Prospects for the Development Banking System—DBJ’s Case At ALIDE Annual Conference 2001 Kazuyuki Mori International Cooperation Department Development Bank of Japan

1 Table of Contents s Consensus Views on DFI Management s Establishment of DBJ— Integration of JDB and NEF s Government Reform— Background of the Integration s Main Objectives and Function of DBJ s Loan and Investment Budget for FY 2001 s Changes in Major Areas of DBJ Loans s Financial Sector Reform— Background of New Management s Financial Institutions in Japan s Policy-based Financial Institutions in Japan s Former FILP System s Current FILP System s DBJ’s New Management s Ensuring Operational Transparency and Accountability s Maintenance of Financial Soundness s Strengthening the Knowledge Bank Function s Appropriate Action on Policy Issues

2 Consensus Views on DFI Management s Development Mission Not for profit maximization s Financing Higher Risk Areas Medium- to long-term finance Inadequate credit supply from the market s Financial Soundness Sustainability of the institution Low cost funds needed Stringent credit analysis s Autonomous Management Financial judgement over policy judgement

3 Establishment of DBJ — Integration of JDB and NEF

4 Government Reform —Background of the Integration s Continuous Government Reform continuing 1996 Hashimoto 1997 Cabinet Decision on government institution reform s End of High Growth in Mid-1970s Oil crisis triggered inflation, recession and low growth stage Fiscal deficit s New Conservatism in 1980s Inflation, unemployment, fiscal deficit, trade deficit → Market- oriented approach by US & UK governments Political priority in Japan → Fiscal reform and government reform

5 Main Objectives and Function of DBJ s Main Objectives Enhancement of the vitality and sustainable development of Japan’s economy and society Creation of a better quality of life for the nation’s citizens Development of self-reliant regional economies s Functions Money bank function Provision of medium- to long-term funds Knowledge bank function Assistance to projects important to national policy Dissemination of information and knowledge

6 Loan and Investment Budget for FY 2001 s Planned amount of investment and loans: 1,600 billion yen s New Development Policy for Rebirth of Japan: IT Promotion, Environmental Protection, Aging Society, Business Recovery, and New Business Development Creation of Self- reliant Regions （ billion yen ） Development of regional social infrastructure Promotion of regional industrial orientation Support for regional tie- ups and self-reliance Creation of Self- reliant Regions （ billion yen ） Development of regional social infrastructure Promotion of regional industrial orientation Support for regional tie- ups and self-reliance Enhancement of Quality of Life （ billion yen ） Environmental protection, energy, disaster preparedness and welfare measures Transportation/distribution networks Telecommunications networks Enhancement of Quality of Life （ billion yen ） Environmental protection, energy, disaster preparedness and welfare measures Transportation/distribution networks Telecommunications networks Economic Revitalization （ billion yen ） Economic structure reform Development of new technology and business Economic Revitalization （ billion yen ） Economic structure reform Development of new technology and business

7 Changes in Major Areas of DBJ Loans Electric Power Others Ocean Shipping Coal Mining Regional Development Others Regional Development Development of Technology Ocean ShippingUrban Development Improvement of Living Standards Resources and Energy Others Regional Development Development of Technology Creation of Self-reliant Regions Enhancement of Quality of Life Economic Revitalization Improvement of Social Capital Coal Mining NEF’s Regional Development Regional Development Resources and Energy Improvement of Living Standards Improvement of Key Transportation System Telecommunications and Information Network Development of Industrial Technology Internationalization of Japan 16

8 Financial Sector Reform —Background of New Management s End of High Growth in Mid-1970s Low investment demand From ‘savings shortage’ to ‘savings surplus’ s End of Specialized Bank System Financial sector liberalization Collapse of long-term bank system Financial sector big bang s Change of FILP System Stable sources of funds for Japanese government institutions Market-based operation

9 Financial Institutions in Japan Central Bank Bank of Japan Private Financial Institutions Long-term Credit Banks (3) Trust Banks (30) Ordinary Banks: City Banks (9) Regional Banks (64+57) Foreign Banks (84) Credit Associations (386) Agricultural & Fishery Cooperatives (1,537) Credit Cooperatives (291) Insurance Companies (46) Securities Companies (228) Policy-based Financial Institutions Banks (2) [DBJ & JBIC] Government Finance Corporations (7) Notes: Figures in parentheses denote the number of institutions as of the end of March 2000.

10 Policy-based Financial Institutions in Japan

11 Former FILP System Postal Savings Pension Premium （ Welfare/National ） Surplus of Special Accounts Self- management Trust Fund Bureau Government Institutions Compulsory Deposit Loans Self- management

12 Current FILP System Since April 2001 Postal Savings Pension Premium Surplus of Special Accounts Capital Market Government Institutions Loans Self- management FILP Institution Bonds FILP Special Account Industry Investment Account Investment FILP Bonds Compulsory Deposit Gov. Guaranteed Bonds Self- management

13 DBJ’s New Management s Transparency and Accountability Accountability to the national citizens s Maintenance of Financial Soundness Assurance of repayment Cost recoverable operation s New Financial Tools Project finance, Asset finance, M&A s Knowledge Bank Function Money is a part of necessary resources

14 Ensuring Operational Transparency and Accountability s ‘Medium-term Policy Principles’ and ‘Investment & Finance Guidelines’ Three priority areas Disclosure of loans, debt guarantees, and investment s Management Council External experts and professionals (academia, private financial institutions, mass media, etc.) Review of the status of operational performance s Disclosure of Operations and Financial Conditions Disclosure of financial conditions on an equal basis with that of private financial institutions Information dissemination through the annual report and the Internet Evaluation of policy effectiveness

15 Maintenance of Financial Soundness s Risk Management to Maintain Sound Operations s Credit Risk Internal rating system started in FY 1999 Self asset appraisal started in FY 2000 External audit by independent accounting firm s Market Risk s Liquidity Risk and Interest Rate Risk ALM management Portfolio management s Foreign Exchange Risk Forex swaps

16 Strengthening the Knowledge Bank Function s Knowledge Bank Function as a Highly Developed Form of Fund Supply Main areas ： new financial measures, improvement of social capital, environmental protection s Technical Assistance: International Cooperation Activities s Fostering Human Resources with High Expertise Project Support Activities ･ Planning and implementation of projects ･ New partnership between the public and private sectors ･ Risk sharing Project Support Activities ･ Planning and implementation of projects ･ New partnership between the public and private sectors ･ Risk sharing

17 Appropriate Action on Policy Issues s Work Management Based on Policy Matters and with a Different Role than That of Private Finance s Swift Response to Medium- and Long-term Issues in Japan Promotion of regional industries, town planning Environmental protection Improvement of social capital Support for industrial activities （ IT, development of new business ） Response to an aging, or maturing, society with a decreasing birthrate s Active Approach to New Financial Measures Project finance, asset finance M&A, utilization of debt guarantee function Response to direct finance