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Banking & Finance

Japan's finance czar gets a rare 3rd term -- and 3 challenges

FSA chief's tasks include perennial challenge of promoting shift 'from savings to investment'

Financial Services Agency Commissioner Nobuchika Mori.

TOKYO -- The commissioner of Japan's Financial Services Agency, recently appointed to a rare third year in office, faces the need to promote change among groups that have become set in their ways: local banks, savers and his own organization.

"This one year will define everything he has done up to now," said a ruling Liberal Democratic Party lawmaker knowledgeable about financial oversight. "In a sense, it will be the most difficult year."

Nobuchika Mori heads into this testing time with the same trio of lieutenants serving him. Not everyone at the FSA is pleased with the lack of change at the top, but it shows his commitment to pushing ahead with reforms.

"I want to focus on ensuring there is no backsliding even when senior officials change," Mori recently told confidantes.

Saving local banks from themselves

The biggest challenge facing Mori will be improving the way regional banks are run. When top FSA brass met with regional bank presidents Wednesday in Tokyo, Mori bluntly conveyed his frustrations. "I'm disconcerted by the high pace of earnings decline at regional banks," he said, urging them to rethink the future of their business models.

Last year, the FSA began evaluating how well regional lenders support local companies. The aim, in part, was to spur banks expand their own businesses into such areas as discovering promising yet overlooked enterprises and helping them grow.

The banks so far have remained cool to the initiative. "It's too risky to lend where there is no collateral or guarantees," said a source at a regional bank in the Osaka area.

But regional banks also face a shrinking population and market uncertainties, and at this rate appear doomed to gradual decline. It remains to be seen whether Mori can get them to come to grips with this crisis and embrace change.

Japan's Financial Services Agency in Tokyo

Mori's second task is shepherding a long-discussed shift in Japanese society "from savings to investment." To that end, he is championing a version of the NISA personal savings account with regular contributions, which will be rolled out next year.

These investment vehicles will house capital gains and dividends tax-free for 20 years. Yearly contributions are capped at 400,000 yen ($3,550) to encourage gradual, long-term investing.

But to qualify as NISA investments, mutual funds must meet a number of conditions, one of which is the lack of sales commissions. Only 1% of the roughly 5,000 publicly traded stock funds match those requirements.

"The terms are too severe. There's no profit to be had," said a securities industry source.

The rate at which Japan is graying may make it impossible to maintain public pension benefits at current levels. The FSA seeks to create an environment where individuals can get an early start on building wealth. The U.S. up until the early 2000s provides a model for how government policy can promote stock investment.

Change comes from within

Mori will also have to bring about change at the FSA itself. Central to this is rethinking the roles of the supervisory and inspection bureaus. The former maintains a regular dialogue with financial institutions, while the latter probes hard when any improprieties are suspected. This compartmentalized approach may have worked during Japan's banking crisis, when the focus was on cleaning up bad loans, but it is ill-suited to promoting finance's evolution into a growth industry.

The agency is moving to have the two bureaus work as one. The idea seems to be that by breaking down barriers to communication within the FSA itself, the regulator will become capable of a higher level of dialogue with financial institutions.

The FSA leadership remains unchanged in Mori's third term. Toshihide Endo, the director-general of the supervisory bureau, is serving a third year with Hidenori Mitsui, his counterpart at the inspection bureau. Yuichi Ikeda, head of the planning and coordination bureau, stays on for a fourth year.

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