I. Introduction

I am Katsunori Mikuniya, Commissioner of the FSA. I am honored to speak today before the executives of foreign financial institutions and market professionals on the occasion of the annual conference of the IBA.

Let me first mention that we have very much appreciated the contributions of the International Bankers Association and its members in the process of reforming our laws and regulations towards building more open, transparent and user-friendly financial markets in Japan.

I would like to begin by talking about my personal experiences as a means of self-introduction. After I joined the Ministry of Finance 35 years ago, I was involved mainly in budgetary affairs until I was assigned to financial regulatory policy 20 years ago for the first time. My first task then was to improve the regulation of secondary markets for securities. At that time, a critical challenge was how to restrain the overheating stock market, when it appeared as if the Nikkei stock average would rise beyond 40,000 yen. Around the same time, we witnessed a major scandal involving inappropriate transfers of unlisted shares. Also, Japan introduced the regulation on insider trading and the reporting requirement for large shareholdings around that time.

Later, 12 years ago, when active debate on the Big Bang initiative of financial deregulation was ongoing, I was assigned to financial regulatory policy again. I vividly remember that twice I was surprised at the report of the Financial System Council on the financial Big Bang. The first time was when I read the report immediately after it was issued: I was surprised at how drastic the recommended deregulation measures were. The second time was when I read the report several years later. This time, I was surprised at how commonplace those measures appeared to be.

Then, we experienced a financial crisis. Although Mr. Greenspan, the former chairman of the U.S. Federal Reserve Board, has described the current financial crisis as a “once-in-a-century credit tsunami,’ Japan experienced a financial crisis ten years ago. Therefore, for me, this is the second financial crisis in a decade. The perception is growing that the worst of the financial crisis is behind us. However, in light of Japan's experiences, we will likely experience further ups and downs before a full-fledged recovery is assured.

Today, I would like to talk about the financial crises that Japan has experienced and the country's response to them, as well as about the focus of recent international debate, Japan's efforts to strengthen its financial and capital markets, and issues related to recent financial regulatory policy in Japan.

II. Japan's Experience of Financial Crisis and the Current Crisis

In the first crisis, which started with the non-performing loan problem, the Japanese government made efforts to establish the necessary regulatory frameworks mainly in four areas, and to better manage those frameworks. First, we have established a framework for dealing with the disposal of non-performing loans by individual financial institutions, and the failures of individual financial institutions. Second, we have created and strengthened various safety net schemes over time, and as a result, I believe that Japan has become the most advanced country in the world in terms of the development of the financial-sector safety net. Ten years ago, we studied the safety net systems of the U.S. and Europe to strengthen our own system. Now in response to the current crisis, foreign regulators are learning lessons from our experience. Third, we have improved infrastructures for Japan's financial and capital markets from a long-term perspective. Fourth, we have established and managed regulatory frameworks from the standpoint of protecting consumers of financial services.

Through these experiences, I learned that there needs to be a balance between pursuing both short-term measures to stabilize financial markets and implementing medium- to long-term measures to strengthen the financial system and to vitalize the financial markets. Also, we learned how to respond properly to public opinion.

On the basis of this experience, we have strived to stabilize the financial system and support economic recovery in the current crisis, while dealing with such individual incidents as the failure of Lehman Brothers, the first bankruptcy of a listed J-REIT and the failure of Yamato Life Insurance.

During the current financial crisis, several problems have emerged, particularly at U.S. and European investment banks, including dependence on high leverage, an excessive focus on short-term profits and a lack of transparency over the securitization business. In the meantime, Japan's financial system has remained relatively stable compared to the U.S. and European financial systems, as Japanese financial institutions have not leaned towards such businesses as much as their American and European peers, and therefore the amount of losses and the effects on financial institutions were relatively small. As a result, measures such as recapitalization using government funds and government guarantee programs to prevent systemic risk were not necessary in Japan. Nevertheless, it is true that the financial crisis has hit the Japanese economy in various ways, for example, through turmoil in the stock market and the foreign exchange market, as well as through a plunge of exports.

