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Major Decisions by the Policy Board in Fiscal 1996

August 1997
Bank of Japan

Major decisions made by the Policy Board during fiscal 1996, summarized from press releases and press conferences made by the Bank.

I. Capital Subscription to the Bank for International Settlements

The Policy Board decided on September 6, 1996 to subscribe to an additional 8,000 shares of the Bank for International Settlements (BIS), following a request by the BIS. The decision was based on the Policy Board's view that an increase in the shareholding of the Bank of Japan would further strengthen its relationship with the BIS and, as a result, contribute to enhancing international financial cooperation. The Bank made the subscription on November 1, 1996.

II. Decisions Related to the Financial System

A. Resolution of the Jusen Problem and Improvement of the Deposit Insurance System

1. Provision of funds to the Deposit Insurance Corporation under the Law Concerning Special Packages for Promoting Disposal of Claims and Debts of the Specified Jusen Companies

On July 19, 1996, the Policy Board approved provision of funds to the Deposit Insurance Corporation (DIC) pursuant to Article 25, Paragraph 1 of the Law Concerning Special Packages for Promoting Disposal of Claims and Debts of the Specified Jusen Companies (hereafter, Jusen Resolution Law).1 The Board's approval was given based on the judgment that all the conditions required for the provision of funds had been met.2

On July 22, 1996, following a decision by the Management Committee of the DIC and its request, the Bank announced that it would provide funds of 100 billion yen to the DIC on July 26, 1996.3

2. Amendment of the by-laws of the Bank of Japan to allow provision of funds and extension of loans to the DIC

The Policy Board decided on July 19, 1996 to amend the Bank of Japan's by-laws in accordance with the enactment of the Jusen Resolution Law, which allowed the Bank to provide funds to the DIC under Article 25, and in accordance with the amendment of the Deposit Insurance Law, which allowed the Bank to extend loans to the DIC under Article 20 of the Supplementary Provisions of the Law.

3. Loan extension to the Deposit Insurance Corporation

The Policy Board determined on September 6, 1996 the terms and conditions of loans to be made to the DIC under Article 20, Paragraph 2 of the Supplementary Provisions of the Deposit Insurance Law as follows.4

  1. (1) Amount: The minimum amount necessary for the operations or the repayment of loans by the DIC within the limit determined by a Cabinet Order pursuant to Article 20, Paragraph 1 of the Supplementary Provisions of the Deposit Insurance Law.
  2. (2) Form of lending: Loans on bills.
  3. (3) Period: Period until the following collection period of special insurance premiums of the DIC.5 However, if loans were extended during the period between the beginning of June or the beginning of December and the following collection period of special insurance premiums, loans would be extended for a period until the second collection period after the loan extension, except for when it was deemed possible for the DIC to repay all loans due within the following collection period with insurance premium surpluses.
  4. (4) Collateral: The extension of loans would not be conditioned on the pledge of collateral.
  5. (5) Interest rate: The official discount rate applied to loans secured by collateral other than Japanese government securities, specifically designated securities, or bills corresponding to commercial bills.6

In accordance with the above terms and conditions of loans, the Bank extended 19.7 billion yen to the DIC on September 25, 1996 for the DIC's capital subscription to the Resolution and Collection Bank (RCB).7

4. Provision of funds to the New Financial Stabilization Fund

The Policy Board decided on September 24, 1996 to become a founder of an incorporated association, the New Financial Stabilization Fund, and, as a special member, to provide 100 billion yen to the Fund with a view to maintaining financial system stability.8

The Board's decision was made in response to a request by the Government and the ruling parties in a statement on June 19, 1996, which requested private financial institutions to establish a fund to be concerned with the disposal of the claims and debts of the seven failed jusen, and the Bank of Japan to utilize its funds for the objective of stabilizing the financial system while taking into consideration the public nature of the Bank's funds.

The decision on the provision of funds was made based on the judgment that it would accord with the basic principles of the Bank of Japan that (1) funds of the Bank are public funds and, therefore, are not to be used for the purpose of reducing fiscal expenditures; and (2) the Bank's contribution should be made only if the contribution is indispensable to the stability of Japan's financial system, and if the Bank's financial soundness would not be impaired.

