Responding to Financial Crises: Lessons to Learn from Japan s Experience

Transcription

1 JAPAN CREDIT PERSPECTIVES Responding to Financial Crises: Lessons to Learn from Japan s Experience August 8 Koyo Ozeki The financial crisis sparked by the subprime loan problem has intensified to the point where U.S. and European governments have had to extend support to financial institutions, and we believe that governments will need to widen and deepen the scope of this support framework in the near future. Japan s experience in dealing with bad loans and financial crises serves as an insightful lesson about public support. In this special edition of Japan Credit Perspectives, we reflect on Japan s financial crisis in the 199s and early s, then compare it to the present situation in the U.S., and consider the implications for government action. Part 1: A Brief History of Japan s Financial Crisis Summary: The Four Phases of Japan s Financial Crunch Japan s financial crisis persisted for nearly 1 years, from the burst of the economic bubble in 1991 until around, but throughout that timeline there were transitions in the state of the markets and the nature of the crisis. Broadly speaking, we can divide the progression into four phases (Chart 1). Phase 1 (1991-9): The real estate bubble collapsed, triggering an economic shock. The government responded typically with economic stimulus packages, such as public works projects. Phase (199-9): Signs of instability appeared in the financial system. Even as banks failed due to financial difficulties, the government failed to come up with a comprehensive policy package that would address financial system issues. Phase 3 ( ): The bankruptcy of major banks triggered a financial emergency. Through establishment of new laws and budgetary measures, the government nationalized failed banks and injected taxpayer money into large financial institutions. Even so, it was unable to resolve the situation. Phase (-): The system again reached a crisis point due to the massive volume of excess debt held by corporations. The Financial Revitalization Program ( Takenaka Plan ) promoted the disposal of non-performing loans, and the government supplied public funds to tottering Resona Bank. These measures finally helped bring the crisis to an end. TOPIX,, 1, 1, 1991 Four Phases of Financial Crisis and Share Prices Phase 1 Phase Phase 3 Phase Source: Bloomberg, PIMCO Chart

2 JAPAN CREDIT PERSPECTIVES 3 3 Early Background: Excess Liquidity, Massive Bank Lending, and the Property Bubble The sharp appreciation of the yen and accompanying monetary easing following the Plaza Accord of 198 gave rise to a tremendous amount of excess liquidity in Japan. As a result, a massive volume of funds poured into commercial real estate and the stock markets. Bank lending doubled between 198 and the first half of the 199s, most of which went into the real estate market. We estimate that direct and indirect investment (including loans to nonbanks) in commercial real estate accounted for around % of total lending; another % went into loans to individuals for the purchase of rental property, such as apartments; and % went into non-manufacturer loans, many of which were presumably used to acquire property (Chart ). Bank lending also grew after the bubble burst in 1991, but we suspect this was largely to prop up corporate borrowers experiencing a slump in business. Bank Lending Volume Estimated Use of New Bank Loans During Bubble Era (198-93) Increase in bank loans trillion yen (GDP Ratio %) Source: Bank of Japan, PIMCO estimates (based on statistics from BoJ, MoF, CCPC, bank financial results and others) Chart For Commercial Real Estate For Individuals For Nonmanufacturers 11 trn (GDP Ratio %) trn (GDP Ratio1%) 1 trn (GDP Ratio%) Jun 8 Phase 1: Collapse of the Commercial Real Estate Bubble (1991-9) The collapse of the bubble economy in the early 199s sent the value of land, which represented more than half the nation s wealth, spiraling downward by nearly trillion yen (US$. trillion) 1, and the total value of share prices plummeted by 3 trillion yen (US$.7 trillion). That is, assets lost 8 trillion yen (US$7.3 trillion) in value, equivalent to almost 1. times the gross domestic product (GDP) of Japan (Chart 3)., 3, 3,,, 1, National Wealth (Net Assets in National Asset/Debt Accounts) 1, Corporations held around % and individuals % of the nation s land assets, so the sharp decline of land value had a significant impact on both corporate and household balance sheets. The bad debt problem, however, was concentrated primarily in commercial real estate due to the extremely speculative and broad acquisition of land for commercial building construction and golf course development. In the household sector, falling asset values had a large effect, but leverage had not expanded as much because a system for borrowing money using homes as collateral, such as home equity loans, wasn t readily available. As such, there was only a modest volume of bad debt related to residential property loans (Chart ). One factor that probably helped stem the default rate on home mortgages despite the sluggishness in the economy was the relative employment stability, thanks to the system of lifetime employment. Net Assets (National Wealth) Land Source: Cabinet Office (Japan) Chart 3 Phase : Prolonged Land Price Decline Sparks Sharp Rise in Bad Debt (199 9) Land prices continued their dramatic plunge in the mid-199s (Chart ). By our estimates, Japanese banks had around trillion yen (US$ billion) in non-performing loans immediately after the burst of the bubble in 1993, which shot up to nearly 1 trillion yen (US$91 billion) by 199, along with the loss rate (Chart ). As a result, financial institutions