Also, in our financial system, lending by deposit-taking financial institutions such as banks is relatively important. Therefore, financial stabilization measures taken in the current crisis put emphasis on enhancing financial intermediation towards SMEs and in the regions. This is because we consider that enhancement of financial intermediation, especially lending, is the most important measure in supporting the recovery of our economy towards sustainable economic growth led by domestic demand.

I would like foreign financial institutions operating in Japan to understand the idea underlying these measures. On the other hand, we are working on reforms in the infrastructure of securities markets. The Financial Instruments and Exchange Act has been amended, and regulation of credit rating agencies has been introduced in June this year. On the occasion of this amendment of the Financial Instruments and Exchange Act, the disclosure rules concerning the secondary distribution of securities have also been amended. We appreciate your comments on the draft cabinet orders and the regulations concerning the amendments through the public consultation process.

Financial institutions are required to establish internal control systems in order to improve the transparency of securitized financial instruments. It cannot be denied that investors in Japan suffered considerable losses and lost confidence in securitized financial instruments during this crisis. Self-regulation by the Japan Securities Dealers Association to provide adequate information to investors has been enacted and promulgated with the objective of restoring and revitalizing the securitization markets in March this year. I would urge each financial institution to strive for improving transparency and confidence in securitized products by providing adequate and timely information to investors and developing the necessary internal control systems.

III. Focus of Recent International Debate

Discussions are ongoing towards regulatory reform based on the lessons of the current financial crisis, particularly in the G20 and FSB. As you may be aware, there have been calls to improve both the quantity and quality of bank capital and to restrain excessive leverage. There are also ongoing discussions over other regulatory issues. The main issues are as follows.

Regarding over-the-counter (OTC) derivatives, the G-20 agreed that all standardized OTC derivative contracts should be traded on exchanges or electronic trading platforms, where appropriate, and cleared through central counterparties by end-2012 at the latest, in order to reduce systemic risks by making the derivatives market more robust and transparent. Based on this agreement, discussions on how to introduce regulation on OTC derivatives are under way in each country

Regarding accounting standards, the IASB is reviewing accounting standards related to financial instruments as requested by the G-20. On November 5th, the IASB published an exposure draft for introducing expected loss provisioning in the standard for the impairment of financial instruments. Also, on November 12, it announced the revised final standard on the classification and measurement of financial instruments in order to reduce the complexity of the standard. On November 5, the IASB and FASB announced concrete plans for the convergence of accounting standards. The Monitoring Board of the IASCF (International Accounting Standards Committee Foundation) issued a statement welcoming this initiative. I hear that discussion on the standard for classification and measurement of financial instruments is still ongoing in the European Union. We will continue to consider the introduction of IFRS in Japan. I sincerely hope that progress will be made in the efforts to establish a single set of globally accepted high quality accounting standards based on sufficient dialogue with a broad range of relevant parties.

Regarding hedge funds, in response to an agreement reached among the G-20 members on the need to introduce regulation, IOSCO (International Organization of Securities Commission) drew up a final report on hedge funds oversight in June this year, which lays down six principles, including the principle that hedge funds or hedge fund managers should be subject to mandatory registration. In response to this, each country is considering its hedge funds regulation in line with these principles.

Regarding credit rating agencies, IOSCO has commenced a dialogue with credit rating agencies and is examining whether there are material differences between national and regional regulatory frameworks and the IOSCO Principles and Code of Conduct Fundamentals for credit rating agencies. In Japan we are developing our regulatory system in line with the international discussion as I mentioned before.

In relation to strengthening adherence to international standards developed by the Basel Committee, IOSCO and IAIS, FSB member jurisdictions have committed to undergo periodic peer reviews focused on the implementation and effectiveness of international financial standards and of policy recommendations agreed by the FSB. In addition, the FSB is developing procedures to identify non-cooperative jurisdictions and encourage their adherence to international financial standards. Of particular concern to the FSB is the adherence of jurisdictions to international cooperation and information sharing standards in the financial regulatory and supervisory area. A process is being developed, to be finalized by February 2010, with the aim of improving their adherence to standards.

These initiatives will be necessary to prevent the recurrence of a financial crisis. However, these initiatives alone will not be sufficient. As a report by the SSG (Senior Supervisors Group), which is a group of financial supervisors from U.S., EU and Japan, has pointed out, there are at least ten critical areas in which improvement in terms of risk management is needed. There is no doubt that financial institutions should make more efforts to improve their risk management systems.