B. Resolution of Failed Financial Institutions

1. Loan extension to Tokyo Kyodou Bank as part of the resolution scheme for Cosmo credit cooperative

The Policy Board decided on April 26, 1996 on the terms and conditions of a loan extension to Tokyo Kyodou Bank aimed at generating earnings of approximately 20 billion yen in total in five years. The measure was part of the resolution scheme for Cosmo credit cooperative, and was based on the decisions made by the Policy Board on August 28, 1995 and on March 22, 1996, and an agreement between the Bank of Japan and Tokyo Kyodou Bank made on March 25, 1996.9 The lending terms were determined as follows.

  1. (1) Amount: 220 billion yen.
  2. (2) Date of disbursement: April 26, 1996.
  3. (3) Period: 5 years (bills to be renewed every 3 months).
  4. (4) Collateral: Japanese government securities and other securities deemed eligible by the Bank of Japan as collateral for loans on bills.
  5. (5) Interest rate: 0.5 percent per year.

2. Statement of opinion to the Minister of Finance on the resolution of Sanyo credit cooperative and Kenmin Daiwa credit cooperative

Pursuant to Article 16, Paragraph 4 of the Supplementary Provisions of the Deposit Insurance Law, the Minister of Finance requested that the Bank of Japan give its opinion on the necessity of transferring the businesses of Sanyo credit cooperative and Kenmin Daiwa credit cooperative--both of which failed in April 1996--to Danyo credit cooperative, as such business transfer would entail the DIC's financial assistance in excess of the payoff cost.10

The Policy Board judged that if the two credit cooperatives were liquidated, rather than having their businesses transferred to Danyo credit cooperative, and that if consequently deposits and other liabilities were not fully repaid, the confidence of the depositors and creditors of other financial institutions might also be undermined. This judgment was made in the light of the fact that the financial system was still burdened with a significant amount of nonperforming assets and that the solution of the problem would require an extended period of time, especially for smaller financial institutions. With this in mind, the Board decided as follows.

"Having regard to the condition of the nation's financial system, the Bank of Japan deems it necessary that the businesses of Sanyo credit cooperative and Kenmin Daiwa credit cooperative be transferred to Danyo credit cooperative with financial assistance from the DIC, in order to maintain the stability of the financial system."

The Bank of Japan responded to the Minister of Finance on October 22, 1996, in accordance with the Policy Board's decision.11

3. Measures related to the resolution scheme for Hanwa Bank

a. Special measures for loans on bills to Hanwa Bank

The Policy Board decided on November 21, 1996 to implement special measures regarding loans on bills to Hanwa Bank with a view to ensuring the stability of the financial system as a whole. The following special measures were to be applied until a resolution scheme for Hanwa Bank was put into effect.

  1. (1) Collateral stipulated in Article 20, Section 2 of the Bank of Japan Law but had not been deemed eligible by the Bank could be pledged as security for loans on bills, under the following conditions.
    1. (a) The appraised value of each collateral would be determined at not more than 80 percent of the market value (or the face value if there was no market value), taking into consideration its marketability and credit standing.
    2. (b) The official discount rate applied to loans secured by collateral other than Japanese government securities, specifically designated securities, or bills similar in nature to commercial bills would be applied.12
  2. (2) Should there not be sufficient collateral available even after application of (1), the Bank would, in accordance with the conditions mentioned below, extend loans on bills not secured by collateral defined in (1).13
    1. (a) Amount: The minimum amount necessary for Hanwa Bank to continue payment of funds allowed under the business suspension order by the Minister of Finance, including repayment of deposits, determined in light of the liquidity position of Hanwa Bank.
    2. (b) Period: The period deemed appropriate by the Bank.
    3. (c) Interest rate: The official discount rate applied to loans secured by collateral other than Japanese government securities, specifically designated securities, or bills similar in nature to commercial bills.14

Hanwa Bank's asset quality rapidly deteriorated following the bursting of the economic "bubble" and the subsequent fall in land prices. It became apparent, on such occasions as the inspection by the Ministry of Finance, that the amount of assets which should be written off exceeded the bank's capital, and that the bank was unlikely to recover financial soundness by itself. Thus, the Ministry of Finance judged that Hanwa Bank was not in a position to continue its usual operations, and on November 21, 1996, pursuant to Article 26 of the Banking Law, ordered the bank to suspend business except for the repayment of deposits.