3 Percent Index 3/ =1 found themselves in a rapidly deteriorating position, and a succession of bankruptcies among relatively large regional banks in 199 signaled an impending crisis in the financial system. 3 1 Home Mortgage Delinquency Rate and Unemployment Unemployment Rate (Seasonally Adjusted) Home Mortgage Delinquency Rate (1-month Moving Average) Source: Ministry of Internal Affairs and Communications (Japan), Japan Housing Finance Agency, Bloomberg Note: Disclosure of home mortgage delinquency rate data started in Commercial Land Residential Land Source: Japan Real Estate Institute Chart Land Price Index for Six Metropolitan Areas Chart Phase 3: Collapse of Major Banks ( ) Anxiety over the financial system intensified with the failure in November 1997 of Hokkaido Takushoku Bank, one of the nation s leading banks, followed closely by the collapse of securities giant Yamaichi Securities. In the following year, Long-Term Credit Bank of Japan (LTCB) and Nippon Credit Bank (NCB) were nationalized when they too went under. All of the failed banks at this time had loan-todeposit ratios of over 1% and a high dependence on the interbank market and bond issuance (longterm credit bank debentures) for financing. Funding problems in the short-term financial markets and bond markets caused them to fold. With the failure of LTCB in October 1998, the government established a new framework to protect the banking system and in March 1999 injected 7. trillion yen (US$8 billion) in taxpayer money into the major banks. The situation improved temporarily from the first half of 1999 through the first half of, thanks to the global stock market boom fueled by the IT bubble as well as the rapid pace of bank mergers and other financial industry reorganization. The emergence of a so-called Japan premium in foreign interbank markets from meant higher fund procurement costs for Japanese banks in these markets (Chart 7). However, thanks to funding from domestic sources and a reduction in assets, there was no shortfall of liquidity or consequent market turmoil Bad Debt and Loss Ratio (Estimate) Loss Rate (Weighted Average) Problem Loans Write-offs & Reserves (Aggr) Japan Premium Percent Percent Source: PIMCO estimates (based on statistics from BoJ, MoF, CCPC, bank financial results and others) Chart Source: Bank of Japan Chart 7 3

4 JAPAN CREDIT PERSPECTIVES Times Phase : Excessive Corporate Debt Spurs Renewed Crisis ( ) In the latter half of the 198s, Japan s corporate sector was aggressive in capital spending on plants and equipment. In particular, as noted earlier, non-manufacturers expanded their borrowings significantly during this time. When the bubble burst in 199, the slump in profits caused their debt burden to swell, and worsening in leverage indicators persisted until the late 199s (Chart 8) Capex and Ratio of Net Interest-Bearing Debt to EBITDA When the IT bubble deflated in mid- and share prices began to sink, corporate bankruptcies spread through several sectors. In addition to construction firms, real estate companies and other sectors directly affected by land investment, there was also a steep rise in failures of non-manufacturers carrying excess debt (Chart 9). On top of the sluggishness in earnings caused by the prolonged economic slump, the funding environment suffered badly from a severe credit crunch. Net Debt to EBITDA Chart 8 Capex (RHS) Source: Ministry of Finance (Japan) Resona Bank reached the brink of crisis in May 3, spurring the government to supply trillion yen (US$18 billion) in taxpayer money. In -, UFJ Bank faced a crisis due to massive losses and subsequently merged with Mitsubishi Tokyo Financial Group (MTFG). At that time, the banking crisis was not caused by funding difficulties; instead, asset valuations by auditors and financial authorities found that banks had capital shortages or excess debt. Survival of such banks was possible only through the intervention (support) of the government or mergers with other banks. The bank regulators prudence policy evolved as they sought to assess bank balance sheets through a proper valuation of assets before funding difficulties could build to a point that threatened a bank s viability Total/Construction* Manufacturers Wholesale Retail Transport, Telecom Service Real Estate Other GDP Ratio Government support for Resona Bank, one of the sector s major players, consisted of soft capital injections through the purchase of preferred shares, which protected ordinary shareholders. Combined with the ongoing improvement at the time in the macroeconomic environment, this had a dramatic positive impact on market sentiment. The creation of the Mitsubishi UFJ Financial Group (MUFG) in by the merger of MTFG and UFJ formed the nation s largest banking group, and helped put a firm end to Japan s financial crisis. Part : Evolution of Japanese Government Policy In concert with the financial crisis, there were many changes in government measures and the legal framework governing bank failures. There were three main developments. Total Debts by Industry FY8 9 is total. FY9 is construction industry. Source: Teikoku Databank Ltd., PIMCO Chart 9 GDP Ratio ( ) 3 1

