Tentative Translation

Comprehensive Plan for Financial Revitalization
(1st Version)

June 23, 1998
Government-Ruling Party Conference to Promote the Comprehensive Plan for Financial Revitalization


In order to promptly restore and revitalize the economy in our country, we need to shed light upon the actual circumstances of the problem of bad loans held by financial institutions and others, which is one of the root causes of the economic standstill. Also, we should promptly carry out substantial settlement of bad loans such as removing them from balance sheets through comprehensive measures leading to the effective utilization of collateralized real estate, thus restoring the fundamental function of financing which is to facilitate smooth supply of funds.
The "Government-Ruling Party Conference to Promote the Comprehensive Plan For Financial Revitalization (abbreviated as "the Conference" hereafter)" was established on May 22, as a body for the government and the ruling party to have a comprehensive discussion. The purpose of the discussion is to further grapple with effective measures to revive financial system, and to promote concrete implementation of the "from the entrance to the exit" measures included in the Comprehensive Economic Package (announced on April 24, 1998) a) settlement of the relationship between claims and liabilities, b) enhancing the liquidity of real estate and bank loans, and c) efficient utilization of land.
Considering the current situation of our economy, we have no time to spare before addressing the bad loan problems of financial institutions, and we need to promptly come up with the specifics of the necessary measures. The government and the ruling party will carry out the tasks on a rolling basis starting from those which are most feasible.
The Conference has decided to put together the results of the discussions made so far among the members from the government and ruling party as this "Comprehensive Plan for Financial Revitalization--1st Version"


1. Enhancing the Liquidity of Real Estate and Bank Loan Assets and Promoting Efficient Utilization of Land

(1) Prompt and Smooth Settlement of the Relationship between Claims and Liabilities

a. Establishment of the Temporary Council for Coordinating Real Estate-Related Rights (tentative name)
We will establish a Temporary Council for Coordinating Real Estate-Related Rights (tentative name) to settle the relationship between claims and liabilities, related to bad loans with collateralized real estate, through various processes based on agreements between the parties concerned such as" good offices", arbitration, and mediation. The necessary legislation will be introduced to the Diet in the next session.
The outline of the bill will be as follows:

b. Clarification of Tax Treatment Concerning Renouncement of Claims
The Basic Directive Concerning Corporate Income Tax was revised (announced on June 8, 1998) to further clarify the general treatment that allows the losses from renouncement of claims following rational reconstruction plans to be included in business expenses for tax purpose. The points clarified are as follows:

c. Establishment of an Appropriate Evaluation Process (Due Diligence)
In introducing due diligence, it is necessary to establish an appropriate way to make use of appropriate processes to justly evaluate the value of claims, after judging the economic value of collateralized real estate and other claims related to them and considering the asset portfolio of the debtors--in particular using the income capitalization approach based on future income expectations. In this context, we will first make clear the key points that real estate appraisers should take note of when they appraise real estate collateralized against bad loans. To be specific, the Conference, in cooperation with the Real Estate Appraisers' Association of Japan, is considering issues such as those listed below, in preparing for the sale of collateralized real estate against bad loans, and will finish assembling and clarifying the key points by this summer:

d. Introducing Prompt and Smooth Auction Processes
To introduce prompt and smooth auction processes, we will prepare the legal framework by revising the Law of Civil Execution Act, and for this purpose, will submit a bill prepared by House members to the Diet in its next session. Also, we will implement measures to improve the actual application of these processes. The Specific contents are as follows:

e. Establishing Servicer Companies
We will submit a member-written bill to the next session of the Diet to establish servicer companies, which will be able to engage in the management and collection of credits as an exception of the Practicing Attorney Law. The outline of the Servicer Bill (provisional name) is as follows:

f. Expansion of the Functions of the Cooperative Credit Purchasing Company (CCPC)
The CCPC will take the following measures to expand its function.

g. Extension of the Auction Functions of Financial Institutions
Auctions should promote efficient use of land held by financial institutions, in cooperation with relevant parties such as the Organization for Promoting Urban Development. In the past, successful bids for real estate held as collateral in principle had to be equivalent to the minimum sale price set by a court. The official notice regulating this matter, however, was abolished on June 8. At the same time, new guidelines clarify that auctions should make best efforts to efficiently use land examinations in the liquiditization of land.

h. Preparing a Secondary Market for Asset-Backed Securities
As a part of preparation for the real estate investment market, we are now discussing a real estate index, which an investor can use an indicator when he makes investment decision comparing with stocks and bonds, and disclosure with respect to public offer of ABS, which is based on real estate.
On a basis of this discussion, toward the enforcement of the recently approved Special Purpose Companies Act in September, we will take necessary measures for ABS issued on a basis of this act, such as a plan for asset liquiditization and disclosure prescribed by the Securities and exchange Act.