Believing that failed financial institutions should be resolved without delay, the Bank of Japan judged that it was appropriate to promptly arrange, in consultation with the Ministry of Finance, a comprehensive resolution scheme for Hanwa Bank with a view to protecting depositors and maintaining the orderly functioning of the financial system. Specifically, it was considered appropriate to (1) establish a new bank to assume all business of Hanwa Bank and thereby dissolve and liquidate the bank; and (2) utilize the Deposit Insurance System to protect depositors and to facilitate the process of resolution and liquidation.

In order for these measures to be implemented, it was necessary that Hanwa Bank be able to continue smooth payment of funds allowed under the business suspension order, including repayment of deposits. However, Hanwa Bank was no longer able to raise funds through usual channels, such as from other financial institutions, and therefore, it was indispensable that the Bank of Japan extend loans to Hanwa Bank under Article 25 of the Bank of Japan Law in order to allow the bank to avoid a shortage of funds needed to repay deposits. On examining the assets of Hanwa Bank, it was judged unlikely that the loans could be secured by the collateral that the Bank of Japan usually required for loans on bills.

The Bank made a public statement concerning this issue on November 21, 1996, announcing the outline of the problem together with the Bank's view (for a complete version of the statement, see "Public Statements by the Bank of Japan" in the Bank of Japan Quarterly Bulletin, February 1997).

b. Utilization of the New Financial Stabilization Fund for the establishment of a new bank to take over the business of Hanwa Bank

Following deliberations by the parties concerned on the resolution scheme for Hanwa Bank, the Bank of Japan was requested by the New Financial Stabilization Fund on December 12, 1996 to give its opinion on the possibility of a capital contribution amounting to 10 billion yen from the Fund's Primary Account to establish a bank that would take over the business of Hanwa Bank (Chart 1 on next page).15 On December 13, 1996, the Policy Board gave its approval to the capital subscription for the following reasons.

  1. (1) In view of the role and operations of the new bank under the resolution scheme, capital contributions from private financial institutions could by no means be expected.
  2. (2) In light of the objective of the New Financial Stabilization Fund, which was to support the capital enhancement of financial institutions and to thereby enhance the stability of and global confidence in the Japanese financial system, it was appropriate that the Fund be utilized.
  3. (3) The four principles for the provision of the central bank's funds were met: namely, (a) there is a possibility that systemic risk would materialize; (b) provision of the central bank's funds is indispensable in that there are no other sources of funds; (c) the responsibility of all parties concerned will be clarified to prevent moral hazard; and (d) the financial soundness of the central bank will not be threatened.

An agreement was thus reached by the parties concerned on the fundamental scheme for the resolution of Hanwa Bank by December 13, 1996, and on that day, the Bank announced the outline of the resolution scheme.

(Chart 1)
Outline of the Resolution Scheme for Hanwa Bank1

  1. (1) A new bank to take over the entire business of Hanwa Bank, this bank to be established by the New Financial Stabilization Fund with capital subscription from the Primary Account amounting to 10 billion yen.
  2. (2) The DIC to provide financial assistance to the new bank, including purchase of loans and all other assets of Hanwa Bank, under Article 59, Paragraph 1 and 2 of the Deposit Insurance Law.
  3. (3) The DIC to entrust management and collection of the purchased assets to the RCB. A division to be created in the RCB to conduct the entrusted operations.
  4. (4) The new bank to conduct operations, in particular repayment of deposits, in order to facilitate the resolution and liquidation of Hanwa Bank, with minimum staff and premises.
  • Chart1

Notes

  1. The scheme is implemented on condition that it be officially endorsed by all parties concerned.
  2. An amount of 100 billion yen was provided to the Primary Account by the Bank of Japan based on a decision made by the Policy Board on September 24, 1996.