5 Bankruptcy Cleanup Through Enforced Cooperation, Mergers and Takeovers (through 1997) Prior to the temporary nationalization of LTCB and NCB in 1998, the authorities dealt with failed or tottering banks by orchestrating mergers or asset takeovers by other banks. Large banks had the financial leeway to rescue smaller financial institutions, and the authorities would lean on multiple banks to bear the losses in what was known as a subscription list policy, followed by mergers and asset transfers. However, as the health of the banking system as a whole worsened, this method reached its limit when Hokkaido Takushoku Bank and Yamaichi Securities failed in In addition, the Bank of Japan (BoJ) had greatly expanded the scope of its special loans, significantly raising its risks in the event of a bank failure. Thus, the use of liquidity support to deal with solvency issues was nearing its limits as well. Nationalization of LTCB and NCB and Capital Injections into Large Banks ( ) Faced with this situation, the government passed the Emergency Measures Act for Financial Function Stabilization and injected 1.8 trillion yen (US$1 billion) into 1 large banks in March This was the first capital injection, but the sum was small and did little to boost market sentiment. Hurt further by the turmoil in global financial markets in the wake of the Russian financial crisis and Long-Term Capital Management s failure in the summer of 1998, Japan again entered a financial crisis mode. The severity of LTCB s troubles deepened as its finances worsened and its share price fell, and the government was again forced to prepare a framework for a bank bailout. By October 1998, it passed necessary legislation such as the Financial Revitalization Law, the Financial Function Early Strengthening Law and a revised version of the Deposit Insurance Law, and offered trillion yen (US$ billion) (equivalent to 1% of GDP) in budgetary measures. Once the laws were enacted, LTCB was immediately nationalized under the Financial Revitalization Law, and NCB followed in December. With the state takeover, the banks debt was fully guaranteed, but because audits had found the banks in a state of excess debt, the value of their shares fell to zero. Along with enacting new laws, the government overhauled the financial regulatory system and transferred oversight responsibility of the nation s banks from the Ministry of Finance (MoF) to the Financial Reconstruction Committee (now the FSA). The committee injected 7. trillion yen (US$8 billion) into 1 banks in March 1999 based on the Early Strengthening Law. New Financial Framework and Public Money for Resona Bank (-) Both the Financial Revitalization Law and Financial Function Early Strengthening Law were temporary measures, and there remained the need for a permanent framework for dealing with bankruptcies. In that regard, numerous legal measures were passed in -1, including another revision of the Deposit Insurance Law. Based on past experience, the new framework incorporated faster and more diverse bankruptcy disposal methods and measures for responding to financial crises. It was the sum of all the lessons learned from the previous ten years. As part of this new framework, the Deposit Insurance Law (Article 1) introduced three models to address different levels of systemic risk: capital injections in extremely serious cases (Item 1), protection of all debt through special financial aid in the case of small bank failures (Item ), and nationalization in serious cases (Item 3). A 1 trillion yen (US$13 billion) emergency fund was established as a permanent budgetary measure for use in enacting these items. In the second half of, the government tightened its asset audits through the Financial Revitalization Program

