Financial Institutions. Japanese Finance. Financial Institutions. Financial Institutions

Transcription

1 Financial Institutions Japanese Finance Financial markets have traditionally been highly regulated Price controls Deposit interest rate ceilings Usury laws Entry restrictions Limits on interstate banking Separation of banks and securities firms Glass-Steagall act (US) Securities transaction law (article 75) (Japan) Financial Institutions Rigid financial structure after WWII But broad range of structural changes after 1970 Deregulation of interest rates Expansion of scope of competition among financial institutions Relaxation of international capital controls Japanese Big Bang financial system reforms after 1996 Free, fair and global More liberalization than other OCED countries Last 30 years Financial Institutions Post World War II Tightly controlled monetary and financial system Controlled interest rates Limited competition among financial institutions Maintained international capital controls Wanted to assure financial stability Avoid bank closings of 1920s (36 banks closed) Reduce postwar inflation Assist Japan s reconstruction 1

2 Financial Institutions Financial institutions highly specialized To reduce risk To control demand for credit in particular sectors during rapid industrialization Specialized by Maturity of financial instrument Type of financial activity Lending, underwriting, insurance, trust Purpose of finance International trade, home finance, agriculture Size of customer City, regional institutions Private Financial Institutions Private commercial banks Provide short term credit to industrial customers City banks (largest banks) toshi ginko Most power 25% deposits and lending in Japanese economy in 1970 Largest banks in the world Nationwide network of branches Lend to mostly medium and large firms mainbank for keiretsu Corporate and individual deposits City Banks Dai-Ichi Kangyo* (Dai Ichi Kokuritsu & Nihon Kangyo) 2. Sumitomo* 3. Sakura* (Mitsui Bank & Taiyo Kobe Bank) 4. Fuji* (Yasuda) 5. Mitsubishi* 6. Sanwa* 7. Tokai 8. Tokyo (Yokohama Specie Bank) 9. Daiwa 10. Asahi (Kyowa Bank & Saitama Bank) 11. Hokkaido Takushoku (failed 1997) * Main bank of financial keiretsu City Bank Mergers 1. MUFG Mitsubishi Tokyo Financial Group Bank of Tokyo Mitsubishi Mitsubishi Bank Mitsubishi UFJ Financial Group Bank of Tokyo $1.7 trillion Mitsubishi Trust Nippon Trust Tokyo Trust UFJ Holdings Sanwa Bank Tokai Bank Toyo Trust 2. Mizuho Dai Ichi Kangyo Ginko Fuji Bank Industrial Bank of Japan 3. Sumitomo Mitsui Sumitomo Bank Sakura Bank 4. Resona Daiwa Bank Kinki Osaka Bank Nara Bank Asahi Bank Kyowa Bank Saitama Bank 2

3 Private Financial Institutions Private commercial banks Regional banks (124 banks) chihō ginko Serve smaller customers outside major cities Strong in specific cities or prefectures 15% deposits and lending 1970 Time deposits from individuals Loans to small medium firms US regulates interstate banking Many states have unit banking (banks with no branches) Some 15,000 banks in the US Japanese banks are larger than US banks Most of the largest world banks are Japanese Private Financial Institutions Specialized Private Financial Institutions Long term credit banks (like investment banks) Long term financing for industrial customers Raise funds by issuing long term bonds Underwrite securities of large corporations and local governments Industrial Bank of Japan (Nihon Kogyo Ginko) (until 2002) Long Term Credit Bank of Japan (Nihon Chōki Shinyō Ginko) Private Financial Institutions Specialized Private Financial Institutions Trust banks (Japanese and foreign trust banks) Receive and manage money on behalf of the owner Household trust deposit 30% long term loans, 70% financial investment (securities, equities) More like mutual fund or pension fund Mitsubishi Trust & Banking (until 2005), Mitsui Trust & Banking (now Chuo Mitsui), Sumitomo Trust & Banking, Yasuda Trust & Banking (now Mizuho) Private Financial Institutions Specialized private financial institutions Sogo banks (mutual banks) until 1988 Shinkin banks (credit associations) Credit cooperatives Labor credit cooperatives Agricultural cooperatives 3