IV. Strengthening of Japan's Financial and Capital Markets

I understand that even after the current financial crisis, the importance of the financial intermediary function that supports various economic activities and ensures appropriate allocation of resources remains unchanged. It is still important for each financial institution to continue to exercise its financial intermediary function so as to provide appropriate investment opportunities for households which own financial assets and to provide firms with funds necessary for their growth.

The FSA has positioned the enhancement of financial intermediation, especially enhancing lending by deposit-taking financial institutions such as banks, as its top policy priority and the related legislation has been enacted in the current Diet session. We are preparing for its promulgation to be made as soon as possible.

On the other hand, we have also placed emphasis on the vitalization of financial markets. Since the end of 2008, the FSA has adopted and have been implementing the Better Market Initiative, which is intended to strengthen the competitiveness of Japan's financial and capital markets.

In June this year, as part of the Better Market Initiative, the FSA implemented revised firewall regulations and established a principles-based regulatory framework in which financial institutions which have both banking and securities businesses develop their own internal systems to control conflicts of interests.

It is important for each financial institution to establish its own code of conduct and pursue best practices so as to enhance the convenience of users of financial services, and prevent conflicts of interests at the same time in the new regulatory environment.

Moreover, we have been instructed by the Minister of State for Financial Services, the Senior Vice Minister and the Parliamentary Secretary to start a study on specific measures to

in preparation for the ordinary Diet session that starts early next year.

The Minister of State for Financial Services, the Senior Vice Minister and the Parliamentary Secretary plan to announce the issues for discussion and the outline of the measures to be taken by the end of the year. We will study these issues as soon as possible, while continuing discussions with a broad range of interested parties.

V. Enhancement of Compliance and Governance

It has been pointed out recently that financial groups that manage complex business operations on a large scale especially in the U.S. and Europe may be finding it difficult to exercise group-wide governance and identify their sources of risks while the potential risk that they pose to the financial system is growing. We consider that it is important for such groups to ensure robust and comprehensive risk management while exercising proper management and governance. Recently there is widespread discussion of the so-called “too big to fail’ problem. If each firm cannot take effective measures to manage risks, governments may be forced to strengthen intervention. I hope that each financial group undertakes proactive reform measures as a group.

We understand that foreign financial institutions are conducting their businesses in Japan using internal control systems built for their global operations. It is very regrettable that we have found some cases of illegal or inappropriate business practices at some foreign financial institutions. The FSA believes that such problems occur because of inadequate understanding of Japanese laws and regulations, and insufficient internal control systems. It is important that foreign financial institutions continue efforts to establish and strengthen the governance and internal control systems for their Japanese operations and make those systems more effective. It is also important that senior officials at their head offices and regional headquarters fully understand the actual situation of business operations and the regulatory environment in Japan. From this perspective, the FSA believes that an exchange of views with the senior officials of the head offices and regional headquarters will be useful. I would like to increase such opportunities.

The G-8 and the G-20 have attached importance to strengthening countermeasures against money laundering and terrorism financing so as to ensure fairness and transparency of the international financial system. They are also committed to work with the FATF (Financial Action Task Force) in implementing FATF recommendations, which serve as international standards for such measures. On the basis of these commitments, the FSA requires financial institutions to fulfill their obligations for customer identification and reporting of suspicious transactions. I urge each financial institution to strengthen these measures in light of the international discussions.

VI. Conclusion

Based on our experiences of the past and current financial crises, we have again realized that close and timely discussions between regulators and market participants are very important. We will continue further efforts to improve the quality of our financial regulatory policy and pursue better regulation while listening carefully to your voices.

To use the sumo analogy, if we are to build a good market, we need to have a good “dohyo’, which is the ring, good sumo wrestlers, and a good “gyoji’, the sumo referee as well as a good overall environment. You are the sumo wrestlers, and we, as “gyoji’, will make further efforts to improve the quality of the “gyoji’, improve the “dohyo’ facilities and work jointly for a better environment. I hope that we, together with you, can contribute to the development of the market while maintaining an appropriate working relationship with each other.