6 JAPAN CREDIT PERSPECTIVES (also known as the Takenaka Plan after the thenfinancial services minister), and banks hastened the pace of their bad debt disposal. Emergency measures were carried out under the new framework: Resona Bank found itself with a capital shortage in 3 as a result of the faster debt disposal, and the government provided public funds as prescribed in the new law s Item 1. The government also nationalized Ashikaga Bank, one of the major regional banks, as per Item 3. Part 3: Questions and Answers Regarding Government Response Q: Why did it take so long to resolve the crisis? A: It took nearly 1 years from the burst of the Japanese bubble economy in 1991 until the financial crisis finally came to an end. There are several reasons for this unusually long timeframe. Hopes for a turnaround in property prices: From the collapse of the bubble economy until the mid-199s, most people assumed that real estate prices would eventually turn upward again. Policy makers were also focused on encouraging an economic and market recovery through fiscal stimulus measures such as public works projects. Existence of colossal latent stock profits: At the start of the 199s, Japanese banks had stock portfolios with unrealized profits amounting to nearly twice their net worth. This acted as a buffer for loss writeoffs, encouraging a complacent stance that they could hold out until the real estate market made its comeback. The plunge in the stock prices in severely eroded these latent profits, and appraisal losses began to have a negative impact on profits. Banks and financial authorities gradually came to recognize the risks regarding the shares in their portfolios, and proceeded to trim their holdings Massive scale of the problem: Japan s cumulative bad debt totaled an estimated -3% of GDP, while the value actually written off by financial institutions amounted to nearly 1 trillion yen (US$91 billion) or % of GDP. The large banks alone accounted for 7 trillion yen (US$8 billion) of this total (Chart 1). This exceeds the combined value of their net worth of trillion yen (US$18 billion) and 1 years worth of net operating profits at trillion yen (US$ billion). They realized profits from their share holdings to supplement the portion that could not be covered by net operating profits. Though this conclusion is made in hindsight, it is clear that banks simply did not have the financial strength to dispose of these vast losses in a short period, and they had no choice but to take their time to write off debt using their annual earnings and unrealized profits. Bad Debt Disposal Costs (Total 7. trn yen) Earnings by Major Banks Net Equity Profit and Loss of 3 Accounts (Total 1.8 trn yen) Net Operating Profits (Total 9.8 trn Yen) Net profits (Total 1.8 trn yen) Source: Financial Services Agency (Japan), Japanese Bankers Association, PIMCO Japan Chart 1 Q: Why did the capital injections in fail to solve the problem? A: At the time of the taxpayer money injections in , authorities maintained the position that most of the major banks were fundamentally healthy, despite the fact that they were aware of the damage being done to bank capital by bad debt. At the same time, a credit crunch was becoming a serious issue

7 as the banks turned increasingly reluctant to lend, and authorities provided public funds to ease the credit situation. They set their policy goals with this in mind, such as requiring banks to boost their lending to small businesses. These cash injections might be characterized as preventive actions, but because the policy had multiple objectives, it did not act as a genuine incentive to comprehensive bad debt disposal. debt and a decline in interest rates, but we estimate that the latter had around twice the impact. That is, monetary policy not only helped maintain liquidity in financial markets, but also played a large role in improving corporate balance sheets Sales Net Worth Ratio Corporate Leverage Net Interest-bearing Debt to EBITDA Ratio (RHS) Q: Is rapid disposal really the key to early resolution of problem? A: In responding to a crisis, authorities must 1) rapidly analyze the nature of the problem, ) evaluate its scale, and 3) devise necessary measures. It is difficult to identify the precise causal relationship between financial system measures and a bottoming out in asset prices, but one lesson that can be learned from Japan s financial crisis is that the delay in recognizing the problem during Phases 1 and (1991-9) made the subsequent fallout even worse, and an underestimation of the situation s severity and the authorities trial-and-error approach in Phase 3 ( ) caused the delay in settling the problem. Q: How effective were the BoJ s zero interest rate and quantitative easing policies? A: Phase of the crisis (-) was a problem of surplus debt at private corporations. Under the surface, however, corporate fundamentals were improving rapidly (Chart 11). The ratio of net debt to EBITDA (earnings before interest, taxes, depreciation and amortization) in the corporate sector as a whole took a swift turn for the better, improving from.3 times in 1999 to 3. times by. Reduction of capital spending mainly made debt repayment possible (Chart 1). During this period, interest payments also dropped considerably, bringing the ratio of interest payments to operating profits down from % to 1% (Chart 13). This is due to both a reduction in interest-bearing End of Mach Source: Ministry of Finance (Japan) Capex Chart 11 Capex Chart 1 Capex/EBITDA (RHS) Source: Ministry of Finance (Japan) Interest Payments Interest Payments Interest Payments to Operating Profits (RHS) Source: Ministry of Finance (Japan) End of March Chart Times Percent Percent 7

