillion to Y30 trillion. But most of the funds have just stayed in the market without being circulated in the economy as banks, suffering from the bad-debt problem, are hesitant to make new loans. The use of securitization will allow the BOJ to attract a wide range of investors amid financial institutions' weakening ability to take risks, according to BOJ Governor Fukui. The bank is willing to buy speculative-grade securities with ratings of BB since it desperately seeks to unclog the pipes that now prevent the nation's financial system from working properly. Healthy market will not grow if the central bank intervenes in the market excessively for producing a quick economic impact. This is because there are not many securities that meet the BOJ's purchase criteria of having at least 50% of the underlying loans as loans to smaller businesses. It is possible that this will disturb the market's price forming function. (July 25, the Nihon Keizai Shimbun)

Major banks beef up marketing of foreign currency deposits by attracting more individual customers to foreign currency deposits such as offering higher rates for a limited period and lower minimum balance requirements. In the process, they will steer risk-tolerant individual investors toward other foreign currency denominated products, including investment trusts and insurance. Such moves are also aimed at attracting more individual depositors to foreign currencies. Sumitomo Mitsui Banking Corp. since June has offered special limited-time-only rates on dollar, euro, Australian dollar and New Zealand dollar deposits. Likewise, in June, Mizuho Bank reduced minimum balance requirements on a portion of its foreign currency deposits from Y1 million to the equivalent of Y500,000. The combined balance of individual foreign currency deposits at Bank of Tokyo-Mitsubishi, Mizuho Bank, Sumitomo Mitsui Banking and UFJ Bank reached Y2.3 trillion at the end of June, a roughly 10% increase in just one year. Simultaneously, a number of depositors have withdrawn their funds to lock in currency-based profits. As a result, the actual inflow of funds is much higher than what the net increase suggests. Banks are focusing more on foreign currency deposits amid the belief that with rates for yen deposits stuck at near-zero levels, it will be difficult to attract new customers. While there are currency fluctuation risks, banks are emphasizing the higher rates offered on foreign currency deposits. Bank of Tokyo-Mitsubishi's Australian dollar three-month time deposits have an annual rate of 2.28%. In comparison, the interest rate for yen deposits with the same term is merely 0.02%. Depositors have been mainly wealthier middle-aged and elderly customers, but salaried workers in their 30s are also beginning to show an interest. (July 24, the Nihon Keizai Shimbun)

Japan Post will start selling investment trusts in April 2004, initially at about 50 main post offices in urban areas. The public postal corporation plans to handle investment trusts that have a low risk of falling below par value. Investment trust sales at post offices will help revitalize the stock market. The Cabinet of Prime Minister Koizumi decided in May allowing Japan Post sell investment trusts at post offices as part of measures to prop up the stock market. The government will use the network of more than 24,000 post offices nationwide to lure financial assets held by individuals to the stock market. The Posts and Telecommunications Ministry plans to submit bills to the extraordinary Diet session this autumn that would enable Japan Post to start selling investment trusts next April. Japan Post will sell investment trusts developed by asset management companies affiliated with major banks, such as Mizuho Financial Group Inc. and UFJ Holdings Inc., as well as those affiliated with large securities companies and foreign firms. Japan Post is expected to handle mainly investment trusts with low price volatility, and its main products will most likely be stock index funds such as those tracking the Nikkei Stock Average. Japan Post will gradually increase the number of post offices handling investment trust sales from the initial 50 and to have employees obtain licenses as securities brokers and place such experts at each post office. The balance of investment trusts stood at around Y35.6 trillion at the end of June, with the balance of stock investment trusts at Y18.3 trillion. Investment trusts handled by Japan Post over the next four years are expected to amount to Y4-10 trillion, Y2-5 trillion of which is seen flowing into the stock market, according to an estimate by Daiwa Institute of Research. Investment trust sales at post offices will have a negative impact on investment trust sales at banks, according to the Japanese Bankers Association. (July 23, the Nihon Keizai Shimbun)

Spending by the central government on public works projects will be reduced by more than 7% in fiscal 2004, according to a budget outline. The Council on Economic and Fiscal Policy (CEFP) calls for trimming by 10% of subsidies from the central government to the local governments to finance public works projects. It also calls for slashing the central government's direct spending on public works by at least 3%. The overall cut in central government spending on public works will result in 7% or more. The CEFP budget outline states that more than one-third of the planned Y4 trillion cut in government subsidies will be implemented next fiscal year, with the rest planned for fiscal 2005 and 2006. According to the plan, Y6 trillion in subsidies to localities for key items and public-works-related projects would be cut by at least 10%. Since there will be many cases in which local governments will finance projects now covered by subsidies on their own, the overall cut in public works spending by the central and regional governments will be smaller than 7%. The proposed cuts will probably be opposed by municipalities and the ruling coalition parties. The CEFP will also need to work out details with the Finance Ministry, which is formulating request guidelines for the fiscal 2004 budget based on the outline. (July 16, the Nihon Keizai Shimbun)