4. Statement of opinion to the Minister of Finance on the resolution of Osaka credit cooperative16

Pursuant to Article 16, Paragraph 4 of the Supplementary Provisions of the Deposit Insurance Law, the Minister of Finance requested that the Bank of Japan give its opinion on the necessity of transferring the business of Osaka credit cooperative to Tokai Bank, as such business transfer would entail the DIC's financial assistance in excess of the payoff cost.17

The Policy Board judged that if Osaka credit cooperative were liquidated, rather than having its business transferred to Tokai Bank, and that if consequently deposits and other liabilities were not fully repaid, the confidence of the depositors and creditors of other financial institutions might also be undermined. This judgment was made in the light of the nonperforming assets that Japanese financial institutions were burdened with, as well as the recent series of financial institution failures. Accordingly, on December 20, 1996, the Board decided as follows.

"Having regard to the condition of the nation's financial system, the Bank of Japan deems it necessary that the business of Osaka credit cooperative be transferred to Tokai Bank with financial assistance from the DIC in order to maintain the stability of the financial system."

The Bank of Japan responded to the Minister of Finance on December 20, 1996, in accordance with the Policy Board's decision.18

5. Statement of opinion to the Minister of Finance on the resolution of Kizu credit cooperative19

Pursuant to Article 16, Paragraph 4 of the Supplementary Provisions of the Deposit Insurance Law, the Minister of Finance requested that the Bank of Japan give its opinion on the necessity of transferring the business of Kizu credit cooperative to the RCB, as such business transfer would entail the DIC's financial assistance in excess of the payoff cost.20

The Policy Board judged that if Kizu credit cooperative were liquidated, rather than having its business transferred to the RCB, and that if consequently deposits and other liabilities were not fully repaid, the confidence of the depositors and creditors of other financial institutions might also be undermined. This judgment was made in the light of the nonperforming assets that the Japanese financial institutions were burdened with, as well as recent developments in the financial markets. Accordingly, on February 7, 1997, the Board decided as follows.

"Having regard to the condition of the nation's financial system, the Bank of Japan deems it necessary that the business of Kizu credit cooperative be transferred to the RCB with financial assistance from the DIC in order to maintain the stability of the financial system."

The Bank of Japan responded to the Minister of Finance on February 7, 1997, in accordance with the Policy Board's decision.21

C. Improvement of the Payment and Settlement Systems

1. Abolition of designated-time settlement to make real-time gross settlement the only settlement mode for funds transfers via Bank of Japan accounts

On December 6, 1996, the current state of the study on the restructuring of the funds transfer system of the Bank of Japan Financial Network System (BOJ-NET) was reported to the Policy Board as follows.

Against the background of the significant increase in the volume of interbank payments in recent years and the growing number of cases of financial institution failure that could have led to materialization of settlement risk, it was essential to reduce systemic risk in the settlement via accounts held by financial institutions at the Bank of Japan (BOJ accounts), which provides the foundation for interbank funds transfers, by abolishing designated-time settlement and making real-time gross settlement (RTGS) the only mode of settlement.

The issue of concern in making RTGS the only settlement mode was that financial institutions would have to obtain a greater amount of intraday liquidity. Although it was expected that efforts would be made to avoid shortages of liquidity by changing the settlement practices and fund-raising structures, there would still be a high possibility that financial institutions would fall short of intraday liquidity. Therefore, to ensure smooth operation of RTGS across the BOJ accounts, it seemed appropriate that the Bank of Japan supply necessary funds to cover the shortages of intraday liquidity that arise despite the efforts of the participating private financial institutions. Funds were to be supplied on the following terms.

  1. (1) Form: Collateralized intraday overdrafts.
  2. (2) Collateral: In principle, collateral which the Bank currently defines eligible for credit extension.
  3. (3) Limit: A maximum limit would be determined for each financial institution.
  4. (4) Charge: Free of charge at the outset of the restructured system.
  5. (5) In the event of failure to repay: A penalty rate would be applied should the provided intraday liquidity not be repaid by the end of the day.
  6. (6) Access to liquidity: Intraday liquidity would be provided to all BOJ account holders that apply for the liquidity facility.

Based on this report, the Policy Board approved the following procedures for making RTGS the only settlement mode via BOJ accounts.

