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The Diet passed a bill Wednesday to create a new mechanism to safeguard deposits in the event of bank failures after the current blanket deposit protection system is lifted in April 2002.

The amendment to the Deposit Insurance Law, which was adopted at a plenary session of the House of Councilors, is aimed at averting financial tumult caused by the government’s removal of full deposit guarantees.

The Upper House also passed a bill to rewrite the Insurance Business Law to create a safety-net system that would protect policyholders in the event of the collapse of a life insurance company.

Both bills cleared the House of Representatives on April 20.

The new safety net is expected to support the government’s “Big Bang” drive to deregulate domestic financial markets and put them on par with other financial centers such as London and New York.

In what government officials say is a demonstration of Tokyo’s unwavering commitment to financial reform, the revision specifies that unlimited protection of deposits will cease in March 2002.

Doubts over Japan’s reform commitment emerged when the three ruling parties decided to delay the replacement of full deposit guarantees by one year from the originally planned April 2001. The full deposit guarantee will be replaced by a refund limit of 10 million yen per depositor at an insolvent bank.

The delay came in the face of mounting pressure on the government — from weaker lenders such as credit unions and the small and midsize firms that deposit with them — ahead of next month’s Lower House election.

The amendment will introduce several emergency financial system stabilization provisions in April 2001, including capital infusions into banks that take over the operations of collapsed lenders and nationalization of doomed financiers.

The funds required for capital injection will in principle be covered by financial institutions via extra insurance premiums instead of the public money used under the existing framework.

The government will consider using taxpayer funds if the money collected by financiers is insufficient.

Decisions on whether to shore up the capital of banks facing difficulties or to place them under temporary state control will be made by an envisaged Cabinet-level council for financial crisis management.

The council, to be set up during next January’s reconfiguration of central government offices, is to be headed by the prime minister and to include the finance minister and the Bank of Japan governor.

The amendment also includes a measure to speed up procedures to liquidate banks, as earlier enactment would substantially reduce the taxpayers’ and the banking industry’s burden.

Specifically, the provision allows undercapitalized institutions to voluntarily apply for a government declaration of their bankruptcy when they believe they are no longer able to fulfill their obligations as banks.

Financial authorities currently deem lenders to be bankrupt and begin procedures to liquidate them only when they face a capital deficit or a severe short-term liquidity crunch.

In addition, the proposal seeks to reinstate blanket deposit protection during emergencies that imperil the banking system as a whole, including the failure of a top-ranking bank.

The government will also maintain the current full protection of bank accounts used for settling business transactions for one year after the imposition of the refund ceiling.

Time deposits, financial debentures held by individuals and loan trusts whose principal repayments are assured to a maximum of 10 million yen in principal plus interest will also be guaranteed for one year through March 2003.

As a consequence, the 10 million yen-per-depositor cap on refunds on all types of deposits will go into force in April 2003, two years behind the original plan’s schedule.

The bill for revising the Insurance Business Law would allow the government to inject 400 billion yen in public funds and an additional 100 billion yen from life insurers to double the size of the policyholder protection fund of life insurance companies.

The fund, composed of private-sector money, currently has 460 billion yen — contributions from life insurers and borrowings from financial institutions.

The bill, which is to take effect in July, will also facilitate the restructuring of financially troubled insurance companies.

Lean investment

The Diet passed a package of bills Wednesday designed to revamp the government’s fiscal investment and loan program into a leaner, market-oriented system.

The House of Councilors approved the package at its plenary session. The House of Representatives passed the package last month.

The package is scheduled to take effect next April.

The program, dubbed Japan’s second budget because of its huge size, is now mainly financed by funds from the state-run postal savings and public pension programs.

The legislation will abolish the mandatory entrustment of such funds to the Finance Ministry’s Trust Fund Bureau.

It will also pave the way for public corporations that are now financed by the program to raise funds by issuing their own bonds without government guarantees.

However, for quasi-governmental institutions that are unable to raise funds by themselves and whose projects are significant enough, the state will finance them from funds it raises through issuing government bonds.

The legislation will also eliminate fiscal loan and investment program funding for projects that can be developed by the private sector.