Demand deposit refund cap to be delayed by two years

Prime Minister Junichiro Koizumi said Monday the government has decided to postpone the full-scale introduction of a refund cap on bank deposits for two years to avoid raising “unnecessary anxieties about the country’s financial system.”

As a result, the government will freeze until April 2005 a plan to create new settlement-specific bank accounts that would be fully and permanently protected by the government even after the cap is placed on all other types of deposits.

Koizumi expressed his intention to take the step at the day’s meeting of the Council on Economic and Fiscal Policy, held at Prime Minister’s Official Residence. He heads the government’s economic policy-setting panel.

“A comprehensive policy package is needed to accelerate banks’ disposal of bad loans and put my reform policy on a steady path,” Koizumi told reporters after the panel meeting. “As part of its financial system reform, the government has decided to postpone the implementation (of the deposit insurance cap) for two years.”

The latest delay in adopting the cap will be formally endorsed later this week by a project team in the Financial Services Agency tasked with promoting the disposal of bad loans at banks, ruling coalition sources said.

This will facilitate its inclusion in a package of antideflation measures scheduled to be adopted by the government in mid-October, they said.

Meanwhile, Financial Services Minister Heizo Takenaka stressed that the decision to postpone the introduction of the refund cap for bank deposits does not mean a change in government policy.

“(The decision) is a necessary step as we implement the disposal of bad loans as part of structural reform,” he told a news conference after the panel meeting. “Accelerating bad-loan disposal is a mainstream of our policy. (This postponement) aims to reinforce (structural) reform and the (reform) policy.”

Legislation to make this postponement possible is expected to be submitted to the upcoming extraordinary Diet session that is to begin Oct.18.

Japan abolished a state-backed blanket guarantee on time deposits April 1, imposing a limit of 10 million yen per bank, per person on deposits at failed banks. It planned to implement a similar refund cap on demand deposits this coming April.

But amid concern the deposit-refund cap could wreak havoc on the nation’s battered banking system, there are growing calls for the plan to be postponed one or two years.

Given the pledges made by Koizumi to introduce the refund cap on schedule, however, this latest development will likely prompt accusations from the opposition parties that he has stepped back from his structural reform initiative. These criticisms will likely be leveled at Koizumi during the extraordinary Diet session.

Meanwhile, the panel agreed during Monday’s meeting to limit the role of government-affiliated financial institutions to fields that are of highly public nature and difficult for private-sector banks to cover because of high risks or difficulties in assessing risks.

The functions of eight such government-affiliated financial institutions, including the Small Business Finance Corp. and Japan Bank for International Cooperation, should be closely reviewed in light of that criteria, after which they should be streamlined, according to the panel’s basic policy on the issue.

When reforming such institutions, realignment, abolition and privatization should be considered, according to the panel.

At the same time, the panel agreed that the schedule for such reforms should be better clarified so that confusion in the country’s financial system can be avoided.

Government-affilated financial institutions have drawn criticism for taking business opportunities away from the private sector and hindering the growth of market-oriented financial services.