4 Private Financial Institutions Securities Companies Nomura, Nikkō, Daiwa, Yamaichi 70% securities market Mediate Japanese purchases of US government bonds Negotiate (with city banks) purchases of Japanese government bonds from MOF Banks and securities firms separated along American lines Glass-Steagall Act (US) Article 75 (Japan) Public Financial Institutions Central Bank (Bank of Japan) BOJ consults with MOF to coordinate policy Technically independent of government with own policy tools and objectives Gain more autonomy over time Adopt forecast (soft target) for monetary growth Policy board (Nihon Ginkō Seisaku inkai) Highest decision making body Bank s governor, MOF rep, EPA rep 4 appointed members from city and regional banks, manufacturing industry, and distribution industry Executive committee (yaku inkai) Decides discount rate policy board and other BOJ officials Public Financial Institutions Postal Savings Public Banks Development Bank of Japan Export Import Bank Postal Savings System Largest deposit taking institution 23,673 post office in every town and village Collects one-third of all deposits in financial system Ordinary savings deposits, savings with fixed or indefinite maturity up to 10 years Deposits from individuals funds FILP (Fiscal Investment & Loan Program) MOF uses FILP funds to invest in infrastructure and public works capital budget for the government 4

5 Postal Savings System Advantages of using postal savings Tax free interest up to 3 million initially and ultimately 10 million Minimal identification required Tax exemption eliminated in 1987 Rates set by MPT (now MIC) (independently of MOF and BOJ) to attract deposits Postal workers were given a commission on new deposits until 1998 Post offices could offer 10-year deposits with 6-month withdrawal period Private banks could not offer long term deposits until 1995 Post offices were more profitable than banks No reserve requirement, no taxes, no deposit insurance Fiscal Investment Loan Program According to the MOF The FILP, without increasing the tax burden on the public, provides long-term, fixed, and low-interest funding that private financial institutions cannot provide. The FILP is a means of fiscal policy that uses financial techniques. FILP report 1999 FILP Planned Amount of New Lending FILP Percent of GDP Year 5

6 FILP 6

7 Financial Structure Stable financial structure after WWII determined by Low level of financial assets held by household and firms ½ US level as % of GNP Equally distributed Easiest to hold in bank deposits (postal savings accounts) Small size of public debt Debt as a percent of GNP in % in Japan, 48% in US Financial Structure Underdeveloped money, capital, and equity markets before liberalization Interbank call money market Only short term money market 1950s 1960s Banks borrow and lend between themselves Less than 7 days, market determined rates No treasury bill market BOJ underwrote all short term treasury issues, and held them to maturity No equity market Equity market relatively unimportant 13% of external funding Firms issue equity in period of tight money which tends to destabilize stock prices Financial Relationships economy grows 10% per year Japanese corporations expand rapidly and need financing 13 city banks overlend Extend more loans than private market can fund BOJ makes up difference with loans at official discount rate High level of lending from BOJ city banks Chronic and large amounts (6-8% total liability) Banks depend on BOJ, accept BOJ authority Financial Relationships Corporations overborrow Corporations depend on bank loans, not equity to raise funds 50% internal sources 50% external sources (90% banks, 10% equity and capital markets) Banks are center of keiretsu (mein banku) 7

8 Financial Relationships Central Bank Imbalance of bank liquidity City banks overloaned big business Regional banks underloaned small and medium businesses Mostly indirect finance Household banks corporation Not direct through equity or bond market HOUSEHOLDS overloan City Banks imbalance Regional Banks Securities overborrow Corporations Postal Savings FILP Infrastructure Financial Relationships Financial system channels funds from savers to investors High household savings (20% income) 1950s 1960s Government budget balanced NX is small percent of GNP Fiscal and Monetary Policy Fiscal policy restrains growth Persistent budget surpluses Small size of government expenditures Monetary policy Highly stimulative (low interest rates) Short term management role in BOP deficits 8

