Good afternoon, and thank you very much Professor Hal Scott, Ohta-san, Kaji-Sensei, and International House of Japan for all of your efforts to make this symposium possible again this year in Gotemba. It always gives me a pleasure to join this prestigious Harvard Law School Seminar, the sixth symposium on building the financial system of the 21st century. But, I was a little bit embarrassed by being told by every friend, "Why you are here, not campaigning? You must be so confident for your victory." It is not correct. Instead, I thought this symposium could be a useful for me to think about how to revitalize Japanese economy, which will surely be one of the major campaign platforms of mine. But don't worry! I will be leaving for my constituency this afternoon.

My task today is to talk about recent corporate governance standards and capital market issues.

Before I begin, I would like to first express a disclaimer to all the participants in this conference.

That is, the fact that it is the third time for me to give an opening speech on the capital market and accounting issues at this conference. In the other areas of today's discussions, for example, it seems apparent that Dr. Yoshitomi is "Mr. Academic Economist in Japan" and Chairman Takagi indeed deserves the honor of "Mr. Industrial Revitalization". But I am just a politician, and I do not take the position of "Mr. Capital Market" of this country. I know some bureaucrats call me as "Mr. Walking Japanese SEC". Indeed, I am going to repeat the necessity of Japanese version of SEC today. It has a lot to do with the quality of capitalism in Japan. However, generally speaking, I suppose it should be the worst choice for a country to let politicians handle capital markets issues, since they are not necessarily considered as "clean" and transparent. I really wish to find "Mr. or Ms. Capital Market" and ask him or her to speak next year on this issue.

From a politician's view, I think democratic political system and capital markets system have one thing in common. That is, a check and balance mechanism among three independent branches, which potentially have conflict of interests with each other. By the same token, in order for achieving sound capital markets, it needs independence within the components of capital market mechanism, such as regulators, accountants, and financial analysts, to avoid possible conflict of interests within their functions.

First, I would like to take an example of conflict of interests within the regulators. A public capital injection of two trillion yen into Resona Bank in June this year was the typical case. I was amazed by the fact that banking regulator, the FSA, did not conduct due diligence of assets of Resona Bank before taxpayer's money was used. It may be because they are fearful of revealing negative capital of Resona Bank. But I was amazed even more by the fact that, in this process, capital market regulators did remain silent, although they are exactly in the position to warn against the insufficient due diligence. It was probably because those two regulators are within the same body of the FSA. Currently capital market regulatory functions are scattered in a variety of bureaus in the FSA besides the Securities Exchange Surveillance Commission and even in Kanto Regional Bureau of Finance of Ministry of Finance, and there is no "single regulator's voice" which is solely responsible for protecting investors.

In the case of Resona Bank, past shareholders of Resona Bank were seemingly benefited from this operation of "too big to fail" without due diligence. I have to admit that the event of this capital injection gave an opportunity to buy Japanese stocks of distressed businesses including the banking sector, with a strong sign from the Japanese government that no major banks fail. However, because of that, it seems to me that corporate governance has not worked properly. Resona Bank has now started to use the taxpayer's money for not only non-performing loan disposition, which has to be done before the capital injection, but also for commercial loans with a negative margin to small to medium businesses, for the purpose of increasing their share in lending market, not return on assets. Because of these, it is commonly said that it took only three months from the capital injection in June for capital ratio of Resona Bank to decrease from 12% to only 7% level. My judgment is, taxpayer's money was misused, which means, taxpayers, as new investors through the public capital injection, might be disparaged by the banking regulator. Capital market regulator overlooked it.

I believe a lack of due diligence and corporate governance in this case stems from the absence of an independence of the capital market regulator. The same type of troubles in conjunction with bank's equity offering have been repeated, such as in the case of Ishikawa Bank's public offering with poor disclosure of capital shortage in 2000, and Mizuho Bank's large scale private offering early this year. To solve this kind of problems, together with many other issues, I firmly believe that we must establish an independent and strong "Japanese SEC" with quasi-judicial function, which would separate capital market regulator from banking regulator which has continuously damaged banks' investor's interests.

Let us next turn to accountants and auditors. A comprehensive reform bill of Certified Public Accountants Law was passed in the Diet on May 30, 2003, and as a Chairman of Treasury and Finance Division at the LDP Policy Research Council, I literally have fought to materialize necessary changes into the reform bill.

The revision was aimed at three points. First, strengthening an independence of accountants and auditors. Second, enhancing public oversight of auditors. Third, increasing the number and quality of professional accountants.

The article 1 of the revised law declares a mission of accountants for the first time in its fifty years' history. Amazingly enough, Japanese accountants did not have any clear missions to devote themselves to the interest of investors, and therefore they have tended to be affected by the interests of client corporations or that of regulators. The revised law clearly affirms an independence of accountants and auditors. In this context, the revised law also contains clauses prohibiting certain non-audit services and requirement of audit engaging partner's rotation. A cabinet order may be released to determine rules of the rotation period of seven years or less, and "time-out" period of two years. But I do believe for the purpose of strengthening an independence of audit practices, it is crucial that the auditor's rotation shall be shortened to five years after the first seven years, and the time-out period shall be prolonged to five years at least in the case of principal auditors.

Under the revised law it will establish CPA and Auditing Oversight Board, or CPAAOB, effective April 2004, which will function as public oversight of the audit practices by monitoring quality control review of audit firms by the Japanese Institute of CPAs, or JICPA. The new board will have power of inspections over audit firms. Also, criminal sanctions will be tightened up under the new law.

Moreover, as I said in the last year's meeting, we obviously have to continue to strengthen corporate governance by overhauling commercial corporation laws. For example, tougher responsibility and penalty of CEOs and CFOs is inevitable. In this regard, Japanese corporations already have an option to establish "an audit committee" instead of conventional auditors including outside audit. A legal protection of whistleblower deserves consideration. I am proposing that outside financial experts of some sort be appointed as independent auditors in order to strengthen an independence of auditing.

To name but a few, we are facing lots of issues to enhance corporate governance and capital market function. One last point I should add will be the movement toward global convergence in accounting and auditing standards. The U.S. FASB and IASB have already commenced deliberations on differences identified for resolution in their convergence project. European countries are moving towards IAS convergence of 2005. However, as a report entitled GAAP Convergence 2002 pointed out, Japan still remains as one of the three "axes of evil" countries against the global convergence movement of accounting standards, alongside with Saudi Arabia and Iceland. It would be important to tackle issues one by one and we welcome constructive proposals and discussions today and tomorrow.

Thank you.