+The Financial Sector and the Real Economy in Japan
Ulrike Schaede ウリケ・シェーデProfessor of Japanese BusinessDirector, JFIT: Japan Forum for Innovation and TechnologySchool of Global Policy and Strategy グローバル政策・戦略大学院University of California, San Diego カリフォルニア大学サンディエゴ校Ritsumeikan Univeristy, July 31, 2015
+Macro 101: How the Economy works in the Textbook
DSUs(companies
)
SSUs(household
s)
Commercial Banks
savingsloans
“Ind
irect
fin
ance
”間
接金
融“D
irect
finance
”直
接接
金融
Investment Banks
Bonds, stocks, CP, any IOU
1933 Glass-SteagallSeparation1949 証券取引法
This is driven entirely by the demand of DSUs
+What happened in the U.S.?
DSUs(companies
)
SSUs(household
s)
Commercial Bank
savingsloans
“Ind
irect
fin
ance
”間
接金
融“D
irect
finance
”直
接接
金融
Investment Bank
Bonds, stocks, CP, any IOU
1933 Glass-SteagallSeparation1949 証券取引法
Investment Banks
Holding companies- Investments
- Banking- M&A advice- Insurance- Mortgages
- Credit cards- Private equity deals
- CDOs, and other toxic instruments
1998 Sandy Weill merges Citi, Travelers and Salomon Brothers 1999 Goldman Sachs becomes publicly traded1999 “Financial Services Modernization Act “ (Graham-Leach-Bliley Act)
+The U.S. after the “Lehman Shock” global financial crisis
Large financial institutions are primarily proprietary dealers
Smaller banks specialize on smaller firms Competition with credit cards, leasing firms etc. Arms-length relations: price
Move to e-money?
+ What happened in Japan?(1) The Developmental State (1950-1987)
DSUs(companies
)
SSUs(household
s)
Commercial Banks
savingsloans
“Ind
irect
fin
ance
”間
接金
融“D
irect
finance
”直
接接
金融
Investment Banks
Bonds, stocks, CP, any IOU
1933 Glass-SteagallSeparation1949 証券取引法
Japan put this system on steroids, for the government to guide money flows
+ What happened in Japan?(1) The Developmental State (1950-1987)
DSUs(companies
)
SSUs(household
s)
Commercial Banks
savingsloans
“Ind
irect
fin
ance
”間
接金
融
Basic components:- Excess demand by companies after World War II- Rigid interest rate regulation ( 臨時金利調整法 TIRAL 1947)
- Fixed spreads; banks made more by lending more, SSUs got little- Cost of borrowing (r) kept low to foster growth- “Window guidance” by the Bank of Japan; other controls by MOF
- Pick winners for the big loans- Strict foreign exchange rules: all domestic, no foreign access
+End of Financial Underpinnings of the Development State
1980s: “the 2 kokusaika” 国債化 : government bonds needed to be placed somewhere
Launch of competition between commercial and investment bnaks 国際化: large exporters lobbied for access to foreign financial
marketsMOF designated 300 firms allowed to issue bonds, etc.
1987-1991: the Bubble Everybody rushing to the stock market (incl. banks) Banks losing customers, make desperate and unwise loans Crash in 1991: Non-performing loan crisis Banking crisis 1998: end of the entire system
+Legal change in Japan
1997/8 banking crisis strikes in full forces Huge government capital infusion into all banks Long-term banks disappear as a category Consolidation
1998 revision of Antimonopoly Law Allows holding companies: mergers of banks Revision of Securities Trading Act: abolish firewall
2015 is Japan still “overbanked”? Too many banks chasing too few customers “Cartel”-like behavior that crowds out alternative forms of
financing (e.g., venture capital)
Nikkei Weekly Nov 23, 2009, p.4
+Shift in Corporate Finance
In million Yen; stock of financing outstanding for large firms (capital of ¥1 billion +; n=5,275)
0
20,000,000
40,000,000
60,000,000
80,000,000
100,000,000
120,000,000
140,000,000
160,000,000
180,000,000
'60 '62 '64 '66 '68 '70 '72 '74 '76 '78 '80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04
Bank Loans
Bonds, Stocks, etc.
RetainedEarnings
+
11Debt-Equity Ratios
Calculated from 法人企業統計
+Loans outstanding, by interest rate1970-2002
0
100,000
200,000
300,000
400,000
500,000
600,000
700,000
800,000
900,000
in 100 mil yen
1970-Dec. 1980-Dec. 1990-Dec. 1995-Dec. 1996-Dec. 1997-Dec. 1998-Dec.
1999-Dec. 2000-Dec. 2001-Dec. 2002-Dec.
less than0.25%
1.75% 2.5% 3.0% 4.0% 4.5% 5.0% 5.5% 6.0% 6.5% 7.0% 7.5% 8.0% 8.5% 9.0% 9.5% 10% 10.5% 11% 11.5%
Source: Bank of Japan database
+Loan rates in 2002
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
50,000
in b
illio
n Y
en
At that time, banks’ lendingcosts were between 3-5%
+Japan today
Large Banks Compete globally for huge projects Compete locally for small firms Still have substantial loans to large firms
Small Banks Continuing political influence on price
融資制度 government-guaranteed loans for non-performing regional firms Relationship banking highly important
Overall, Japan is still overbanked Regional banks, local banks, credit cooperatives, … Government banks for small firm finance, big firm finance, failing firm
finance Is Japan ‘s banking system supporting mostly the unproductive economy?
+Supporting the unproductive economy?
Zombie firms: Companies that have no viable business model, but
receive bank loans to pay loans outstandingArtificially kept alive: employmentHog resources: talent, productive assets, financial capitalDrag down the economy overall
Zombie banks: banks that have mostly zombies as customers Kept alive by lack of political will Have little to do, which results in strange behavior
+Advantages of this system
Welfare in disguise Keeps small firms alive, people employed Contributes to social stability Unclear whether it is more expensive
Prevents the excesses we see in the U.S. and Europe? Would Japan be better off turning more to the
market?
+The Next Big Thing: “Fintech”
Germany Since 2010, 30% reduction in number of banks 1990: 4,700 banks, today: 1991 banks
Japan Similar trend, different way of counting Currently 198 “banks”
4 Mega banks (on top of world rankings) 4 Trust banks, 85 regional banks, 57 foreign banks, “others” Does not count cooperatives, etc.
Government initiative to reduce this number When this happens, new providers of capital may get
access