The Financial Supervising Agency (FSA) is preparing to issue an administrative order to five major banking groups with banks that have received public funds but booked net losses for fiscal 2002 to substantially improve their earnings. The issue will be directed at Mizuho Financial Group Inc., UFJ Holdings Inc., Sumitomo Mitsui Financial Group Inc., Mitsui Trust Holdings Inc. and Sumitomo Trust and Banking Co. About 10 regional banks in similar situation also will receive the order. It will be the first time that the FSA has issued such an order to banks. In 1999, the government injected public funds into more than 30 financial institutions under a legal framework aimed for revitalizing the nation's weak financial system. Those banks submitted management restructuring plans with stated targets for net and operating profit and other areas. The FSA has the authority to order banks to improve their earnings when they fall significantly short of the targets, but it has never exercised that right, apparently to allow banks to concentrate on the elimination of bad loans. The FSA will require directors at banks which receive the order to increase earnings to step down, if they again fall to meet earnings goals in fiscal 2003. As part of effort to clean up the banking sector, the FSA issued the 30% rule in April, under which it would order banks to improve their earnings when the level of net profit at banks with public funds falls short of their stated targets by 30%. (July 16, the Daily Yomiuri, the Nihon Keizai Shimbun)

The Ministry of Finance (MOF) will determine more stringently whether financial institutions carry out overseas remittances in compliance with the Foreign Exchange and Foreign Trade Control Law. MOF set up a foreign exchange inspection office to strengthen its oversight of financial institutions. After the Sept. 11, 2001, terrorist attacks in the U.S., Japan banned money transfers to terrorists. And financial institutions are required to obtain approval from the MOF to send money to people who are internationally recognized as terrorists. Financial institutions are also required to report to the MOF overseas remittances worth more than Y30 million. The ministry will ensure that financial institutions send money overseas in line with such requirements. (July 16, the Nihon Keizai Shimbun)

The Bank of Japan (BOJ) had left its monetary policy unchanged due to financial market stability. The central bank's Policy Board decided unanimously to keep its target for the outstanding balance of deposits in current accounts held by private financial institutions at the central bank in the range of Y27-Y30 trillion. If there is a risk of financial market instability, such as a surge in liquidity demand, it will provide more liquidity irrespective of the target. Analysts views that the decision had been expected due to recent rises in Tokyo stock prices, with the benchmark Nikkei Stock Average moving around 10,000. There was no reason for the central bank to change its policy due to the current stability in stock, currency and bond markets, though long-term interest rates temporarily shot up to as high as 1.4% earlier this month. Comments by BOJ Governor Fukui and Minister Takenaka of Economic, Fiscal and Financial Policy suggested tolerance of the current level of long-term interest rates led investors to believe the central bank would launch no new measures to bolster the bond market. Fukui saw somewhat unstable moves in bond prices in recent trading, but the bond market appears to have regained calmness. Fukui expects the Tankan index on business confidence of major manufacturers to move into the plus column soon. The key 10-year government bond suffered heavy selling in the first week of July, with its yield reaching 1.4% on July 4. But the market has regained calmness with the yield moving around 1%. (July 16, the Daily Yomiuri, Kyodo News, the Nihon Keizai Shimbun)

The Bank of Japan (BOJ) will announce in its July report that Japan's economic activity remains flat. The central bank views that uncertainties about the future course of the economy are fading due to growing expectations for a U.S. economic recovery, the end of the severe acute respiratory syndrome (SARS), and the pickup in stock prices. Although the BOJ will continue to assess Japan's economic activity as flat, it will remove the phrase exports are showing some weakness in the June report. The policy board also decided to leave the bank's target for the balance of current accounts deposited by commercial banks unchanged, in a range of Y27-30 trillion. Although long-term interest rates appear to have stopped rising, the policy board agreed to continue to monitor interest rate trends closely and to provide ample funds to the money market beyond the liquidity target, if necessary. (July 16, the Mainichi Shimbun, the Nihon Keizai Shimbun)