  1. (1) In making a final decision on the principles and schemes of RTGS, the Bank would distribute a consultation paper to all BOJ account holders and to operators of major private clearing systems, requesting comments and suggestions.22 Such arrangements were to be made public through the press.
  2. (2) The Bank would make a final decision to abolish designated-time settlement and make RTGS the only settlement mode based on the comments and suggestions received. At the same time, the Bank would summarize all the comments and suggestions received along with the Bank's views. This would be fed back to those institutions from which the Bank requested comments and suggestions, and be made public through the press.
  3. (3) The Bank would aim at making RTGS the only settlement mode by the end of the year 2000, in view of the schedule that the Japanese "Big Bang" deregulation package was intended to be completed by the year 2001.
  1. Article 25, Paragraph 1 of the Jusen Resolution Law, enforced on June 21, 1996, stipulates that the Bank of Japan can provide a maximum of 100 billion yen to the DIC for the DIC's capital subscription to the Housing Loan Administration Corporation (HLAC), an institution created for the purpose of taking over the assets of jusen (housing loan companies) and of collecting the assumed jusen-related claims. Paragraph 2 of the Article states that the funds be returned to the Bank on the dissolution of the HLAC.
  2. The Policy Board had already decided on February 6, 1996, to provide a maximum of 100 billion yen to the DIC on condition that (1) the parties concerned reach a final agreement on the scheme for disposing of jusen's claims and liabilities; and that (2) in line with Government policy, jusen-related bills and the fiscal 1996 budget including jusen-related measures be passed by the Diet.
    After this decision was made, the fiscal 1996 budget including government expenditures for the Emergency Financial Stabilization Fund was adopted on May 10, 1996, and the Jusen Resolution Law came into effect on June 21, 1996. In mid-July, the DIC planned to hold a Management Committee meeting on July 22, 1996 to decide on the creation of the Financial Stabilization Contribution Fund in the Jusen Account and on capital subscription of 200 billion yen to the HLAC, both to be carried out under the provisions of the Jusen Resolution Law. With this, the Board judged that a final agreement on the jusen resolution scheme had been reached by the parties concerned.
  3. On July 26, 1996, the DIC made a capital subscription of 200 billion yen to the HLAC, of which 100 billion yen came from the Financial Stabilization Contribution Fund and 100 billion yen came from funds provided by the Bank of Japan to the DIC.
  4. Article 20, Paragraph 1 of the Supplementary Provisions of the Deposit Insurance Law stipulates that the DIC can borrow funds (and renew borrowings) from the Bank of Japan and other financial institutions--those legally obligated to participate in the Deposit Insurance System, the Zenshinren Bank, the Shinkumi Federation Bank (national federation of credit cooperatives), and the Rokinren Bank--up to a limit determined by a Cabinet Order (1 trillion yen), when it is deemed necessary for undertaking special provisional operations such as special financial assistance (extension of financial assistance in excess of payoff cost), or special deposit purchase (deposit purchase in excess of the estimated payment to depositors under bankruptcy procedures), or operations related to the Resolution and Collection Bank (RCB). Paragraph 2 of the Article allows the Bank of Japan to extend such loans to the DIC regardless of Article 27 of the Bank of Japan Law, which prohibits the Bank from conducting any business other than those stipulated by the Law.
  5. Insurance premiums of the DIC are in principle to be paid within the first three months of each business year. However, if 50 percent of the annual premiums are paid within the first three months of the business year, the remaining 50 percent can be paid within the first three months of the second half of the business year.
  6. The rate was 0.75 percent as of September 1996.
  7. The former Tokyo Kyodou Bank was restructured into the RCB on September 2, 1996 in order to facilitate the disposal of failed credit cooperatives.
    The Management Committee of the DIC had decided on August 29, 1996 to subscribe capital of 120 billion yen to the RCB. However, only 100.3 billion yen was available for capital subscription, leaving 19.7 billion yen to be covered by borrowing.
