The Democratic Party of Japan proposes the following measures and urges the authorities concerned to take proper actions to cope with the situation brought about by the current financial crisis, including a liquidity shortage in the financial markets, credit contraction in corporate finance, and risk of Japan窶冱 economy tumbling into a full-scale recession.

1. Measures to address a Liquidity Shortage (to support financial institutions)

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The Bank of Japan (BOJ) has properly strengthened its liquidity provision both in terms of the yen and the dollar, and the DPJ recommends the BOJ to continue to take necessary measures based on close monitoring of market developments. In particular, while the size of temporary swap facility with the Federal Reserve was increased to 120 billion dollars (approximately 12 trillion yen) and the cutoff date was extended through April 30, 2009, the DPJ requests a further increase in the size and an extension of cutoff date should this be required by market developments.

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The DPJ recommends the BOJ to promptly lower its reserve requirement ratios should this be required by market developments. While the amount of reserves required for foreign banks is small and the amount of excess reserves (outstanding reserve balances minus required reserves) is high, it is possible that a funding squeeze might take place in the future not only for foreign banks but also for Japanese banks. Therefore, the DPJ recommends the BOJ to manage its reserve requirement ratio properly and with vigilance.

Given little room to reduce interest rates, the BOJ did not take any action in the coordinated interest rate reductions by central banks on October 8. The DPJ recommends the BOJ窶冱 proper conduct of monetary policy by thoroughly considering room for policy action and alternative policy instruments.

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With respect to the collateral eligible for the BOJ窶冱 market operations, the DPJ recommends the BOJ relax the eligibility standard if required by market developments. The DPJ recommends the BOJ to properly use eligible collateral not only to cope with financial institutions窶 liquidity problems, but also to support firms窶 funding, as stated below. In addition, the DPJ recommends the BOJ to promptly finalize and implement the plan for a cross-border collateral system that is under consideration.

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With respect to foreign currencies (surplus and reserves in the special account for foreign exchange funds) administered by the Ministry of Finance, the DPJ proposes to use them to address liquidity problems if required by market developments. In particular, the DPJ proposes to utilize the deposits of the fiscal loan fund (19.2 trillion yen in total at the end of fiscal 2006) and foreign currency deposits (14.5 trillion yen in total at the end of fiscal 2006) that are not used for investments in securities denominated in foreign currencies, to properly address liquidity problems, while taking into account the need for foreign exchange interventions and other operations. The DPJ is of a view that, when there are extreme strains in the market, addressing liquidity problems not only by the BOJ but also by the Ministry of Finance sends out an extremely strong message. The DPJ will examine measures such as providing liquidity through the BOJ by making deposits at the BOJ from the special account for foreign exchange funds, establishing currency swap agreements, basically using collateral, between the special account for foreign exchange funds and private financial institutions, and repo transactions with private financial institutions in securities denominated in foreign currencies (including US treasury bonds) held in the special account for foreign exchange funds. On this occasion, the current condition of the special account for foreign exchange funds should be checked in preparation for implementing those measures, and a flexible system to manage the special account needs to be established.

2. Measures to address Credit Contraction??o support firms??/h2>

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Public financing should be expanded to address corporate funding problems. Specifically, the Special Credit Guarantee System for Stabilizing the Finance of Small- to Medium-sized Enterprises, which the government implemented in fiscal 1998, should be revived, and, with 350 billion yen as the resource, the line of credit (credit guarantee limit) should be increased by 10 trillion yen.

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The Japan Finance Corporation (JFC), which was established on October 1, should make use of the account for facilitating crisis response operations to provide private companies with the funds they require for (a) lending, (b) indemnity guarantees, and (c) interest subsidies, as crisis response operations. By judging the current situation as being a 窶徼urmoil of financial order domestically and internationally窶 as stipulated in Paragraph 4, Article 2 of the Japan Finance Corporation Law, the JFC should start preparations for initiating crisis response operations. In so doing, the Financial Services Agency will take the necessary measures to facilitate the JFC窶冱 crisis response operations, given that participation of private financial institutions to the operations is on application basis (please refer to the section below with respect to the Act on Strengthening Financial Functions).