8 JAPAN CREDIT PERSPECTIVES Part : Implications for the Subprime Loan Crisis Differences between U.S. Subprime Crisis and Japan s Crisis Both the subprime loan turmoil in the U.S. and the financial crisis in Japan resulted from a bubble created by the presence of surplus liquidity. However, there are several differences. Complex structure of U.S. bubble: Whereas Japan s Percent 7 3 U.S. GDP. The difference in scale will likely affect the cost and speed of resolving the situation. US Subprime Loan Crisis Bad Debt and Public Cleanup Costs US S&L Crisis (Late 198s) Scandinavian Bank Crisis (Mid-199s) % % 8% Japan s Banking Crisis (Late 199s-3) Asian Financial Crisis (1997) 3% 3% 3% % % bad debt problem stemmed from commercial real estate and excess corporate debt, the U.S. subprime problem involves a more complicated mixture of bubbles related to the housing market, financial institution business models and financial products for investors. 1 ( - 1%) 11% 11% 9% 8% % % % % 3% U.S.A. U.S.A. Norway Finland Sweden Chart 1 Indonesia Thailand S. Korea Malaysia Bad Debt (GDP Ratio) Necessary Costs (GDP Ratio) Source: World Bank, OECD, PIMCO Estimates Japan 9% Speed of valuations: Japan s bad debt was mostly bank lending, and valuations took some time as regulators conducted asset inspections. In contrast, the subprime loan problem involved securitized products, so market valuations were completed relatively quickly. The valuation of housing loans by commercial banks in the U.S. could take longer than securitized products, though, so we should keep a close eye on future developments. Creditor nation vs. debtor nation: Japan is a creditor nation and does not rely on overseas financing, so its bad debt situation was an internal problem. The U.S. is a debtor nation, which complicates the matter. Also, U.S. housing loans and other securitized products are widely held by overseas investors, so the risk can easily spread to global markets. This will naturally impact how the government responds to the problem. Scale of the problem: Japan s bad debt problem on a cumulative basis amounted to a whopping -3% of the nation s GDP (Chart 1), whereas the subprime problem is an estimated -1% of Part : Summary Framework Necessary for Cleanup of Individual Bank Failures It is important for a government s financial crisisresponse package to include a framework that will help avoid systemic risks arising from the bankruptcy of financial institutions that are crucial to overall stability. Japan finally introduced such a framework in 1 after much trial and error, which helped bring the crisis to a close. We believe that the Federal Reserve opening its discount window to investment banks and facilitating the rescue of Bear Stearns in March 8 were important steps in the right direction. However, lending by a central bank is essentially a liquidity policy. There are limits to the extent to which the central bank can accept bad debt risk in dealing with solvency problems at financial institutions. In the case of Bear Stearns, the Fed provided loans at official discount rates for ten years to the bad bank, which was established to take over Bear Stearns high-risk assets. If the loans go bad, however, it could compromise the credibility of 8

9 the central bank and therefore the currency. Thus, a Bear Stearns-type rescue model should be seen only as a temporary measure until a solid framework for government support can be established. A financial institution rescue package using public funds will require the approval of Congress, and the appropriate legislation needs to be laid out quickly in order to better prepare for possible future developments. Japan s financial crisis-response framework designed in 1 could serve as a useful reference. Preventive Capital Injections: Impact Questionable, but Methods May Be Useful as a Reference Because bank rescues are a very delicate matter politically, it is not easy to move proactively to keep the situation from getting out of hand in the first place. In Japan s case, capital injections in had no clear policy goal and thus no substantial result. However, major banks were able to repay the money in the subsequent economic upturn, and the nation earned a profit from the rebound in share prices, consequently reducing the fiscal burden. In goingconcern bank support, indicating a clear exit strategy can help in winning taxpayers understanding. The Japanese examples may be helpful in this sense. balance sheet corrections. Such measures included the passage of the Civil Rehabilitation Law in, the reinforcement of the Resolution and Collection Corporation (RCC) in 1, and the establishment of the Industrial Revitalization Corporation in 3. A cleanup of the high volume of housing loan debt will require a different method than for corporate debt, and we will be closely watching the future course of debate and policy initiatives. Koyo Ozeki Executive Vice President Framework Needed for Debtor Balance Sheet Adjustments Loss write-offs and capital restructuring at financial institutions are, in fact, balance sheet adjustments on the creditor side. It is important that their balance sheet adjustments also lead to adjustments on the debtor side in order to halt the decline in asset prices caused by a downturn in the overall economy. For example, the Brady Plan played an important role in resolving the Latin American debt crisis of the 198s, and the Resolution Trust Corporation helped resolve the savings and loan crisis from the late 198s and early 199s. Likewise, Japan s bad debt disposal process was helped considerably by various measures in the framework that addressed debtor 9