  8. The New Financial Stabilization Fund was established on September 25, 1996, with the aim of enhancing the stability of Japan's financial system and improving confidence in the system in Japan and abroad. The details of the Fund are as follows.
  1. (1) The Fund is established with contributions from official members and from the Bank of Japan as a special member. Official members include private financial institutions such as banks, life insurance companies, securities companies, as well as agricultural and forestry financial institutions. The funds provided by the Bank of Japan and by the private financial institutions will be managed separately, the former in the Primary Account and the latter in the Secondary Account. Funds would not be transferred between the two accounts.
  2. (2) The Primary Account is to be utilized to consolidate the capital base of financial institutions. The Secondary Account is to be utilized for fund management operations aimed at ensuring the stability of the financial system.
  3. (3) The Primary Account will be utilized on prior consultation and agreement with the Bank of Japan.
  4. (4) Operating profits of the Primary Account will be partially allocated to the expenses of the Fund, and the remainder will be paid back to the Bank of Japan on the dissolution of the Fund. Operating profits of the Secondary Account will be granted to the HLAC on the dissolution of the Fund, and will ultimately be used to repay the Japanese government, through the DIC, its expenditures on the Emergency Financial Stabilization Fund.
  5. (5) On the dissolution of the Fund, the amount outstanding in the Primary and Secondary accounts will be paid back to the institutions which provided the funds, according to the amount of their provision.
  1. 9For details of the decision made on August 28, 1995, see "Major Decisions by the Policy Board in Fiscal 1995," in the Annual Review, Bank of Japan, 1996.
  2. 10Article 16 of the Supplementary Provisions of the Deposit Insurance Law stipulates that (1) if the DIC judges that the cost of financial assistance will exceed the cost of insurance payments--that is, the payoff cost--for the failed financial institution, it report its judgment to the Minister of Finance (Paragraph 1); (2) if the Minister of Finance judges the merger, the business transfer, or the acquisition of stock for which the financial assistance has been requested to be indispensable to avoid serious disruption of the financial system, the Minister acknowledge the necessity of such merger, business transfer, or acquisition of stock to maintain financial system stability, and notify the DIC of the Minister's acknowledgement (Paragraph 2); and (3) in making the acknowledgement, the Minister of Finance may, when the Minister deems necessary, request the Bank of Japan to give its opinion (Paragraph 4).
  3. 11On October 28, 1996, the Management Committee of the DIC decided to provide financial assistance to Danyo credit cooperative, and on November 5, 1996, the businesses of the two credit cooperatives were transferred to Danyo credit cooperative, the assets of the two cooperatives being purchased by the RCB.
  4. 12The rate was 0.75 percent as of November 1996.
  5. 13On November 21, 1996, pursuant to Article 25 of the Bank of Japan Law, the Bank obtained the approval of the Minister of Finance to apply measure (2). Besides the exceptional measures specified in (1) and (2), the Bank was authorized to extend loans on bills secured by loans on deed, based on the approval given by the Minister of Finance on December 13, 1990.
  6. 14See Footnote 12.
  7. 15For details of the New Financial Stabilization Fund, see Footnote 8.
  8. 16The failure of Osaka credit cooperative surfaced in December 1995.
  9. 17For details of the provisions of Article 16 of the Supplementary Provisions of the Deposit Insurance Law, see Footnote 10.
  10. 18On January 9, 1997, the Management Committee of the DIC decided to provide financial assistance to Tokai Bank, and on January 20, 1997, the business of Osaka credit cooperative was transferred to Tokai Bank, the nonperforming assets of the cooperative being purchased by the RCB.
  11. 19Kizu credit cooperative was ordered by the Osaka Prefectural Government, its supervisory authority, to suspend business on August 30, 1995. For details, see "Major Decisions by the Policy Board in Fiscal 1995," Footnote 4, in the Annual Review, Bank of Japan, 1996.
  12. 20See Footnote 17.
  13. 21On February 14, 1997, the Management Committee of the DIC decided to provide financial assistance to the RCB, and on February 24, 1997, the business of Kizu credit cooperative was transferred to the DIC.
  14. 22The consultation paper was distributed on December 6, 1996, on which comments and suggestions were requested by February 5, 1997.