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To ensure the effectiveness of the Notice on Future Response for Facilitating the Finance of Small- to Medium-sized Enterprises issued to financial institutions on September 2 by the Financial Services Agency, necessary measures should be taken as quickly as practicable. Such measures include revisions of the enforcement regulations of the Banking Law, which provide the definition of risk management loans, and financial inspection manuals, which sets borrower categories, so as to ensure consistency with the thrust of the notice. In addition, in relation to 1-(4), necessary measures should be taken as expeditiously as practicable. Those measures include the revision of the contents of financial inspection manuals and instructions to financial inspectors, so as to ensure issuers of securities that could be eligible collateral with the BOJ would receive, in financial inspections, assessments that are consistent with the BOJ窶冱 assessments.

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To support Japanese companies窶 foreign currency funding abroad, examine and establish as soon as possible a scheme and system that enables private financial institutions to gain funding in foreign currencies as part of the crisis response operations explained in 2-(2).

3. Measures to address Financial System Problems (to support insurance policyholders, depositors, and investors)

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Extend public support (government subsidy) for the Life Insurance Policyholders Protection Corporation of Japan, which protects life insurance companies窶 policyholders, that is expected to expire at the end of March 2009 for another two years. A meeting of the Financial System Council窶冱 2nd Subcommittee, an organ investigating the extension of the support, needs to be convened urgently to cancel the investigation.

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Revive the Act on Strengthening Financial Functions, which expired at the end of March 2008, with a two-year limited timeframe for the time being. In so doing, make necessary revisions to previous laws so that public funds could be utilized in conducting the JFC窶冱 crisis response operations outlined in item 2-(2) and operations pursuant to the Financial Services Agency窶冱 Notice on Future Response for Facilitating the Finance of Small- to Medium-sized Enterprises described in 2-(3). With the enactment of the Amended Deposit Insurance Law in August 2004, the framework was established for injecting public funds into large-scale failures.

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Promptly examine public support for the investor protection fund system, which guards users of securities companies窶 services. In addition, examine the current condition of the securities finance system and securities settlement system, and take necessary measures to enhance the stability and safety of these systems. Furthermore, strengthen the functions of markets such as the repo market.

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Promptly examine the ceiling of deposit protection and measures to prevent investment trusts from falling below par.

4. Measures to address securities market problems etc.

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Strictly enforce the short selling restrictions already introduced (the uptick rule and Article 26 of the enforcement ordinance for the Financial Instruments and Exchange Act) and examine the possibility of raising the short selling margin from the current level of 30%. The DPJ will request the Financial Services Agency and the Tokyo Stock Exchange to take necessary measures, including revising government ordinances, ministerial ordinances, and regulations.

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Continue the reduced tax rate on dividends, which forms part of the existing preferential tax system for securities. The DPJ will examine the continuation of the reduced tax rate on capital gains, upon ensuring its consistency with the DPJ窶冱 Outline of Tax System Reforms.

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To avoid double taxation of Japanese companies窶 foreign source income, promptly carry out tax measures that would contribute to the circulation of overseas subsidiaries窶 income into Japan (improvement in foreign tax relief system such as tax-free dividends-received), and apply those measures to the current fiscal year窶冱 account settlements. In so doing, the circulation of funds from abroad into Japan should be dealt with by giving due consideration to foreign exchange market developments.

5. Others (including requests to the authorities concerned)

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There are currently limitations to addressing the current financial crisis on a private sector basis, including mergers, and the DPJ requests the authorities concerned strengthen their surveillance of domestic financial institutions窶 activities including capital participation in US financial institutions.

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The DPJ requests the authorities concerned beef up surveillance of global money flows, including research on the shareholders of the US Federal Reserve Banks, and report their findings to the Diet and political parties as soon as practicable.

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Since there have been changes with respect to the preparation and deliberation toward the introduction of international accounting standards, the DPJ is monitoring with vigilance recent developments including the application of fair value accounting to domestic financial institutions and insurance companies. The DPJ requests the authorities concerned to report the current situation to the Diet and political parties as soon as practicable.

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The DPJ requests the authorities concerned to properly make proposals to overseas countries for strengthening the surveillance of international speculative funds, including hedge funds, and establishing international regulations.