10 JAPAN CREDIT PERSPECTIVES Appendix Year M/D Events 198 3/9 Japan s Ministry of Finance (MoF) eases regulations for banking and securities industries 9/ Plaza Accord 198 1/3 Bank of Japan (BoJ) lowers Official Discount Rate (ODR) from.% to.% (five consecutive cuts to.% by Feb. 3, 1987) /19 Black Monday (Dow Jones Industrial Average plummets) 1989 /3 BoJ raises ODR from.% to 3.% (four consecutive hikes to % by Aug. 3, 199) 1/7 Financial institutions asked to refrain from real estate lending linked to speculative trading /19 Nikkei Stock Average hits record high of 38, /1 MoF introduces volume restrictions on real estate lending /1 BoJ lowers ODR from.% to.% (Monetary easing stance maintained until lifting of the zero interest rate policy in ) 199 1/ MoF ends volume restrictions on real estate lending /7 Establishment of Cooperative Credit Purchasing Company 199 /8 Government launches 1. trillion economic package /8 MoF announces administrative guidance for banks regarding bad loans / Dollar falls below 1 yen in New York 1/17 Liberalization of liquid savings 199 8/3 Failure of Hyogo Bank and Kizu Credit Cooperative 11/ Daiwa Bank forced to shut down U.S. operations due to losses from N.Y. branch scandal 1/ Jusen (housing loan company) Resolution Package includes 8 billion in public fund injections 199 /1 Establishment of Bank of Tokyo-Mitsubishi /18 Establishment of Jusen Resolution Law and four related financial laws 9/17 MoF presents banks with draft plan for private cooperative fund to resolve jusen problem 11/11 Japanese Big Bang reform announced with 1 target 11/1 Hanwa Bank becomes first bank to receive a business-suspension order from the government in the post-war era /3 Sanyo Securities applies for court protection 11/17 Hokkaido Takushoku Bank gives up attempt at self-rehabilitation 11/ Yamaichi Securities ceases operation 1998 /1 Establishment of Deposit Insurance Law and Financial Function Stabilization Law 3/31 Injection of 1.8 trillion in public funds into 1 large banks 1/1 Eight laws passed for Financial Function Revitalization Law and Resolution and Collection Corporation (both enacted Oct. 3) 1/1 Establishment of Financial Function Early Strengthening Law (enacted Oct. 3) 1/3 Collapse of Long-Term Credit Bank of Japan; first temporary nationalization under Financial Revitalization Law 1/13 Nippon Credit Bank shuts down and is temporarily nationalized 1/1 Establishment of Financial Reconstruction Commission 1999 /1 BoJ adopts zero interest rate policy 3/31 Financial Reconstruction Commission provides 7. trillion in public money to 1 large banks /1 Establishment of Resolution and Collection Corporation (RCC) /11 Failure of Kokumin Bank /1 Kofuku Bank ordered to adopt prompt corrective measures 1