(2) Reformation and Integration of Land and the Promotion of Urban Renewal

a. Establishing a System for the Decisive Promotion of Urban Renewal
We will swiftly establish the outlines for a system to urgently promote Renewal in order to expedite urban renewal. Regarding projects approved by the Minister of Construction as urgent, the necessary procedures such as establishment, modification, and execution of city plannings should be taken expeditiously and appropriately, so as for quick realization of the project.
We will instruct the local authorities to streamline processes under the Urban Renewal Act, and we also continue to examine legal issues for the purpose of facilitating urban Renewal.

b. Actively using the Housing and Urban Development Corporation
We decided to actively use and incorporate collectively the technology and know-how of the Housing and Urban Development Corporation to improve the utilization of land in urban areas, and to promote the reform, integration and Redevelopment of land. To this end, the Headquarters for Promoting the Effective Utilization of Land was established within the Corporation on June 22. We also promote the efficient use of land through collaboration between the public and private sectors, using temporary capital supply for the purchase of land (\ 200 billion), active utilization of the Fiscal Investment and Loan Program (\ 100 billion), and the easing of regulations on the size of Specified Redevelopment Projects (Land Readjustment Projects).

c. Establishing a System to Promote Effective Land Use by Leveraging the Organization for Promoting Urban Development
In order to liquidate land and encourage effective land use by promoting private redevelopment program in less effectively utilized lands, an urban development institution (the Center for Private Renewal Assistance) staffed temporarily with experts in urban development, finance, government administration, law, accounting, tax, etc. was established within the Organization for Promoting Urban Development on June 22, 1998. The Center is expected to provide several services actively to private developers facing various problems during urban renewal; gather and provide information on real estate; and conduct research, and offer advice and proposals regarding the effective utilization of land. In order to promote the operation of the Center, the government guarantee for the private sector borrowing to finance the acquisition of real estate was expanded from \1 trillion to \ 1.5 trillion as of the end of the 1998 fiscal year.

(3) Creation of Public Demand for Land
Under the condition where the private demand for development has weakened, extensive measures are to be taken in order to actively promote the acquisition of land for the public use, which is necessary to reconstruct urban areas by enhancing safety features against natural disasters, making city functions more comfortable to the elder and disabled people, and revitalizing the central city areas. In the 1998 FY Supplementary Budget, which was approved recently, \31.74 billion (\17.81 of national government expenditure) was appropriated so that the national government can acquire land in advance (\80 billion was appropriated for local government.) The program is to be executed as soon as possible.

2. Actual Disposal of Bad Loans, and Restructuring of Financial Institutions

(1) Actual Disposal of the Bad Loans of Financial Institutions
In order to settle the problem of the actual disposal of financial institutions' bad loans, it is important to promote the disposal of non-performing loans by requiring discipline against the management of financial institutions using the strict application of market principles. For this purpose, financial institutions are to disclose non-performing loans in accordance with the stricter SEC standards, write off the bad loans, and set up appropriate allowances on the basis of self-examination of assets using certified public accountants in accordance with the Prompt Corrective Action rules introduced in April this year, which are to be checked strictly by government inspection. These measures, together with bank sales of bad loans and the liquidation of loans such as through the sale of loans to the Cooperative Credit Purchasing Company, will remove non-performing loans from bank balance sheets and facilitate the disposal of bad loans in real terms. From this perspective, the Financial Supervisory Agency created on June 22, 1998 will urgently carry out execute the intensive inspections of the major 19 banks.

(2) Restructuring of Financial Institutions
It is required that financial institutions restructure their operation and create responsible management. Through further disclosure of information about restructuring and performance, each financial institution is urged to proceed with restructuring further using market discipline. As for these banks which received capital injections from the government in March this year, the Committee for Financial Crisis Management belonging to the Deposit Insurance Corporation is to publish as soon as possible the current degree of progress of the banks in carrying out their management improvement plans.

(3) Proposal for a "Receiver Bank (Bridge Bank)"
When financial institutions proceed with further disclosure of bad loans, make appropriate write-offs, set up allowance reserves, and carry out real disposal to remove bad loans from their balance sheets, it is feared that some financial institutions might fall into trouble. In this case, the previous amendment of the Deposit Insurance Law enabled the Resolution and Collection Bank to take on the deposit of those failed banks to protect depositors. Therefore, even though there may be no receiver bank to take on the deposits of a failed bank, there is still no concern regarding the protection of depositors. But, on the other hand, it is also necessary to give appropriate consideration to borrowers which are sound but cannot find a new lender after their lending bank fails. It is important to work out measures to enable the revitalization of the financial system in a way that is smooth and earns trust both inside and outside Japan, while at the same time protects sound borrowers. Therefore, the proposal for a so-called "Receiver Bank (Bridge Bank)" will be materialized as soon as possible, as early as possible in July, while considering the issues of the financial burden, the method of financing, and the moral hazard issue of borrowers.

III. Summary

The issue of non-performing loans is one of the most important issues of national policy, which requires urgent measures. A comprehensive plan for revitalization of the financial system, including the materialization of the so-called Bridge Bank scheme, is to be settled on as soon as possible, and will go beyond the group of measures taken up this time. Especially concerning measures requiring legal amendment such as the establishment of the Temporary Council for Coordinating Real Estate-Related Rights (tentative name), the establishment of the so-called servicer system, and the acceleration and facilitation of auctions, the Japanese government will introduce and aim to pass necessary bills in the next Diet session.
We expect that the execution of this comprehensive plan will revitalize and stabilize the financial system, enable the financial system to restore its original function to provide necessary credit to economic activities, and restore international credibility. At the same time, the liquidation of land and bad loans will promote the revitalization of real estate transactions and effective land utilization. We believe that these measures will together help revitalize and restore the Japanese economy.