Press Conference by ASO Taro, Deputy Prime Minister, Minister of Finance, and Minister of State for Financial Services

(Excerpt)

(Tuesday, October 27, 2020, 11:17 am to 11:34 am)

[Questions and answers:]

Q.

I would like to ask a question about the global financial city concept. The prime minister in his policy speech yesterday again stated that he was aiming to create another international financial center for the world. I believe you said at a press conference after the current administration was inaugurated that the prime minister had issued instructions on improving the environment for accepting foreign personnel, and I would appreciate it if you would give us any thoughts you have at the moment on deregulation, tax reform and other efforts that will be needed in future, the direction of discussions, and so forth.

A.

Japan’s GDP in 2019 was 553 trillion yen. By contrast, Gross National Income, or GNI, includes money flowing in from overseas for the year, including interest on money that Japan has lent overseas and dividends on shares purchased. Adding in the profits earned overseas and remitted to Japan from companies overseas gives us a total of 573 trillion yen. This is bigger than GDP. This is why, although there are still some newspapers that for some reason write about Japan as a trading nation, if you do not keep in mind that GNI is bigger than GDP and talk about finance in that context, you are missing the bigger picture. Japan possesses enormous capital, with individuals holding about 1,880 trillion yen in financial assets, a little over 1,000 trillion yen of which is in cash or deposits. This is Japan’s financial situation as a country. The fact is, though, that these enormous personal financial assets are now sitting idle as cash or deposits not earning interest. This money should be moved somewhere but it just sits there, not circulating. Major financial initiatives have been taken in New York, London and elsewhere. The UK, which made its money through mercantilism, created the City with that money, and the US, which accounted for 50% of the postwar world’s GDP, built Wall Street with that money, so others have done something similar. A vast world has now been created where money generates money, and this money itself has grown tremendously. Japan currently has a debt of 1,000 trillion yen, which is often seen as troubling, and, in 1994, when deficit-financing bonds were again issued, Japan’s ordinary government bond balance at the time was around 210 trillion yen. I recall that the interest rate was four-point-something percent, and you would expect the interest rate to rise as the debt swelled beyond 1,000 trillion yen, but the interest rate now is zero-point-zero-something percent. This is the interest rate on 10-year government bonds. If you take a university economics class, you learn it is conventional wisdom that if debt increases and you have no assets, then interest rates rise, but this idea appears completely meaningless now because interest rates have fallen despite debt increasing. How do you explain this? This is the situation we now face. We have moved into an era in which money creates money. In the world of international finance as well, huge Asian funds have based themselves in Hong Kong but, due to turmoil related to China, Hong Kong continues to see its international finance functions eroded. If it is risky to engage in finance in Hong Kong, where will this finance go? Sorry, Shanghai. With the need to create a place that is open and unquestionably more transparent, Japan has emerged as the clear choice. In terms of time zones, New York, London and Tokyo are eight hours apart, establishing a 24-hour circuit, so the time zone issue is one of the reasons that Japan has been garnering attention. If Japan takes on this role, foreign money would surge into Japan in various forms, having an extremely large impact on net financial revenue. The question is what kind of problems would arise when trying to handle all of these huge sums of money in Japan; although I do not know how much money that would be, it would certainly exceed the amount being traded around in the Tokyo Stock Exchange (TSE). This would bring about a variety of changes, starting from fundamental aspects such as requiring that all documentation be translated into English and even eliminating the need to use personal seals on documents. In addition, people will be moving in. While Japan does in fact have people with the talent, skills and experience to help make these changes, a shortfall in absolute numbers makes it imperative that people be brought in from overseas and, if we do this, their income tax rates will differ from those paid by people working in Hong Kong. What do we do about the income taxes for these people? If people suspect that their tax rates would suddenly double or triple by coming to Japan, they just will not come. Traders coming with their wives and children would likely invigorate Japan’s economy and, given that these traders would be bringing their children, their wives and even their maids, what are we to do about their tax rates, about schools and study, and about stipulated areas of residence? We must think of a whole range of things completely differently than we have before, even questions such as should we create something like a special zone for this. While these things will certainly be helpful in invigorating the Japanese market, we have to take into consideration not only the need to carry out tax measures and financial administration in English, but also such matters as visa status and living environments. Anyone who has experience abroad will understand how those things come into play. Many issues will no doubt spring up as we do this, and we were instructed that these matters must be addressed promptly in light of Hong Kong’s present situation. The Financial Services Agency (FSA) has steadily been taking steps since the Hong Kong situation began and, since laws may need to be changed and other issues will likely emerge, we already have study groups and panels working on approaches to take.

Q.

I believe the FSA began on-site inspections last weekend at the TSE regarding its system breakdown. Would you please share with us your thoughts regarding the specific schedule for these inspections and tell us when a decision will be made on any resulting administrative disposition?

A.

On-site inspections at the TSE began on October 23 based on the content of the report submitted by the TSE on the system breakdown. We want to determine why it happened, because this would have been no big deal if the backup system had worked normally, so we need to find out why things turned out as they did to make an accurate assessment – was this very simply a mistake or did some hardware break – but we do not yet have the answer to this. Since we still do not have a firm grasp of the details, I am really not able to give you an answer at the moment. In any case, once we have the answer, our concern is what to do to prevent recurrences. In putting in place the countermeasures needed to prevent recurrences, orders will be placed in a very granular fashion with a variety of major companies, and we will likely need to take a proper look from that point at systems for checking up on this.