Statement by the Governor
Bank of Japan
1. Yamaichi Securities Co. has been facing declining profits after the burst of the so-called bubble and the loss of market confidence in the firm has become more prominent in domestic and overseas markets since last spring as it was downgraded by rating agencies and scandals involving corporate racketeers surfaced. Furthermore, Yamaichi Securities has recently informed the authorities that there is a strong suspicion that the firm has a large amount of off-the-book liabilities.
Under such circumstances, we have been informed today by Yamaichi Securities that it has decided at its extraordinary board meeting to suspend its business operations as a step toward closing down its business and dissolving the firm.
It is truly regrettable for the Bank of Japan that one of our country's leading securities firms has come to face such a situation.
2. This is an extremely exceptional case in that the direct cause of the management troubles at Yamaichi Securities is the revelation of the large amount of off-the-book liabilities. However, when we consider the fact that the firm conducts a wide range of business in domestic and overseas markets and that it has a large number of customers, we believe it extremely important for the stability of the Japanese and overseas financial markets to bring about a smooth closure of the firm.
3. Against such a background, the Bank of Japan, as the nation's central bank, in order to fulfill its responsibility of maintaining stability of the financial system, has decided to take the extraordinary measure of providing necessary liquidity pursuant to Article 25 of the Bank of Japan Law, in cooperation with the main banks of the firm so that it may return customer assets, orderly settle outstanding transactions and withdraw from overseas activities.
The firm is not insolvent. Furthermore, the government will take appropriate steps to resolve this situation and to establish a comprehensive resolution framework by legislating for the Securities Deposit Compensation Fund, enlarging the Fund's financial base and by strengthening its functions. Therefore, we believe there will not be a case in which concerns regarding the full recovery of our funds may emerge.
4. By these measures, all transactions between the firm, including its overseas establishments, and domestic and overseas investors as well as general creditors will be performed smoothly. Thus, we strongly request that all investors, counterparties and participants in the financial and capital markets to act calmly.
5. The environment surrounding Japan's financial system has become increasingly harsh due to the recent instability in the stock markets and Asian currency markets and also due to the recent successive failures of financial institutions. In addition, the economic recovery has slowed down and business sentiment has also become cautious. Under these conditions, the Bank of Japan is of the view that we face a very important situation which requires the utmost efforts of the central bank to assure that the stability of the financial system would not be undermined.
6. From this viewpoint, in addition to the above stated extraordinary measure, the Bank of Japan affirms its readiness to take necessary supportive steps including the provision of sufficient liquidity into the markets, to cope with the risk of unexpected decline in market liquidity.
The Bank of Japan strongly wishes that these measures together with those taken by the government will contribute to maintaining and strengthening confidence of market participants both at home and abroad in the country's financial system.