11 Appendix Year M/D Events 1999 /1 Failure of Tokyo Sowa Bank 8/ Failure of Namihaya Bank 8/ Fuji Bank, Dai-Ichi Kangyo Bank, and IBJ announce merger plan 1/1 Failure of Niigata Chuo Bank 1/1 Sumitomo Bank and Sakura Bank announce merger 1/1 Establishment of Civil Rehabilitation Law (enacted April 1, ) 1/9 Government agrees to delay lifting of Payoff (termination of blanket deposit protection) by one year to April 9/8 Startup of Mizuho Holdings (merged entity of Fuji Bank, Dai-ichi Kangyo Bank, and Industrial Bank of Japan) 1/9 Chiyoda Life applies for bankruptcy protection under Special Rehabilitation Law 1 3/19 BoJ adopts quantitative monetary easing policy /1 Establishment of Sumitomo Mitsui Banking Corporation /1 Establishment of Mitsubishi Tokyo Financial Group /1 Establishment of UFJ Holdings 9/11 Terrorist attacks in U.S. 9/1 Nikkei average falls below 1, for the first time in 17 years 9/1 Large retailer Mycal Corp. applies for bankruptcy protection under Civil Rehabilitation Law 9/18 BoJ lowers ODR to.1% 11/7 Revised Financial Revitalization Law allows RCC to buy debt at market price (enacted Jan. 11, ) 11/1 Financial Services Agency begins on-site special inspections of major banks 11/1 Establishment of Banks Shareholdings Purchase Corp. and other acts limiting bank share holdings (enacted Jan., ) 11/ Taisei Fire and Marine files for insolvency under Special Rehabilitation Law /1 Banks Shareholdings Purchase Corp. starts operation 3/1 Asahi Bank merges with Daiwa Bank (Resona Bank) /1 Implementation of lifting of Payoff only for fixed-term deposits /1 FSA announces additional loss writeoffs of 1.9 trillion after major bank special inspections 9/18 BoJ announces purchase scheme for bank shareholdings 1/7 Government postpones full Payoff two years to April ; allows permanent protection of settlement accounts 11/9 FSA Minister Heizo Takenaka announces Financial Revitalization Program and its schedule ( Takenaka Plan ) 1/11 Establishment of Financial Reorganization Promotion Law to support regional bank mergers (enacted Jan. 1, 3) 1/11 Establishment of Revised Deposit Insurance Law including -year Payoff delay (enacted April 1, 3) 1/1 Revision of laws limiting bank shareholdings in order to expand Banks Shareholdings Purchase Corp. (enacted Jan. 31, 3) 3 1/ First negative interest rates in unsecured overnight call transactions 3/ BoJ raises bank shareholding purchase ceiling from trillion to 3 trillion 3/31 Announcement of billion public fund injection into Kanto Tsukuba Bank, first under Merger Acceleration Law 11

12 Appendix Year M/D Events 3 /8 Startup of Industrial Revitalization Corporation /3 Resona Holdings applies for 1.9 trillion in public funds based on Deposit Insurance Law, Article 1 11/9 Nationalization of Ashikaga Bank after 1 trillion injection of public funds /18 Establishment of Financial Functions Strengthening Law /18 Official announcement of merger between Mitsubishi Tokyo Financial Group and UFJ 1/1 Startup of Mitsubishi UFJ Financial Group 3/9 BoJ ends quantitative monetary easing policy 7/1 BoJ ends zero interest rate policy, lifting unsecured overnight call rate to.% and ODR to.% 1/ Revision in Moneylending Business Law 7 /1 BoJ hikes rates, lifting unsecured overnight call rate to.% and ODR to.7% 1 Approximate exchange rates as of August 8: 1 U.S. dollar = 11 Japanese yen, 1 British pound = yen, 1 euro = 1 yen. Financial Instruments Business Registration Number: Director of Kanto Local Finance Bureau (Financial Instruments Firm) No.38 Member of Japan Securities Investment Advisers Association and Investment Trusts Association Investment management products and services offered by PIMCO Japan Ltd are offered only to persons within its respective jurisdiction, and are not available to persons where provision of such products or services is unauthorized. Past performance is not a guarantee or a reliable indicator of future results. This article contains the current opinions of the author but not necessarily those of the PIMCO Group and does not represent a recommendation of any particular security strategy, or investment product. The author s opinions are subject to change without notice. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. This article is distributed for educational purposes and should not be considered as investment advice or an offer of any security for sale. Investing in the bond market is subject to certain risks including market, interest-rate, issuer, credit, and inflation risk. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. The value of assets under management will be affected by, and fluctuate based upon, movements in prices of securities in the portfolio, financial market conditions, interest rates, and credit risk arising from changes in the financial condition of issuers of securities in the portfolio, among others. Where investments are made in foreign currency denominated assets, the value of the assets will also be affected by movements in foreign exchange rates. All profits and losses resulting from investments are for the account of the investor. Thus, there is no guarantee that the principal amount of the investment will be preserved, or that a certain return will be realized; rather, the investment could suffer a loss. The fee charged for our activities related to the financial instruments business will vary depending on the investment trust acquired or the investment advisory agreement entered into, and thus these materials do not set forth specific fee amounts or their calculation methodologies. No part of this publication may be reproduced in any form, or referred to in any other publication, without express written permission. 8, PIMCO PIMCO Japan Ltd Toranomon Towers Office 18F -1-8, Toranomon, Minato-ku Tokyo, Japan PER38-888