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The Financial Supervisory Agency is reborn with increased power today, incorporating the financial-system planning bureau of the Finance Ministry.

The move effectively puts an end to the ministry’s once-criticized role in financial administration.

The renamed Financial Services Agency is now responsible for planning policy for financial systems as well as inspecting and supervising banks, insurers, brokerages and other financial institutions.

The Finance Ministry’s main tasks are now limited to fiscal policy-planning for budgets, taxes and government debt, and financial diplomacy.

The new FSA will be further reorganized in January when it incorporates the Financial Reconstruction Commission. The FRC, which currently operates above the FSA, has been handling the nationalization and bailout of banks.

The January realignment will thus unify all government authorities related to financial administration, except for planning on crisis-management, for which the reinforced FSA and the ministry will be jointly responsible.

“The Finance Ministry’s role will not be big any more,” said Yuri Okina, a senior economist at Japan Research Institute, a private think tank.

The authorities were all under the ministry’s wing until the Financial Supervisory Agency was set up in June 1998 to take over the ministry’s financial inspection and supervision roles.

Heavy public criticism in the late 1990s of the ministry’s opaque, arbitrary administration — which factored in a bribery scandal involving major banks — led to the launch of a more transparent, strict regulator.

Senior prosecutor Masaharu Hino was named the first commissioner of the old FSA because his background was considered crucial to assuring the agency’s fairness and neutrality. Hino has been reappointed as head of the Financial Services Agency.

During a Diet session later in 1998, where the issue of how to handle the troubled banking sector caused a political stalemate, the opposition forces led by the Democratic Party of Japan demanded the ministry’s power in the area of financial administration be revoked.

Intense negotiations with the Liberal Democratic Party led to the creation of the FRC in December 1998 and the expansion of the FSA. The ministry shared the crisis-management function with the FRC.

Finance Minister Kiichi Miyazawa recently said that the old FSA “has done a very good job,” adding that the financial authority has been transferred in a “very orderly” manner.

The JRI’s Okina said, “Rule-based, transparent supervision has been prevailing.” The Financial Services Agency should now try to make more efficient use of market signals for supervision, she said, adding that it should focus its energy on weak institutions by closely monitoring signals, such as stock prices and ratings for individual institutions.

The reinforced agency will have a larger staff to cope with the increasing number of foreign institutions operating in Japan and credit unions formerly supervised by prefectural governments.

It will begin drawing up a new manual for inspecting securities firms, following similar manuals for banks and insurance firms. Those manuals are aimed at making inspection standards more transparent.