Financial Sector

June 2002

A task force of ruling Liberal Democratic Party (LDP) on anti-deflation measures will request that the government postpone the full protection on ordinary bank savings accounts scheduled to take place on March 31, 2003. The group, led by ranking LDP Diet member Hideyuki Aizawa, also agreed to push for widening the scope of tax breaks envisioned by the government. The task force also intends to promote anti-deflation measures without being shackled by a 30 trillion Yen ceiling on government bond issuance set by Prime Minister Koizumi. The committee plans to map out a list of measures to be proposed to the government by mid-July. The group agreed to call for a delay in the end of the unlimited deposit guarantee offered by the government in cases of bank failure, claiming that the rescission could trigger a flood of funds out of smaller financial institutions. The team will also examine the possibility of raising the cap on the deposit guarantee from the current 10 million Yen. The task force intends to send bills based on its suggestions to an extraordinary Diet session this autumn in cooperation with the LDP's coalition partners, New Komeito and the New Conservative party. In the area of tax reform, the task force plans to recommend that changes aimed at promoting corporate R&D and capital investment and tax breaks on financial gifts passed from one generation to another be implemented earlier. In addition, the committee will call on the government to implement changes to the tax system designed to encourage land transactions at early stage. (June 27, the Nihon Keizai Shimbun)

The Financial Services Agency (FSA) launched an initiative to draw up a medium-term vision for the financial system, focusing particularly on revitalizing the long-stagnant stock market. The vision, a guide to the future shape of the nation's financial system, will cover deregulation issues. At the same time, the FSA is not prepared to take up potential solutions to the bad-loan problem, which is the government's Council On Economic and Fiscal Policy (CEFP) would like to see. Nor will the FSA address the issue of how the impending elimination of blanket government protection for all forms of bank deposits will impact the financial system. The possibility is real that the FSA's vision will be too blurry to allow for the building of a truly sound financial system. Discussions about drawing up the financial system vision were launched by a study group headed by Shoichi Royama, president of Takaoka National College. The group serves as a private advisory panel to Minister Yanagisawa for FSA. The idea of mapping out a midterm vision will also be included in a basic plan on structural reform to be finalized by the CEFP. Yanagisawa is showing a special interest in reshaping the securities sector, backing the idea of lifting a ban on bank sales of equities. In previous meetings, Yanagisawa's study group has taken up a variety of issues, including the relationship between banks and nonfinancial companies, the postal savings system, financial system regulation, and the functions of capital markets. However, there is a striking gap between the aims of the CEFP on the one hand and the FSA and Yanagisawa on the other. The CEFP is holding up the goal of "establishing a revitalized financial system" as the centerpiece of the medium-term vision. The members of the CEFP from the private sector are pushing for policies designed to shore up bank profitability. The two sides also have different ideas about the speed of the process. The CEFP aims to see the vision mapped out "immediately." The FSA, in contrast, is thinking about a two-step process, with the basic outlines of the vision next month, and then before the end of the year deciding on any measures that would require legal revisions. "There is a danger that what we are thinking and what we are being asked to do will end up at cross-purposes," Yanagisawa said. (June 21, the Nihon Keizai Shimbun)

Lending by foreign banks with branches in Japan is growing at a fast pace as domestic banks cut back on lending to unload bad loans. The outstanding balance of lending extended by foreign banks in Japan stood at 9.84 trillion Yen in May, up 25.8% on the year and the second-highest level since July 1991. The figure marks the third-straight month of double-digit year-on-year growth after hitting the highest point since July 1991 in April at 9.95 trillion Yen. The year-on-year increase for May bested the 23.4% seen in April. Foreign banks are aggressively bidding in auctions held by the Finance Minister to lend money to local governments and the Deposit Insurance Corp. Although foreign institutions maintain a pessimistic view of the outlook for the Japanese economy, such auctions enable them to avoid credit risk and increase lending. About 60-70% of the recent growth in lending by foreign banks is believed to be to government institutions. Foreign banks have been able to raise the required yen cheaply from Japanese banks desperate for foreign currencies. Institutions based abroad are also lending to blue-chip corporations in an attempt to make further inroads into the Japanese market. Many foreign banks are taking the opportunity to expand business in Japan, with institutions such as Hong Kong and Shanghai Banking Corp. emphasizing the need to bring business in Japan up to a level on a par with activities in other large markets. HSBC aims to gain a stronger foothold in Japan in order to provide support for companies moving into China. (June 20, the Nihon Keizai Shimbun)

The Financial Services Agency (FSA) will bar investment funds from becoming major bank shareholders. The FSA intends to tighten regulations regarding who can own 20% or larger equity interests in banks, effectively shutting out investment funds. The Agency is making the controversial move, as it is important for banks to have some sort of management stability. When shares are sold off to a group or individual whose management philosophies are completely different from those of the bank, it's management continuity is jeopardized. In formulating the new rule, the FSA is reviewing the fate of Shinsei Bank and Aozora Bank, both of which went bankrupt in 1998, were temporarily nationalized and are now in the hands of private companies. The FSA sees a strong possibility that the two banks' top shareholders will change. An April revision to the Banking Law gave the FSA authority to screen the management quality of prospective major shareholders of banks before approving them. The latest effort is part of the effort to monitor changes in bank management. The agency is concerned that in some cases, under directives from new shareholders, banks may start pushing to have loans returned quickly or refuse new lending. The tighter regulation means the FSA will not approve as major shareholders of banks investment funds and others targeting quick capital gains. The restriction is certainly to invite criticism from overseas investors that it is simply a new financial market barrier. When the current major shareholders decide to sell their stakes in Shinsei Bank and Aozora Bank, the FSA will thoroughly check potential buyers, possibly using the authority granted by the Banking Law to check their books or force them to submit more information. The agency plans to reject any sale that would drastically change the structure of major shareholders. Should negotiations become deadlocked, the FSA plans to confine sales to domestic and overseas financial institutions that promise long-term investment. A development like this is sure to add to criticism of the FSA and fuel the debate over how far a government administrative body can meddle in such private-sector matters as the sale of shares in a private company. (June 11, the Nihon Keizai Shimbun)