III. Decisions Related to the Revision of the Bank of Japan Law

The Policy Board decided and announced on November 12, 1996 that the Bank of Japan would review the procedures related to its policy making and business operations. The review was based on a report prepared by the Advisory Group on the Central Bank (AGCB), an advisory panel to the Prime Minister, on reform of the central bank system aimed at improving transparency and independence. The Bank's view of the report was published together with this announcement of the review.23

  1. (1) The Policy Board would meet regularly to conduct an overall review of monetary policy, including review of the official discount rate and market operations. While the aim of holding regular meetings was to prevent market fluctuations due to speculation on the timing of policy actions, the timeliness of decision making was not to be sacrificed for this aim. Details were to be decided with due consideration given to the business rules and practices in the Japanese financial markets and to the experience of other countries.
  2. (2) The summaries of discussions at the said regular meetings would be published to enhance transparency of the decision-making process. Details including the timing of publication and contents were to be studied further.
  3. (3) The AGCB report recommended establishing a statutory basis for the Bank of Japan's on-site examinations of financial institutions to clarify the scope of the Bank's business. The Bank's thinking was that such statutory basis would not alter the fundamental characteristic of on-site examinations being conducted with the voluntary cooperation of financial institutions. Studies would be conducted by the Bank to ensure that the examinations kept abreast of developments in the financial markets, while being careful to avoid unnecessary duplication of inspections carried out by government agencies.
  4. (4) Based on the understanding that one of the inherent roles of a central bank is to ensure the efficient and smooth operation of the payment and settlement systems, as confirmed in the AGCB report, the Bank would consult with market participants on measures, including enhanced use of RTGS, to reduce risks in the Japanese payment systems.
  5. (5) The Bank considered it essential, as pointed out in the AGCB report, that the Bank's autonomy with respect to management be secured in order to make swift operational and organizational management decisions in response to changing circumstances, such as marketization and globalization. At the same time, the Bank duly recognized the need to continue its efforts to rationalize and to improve the efficiency of its operational and organizational management. The Bank also intended to review the business ethics expected of management and staff.
  6. (6) While the Bank has explained the background of its policies through various methods, in an era of marketization and advanced information technology, it intended to make extra efforts. The Bank would thus continue to study methods of explaining the policy background, including the publication of discussion summaries, and would at the same time, effectively utilize state-of-the-art media such as the Internet for the obtaining and disseminating of information.
  1. 23The outline of the Bank's view was that the Bank highly evaluated the report, submitted to the Prime Minister earlier that day, as it presented basic principles for establishing a central bank capable of becoming the nucleus of the financial system in the 21st century, and also clarified the direction of reform of the Bank of Japan Law and of the related institutional framework. The Bank hoped that the restructuring of the institutional framework of the central bank system, including revision of the Bank of Japan Law, would be promptly implemented in accordance with the principles presented in the AGCB report. In a further study that was to be made on some specific issues, the Bank expected that the two principles of independence and transparency presented in the AGCB report would be fully respected.

IV. Other Policies

A. Extension of Special Loan Measures to Assist Financial Institutions in the Hanshin and Awaji Areas

On July 5, 1996, it was reported to the Policy Board that the Bank of Japan would extend the special loan measures which were initially effected in July 1995 to support the reconstruction efforts in the areas devastated by the Hanshin and Awaji earthquake of January 17, 1995. The extension of the measures was decided in view of the operations of the financial institutions in the damaged areas. The Bank announced the following measures to facilitate financing and to thereby support the steady progress of reconstruction activity.

  1. (1) Eligible financial institutions: Financial institutions with offices in the damaged areas which request the use of the funds.24
  2. (2) Amount: Funds totaling 500 billion yen or less. Allocation of funds among institutions would be determined based on the application from each institution, giving due consideration to the number of offices and the overall lending share of the institution in the damaged areas.
  3. (3) Period: One year from July 12, 1996.
  4. (4) Interest rate: The official discount rate.25

The Bank announced the extension of the measures on July 5, 1996 (for the public statement, see "Public Statements by the Bank of Japan" in the Bank of Japan Quarterly Bulletin, November 1996).

  1. 24One city (Toyonaka City) in Osaka Prefecture, and eight cities (Kobe, Amagasaki, Akashi, Nishinomiya, Ashiya, Itami, Takarazuka, and Kawanishi) and five towns (in the Awaji area) in Hyogo Prefecture were specified as damaged areas.
  2. 25The rate was 0.5 percent as of July 1996.