9 Monetary Policy MOF sets policy BOJ is independent, but conforms to policy Discount rate varied little Most bank lending rates fixed administratively Not tied to cost of borrowing Open market operations Very thin market in government bonds or even private securities Gov coerced financial institutions to accept open market sales of securities at unattractive rates Reserve requirements were very low So money multiplier is large Very difficult to control credit Monetary Policy Window guidance ( moral suasion ) (magoguchi shidō) Direct limits on discount window borrowing Quantitative limits on bank lending BOJ and MOF regulate interest rates Set strict relationships among various interest rates Bond issue committee (kisaikai) (22 banks + 7 securities firms) Set lending rates under MOF and BOJ guidance Monetary Policy Regulated interest rates When MOF imposes credit constraints, it is binding because Underdeveloped securities market Capital controls limit loans from abroad After 1970s Oil prices rise and world goes to floating exchange rates Growth slows, expectations diminish, private investment slows Corporations reduce borrowing loan surplus City banks borrow less from BOJ Gov runs large budget deficits, issues T-bills recession and tax cuts Diversified demand for financial services Firm and individual financial assets increase Japan US fold 2.2-fold fold 1.9-fold 9

10 Financial Regulation Cheap mechanism for government debt financing MOF would issue bonds whose price was well below the market price Bond yield was below the interest rate City bank syndicate would purchase the bonds and hold them for a few months BOJ would later repurchase them and thereby increase the money supply Financial Regulation Mechanism for direct control over financial flows Overloan system First appeared around 1900 Banks could lend out more money than they had in deposits at the prevailing rate BOJ would make loans to city banks in order for them to loan out more money BOJ loans to city banks never exceeded 3% of their funds Banks had a strong incentive to stay on the good side of BOJ BOJ would review banks balance sheets and ensure that loans were going to targeted sectors Financial Regulation Window Guidance System Window guidance allowed the BOJ to put temporary ceilings on loan activities Overloan system create incentives for banks to listen to BOJ policy Permitted for direct control over the money supply Regulations applied more to city banks than small banks Relative share of city banks in loan markets fell when window guidance was used Since city banks were the main source of funds to industries, the policy would slow down growth Financial Regulation Credit markets became a tool of industrial policy Government banks offered below market loans to the private sector Sectors and firms that the government liked got preferential access to rationed credit These sector received interest rate subsidies Government lending could indicate which sectors were targeted to the private sector Firms had to pay careful attention to government attitudes in order to receive credit 10

11 Financial Regulation Banking sector was segmented Could use regional banks as a means of controlling city banks City banks also relied on heavily regulated regional banks Since MOF and BOJ controlled a large share of the capital market, city banks had to generally follow government policy Since the government would sometimes bail out banks if they ran into trouble, loan risks were socialized Control over recipient industries helped influence banks Government also used recession cartels to reduce downside risk Financial Regulation Many policies tended to create inefficient, small, regional banks Window guidance Control over opening of new branches Restrictions on consumer credit Restrictions on cash machines Promoted close firm-bank ties Lead to the development of the compensating balance system Restricting equity and bond markets lead to enormous levels of loan financing Government Policy Gov funds went to all kinds of industries Leading industries, declining, & stagnant industries MOF controls branch administration While large banks provided most support for leading industries, MOF aided small-medium banks more than large banks When MOF contracted MS, MOF contracted credit to city banks and long term credit banks relatively more Seemed more concerned about macro stabilization than directing credit Usual Story Interest rates are low Encourages strong investment demand economic growth Credit controls designed to stimulate investment in targeted industries BUT Low interest rates do not increase savings (not clear) Interest on small deposits in postal system exempt from taxes Two policies are inconsistent Actual investment in individual industries differs widely from the planned levels No direct controls with legislative regulations No direct imposition of direct administrative guidance 11

12 Big Bang Motivation Partial liberalization of financial / product markets undermined the regulatory system This caused the cartel-like system to collapse MOF realized that the perverse incentives in the midst of partial deregulation was untenable Big Bang Announced by Prime Minister Hashimoto 1996 Series of measures to reform Japan s financial system according to the following principles Free markets Fair Trade secured by transparent and reliable rules An institutional framework satisfying international rules Big Bang Free, Fair, & Global Decompartmentalize the finance industry so that all financial services can be offered by one provider Removal of regulation on commissions so that efficiency and competition for business is encouraged Increasing disclosure requirements of corporations so that there is a transparent market and less opportunity for insider trading Moving Japanese accounting standards in line with international standards Big Bang Legal elements 1998 Laws for Financial System Reformation (LFSR) Changed banking law, securities transactions law, insurance industry law Changes in the asset management industry Deregulation of commissions Access to foreign funds (FX liberalization) Securities brokerages to open without government licenses Increased flexibility of asset management services offered by securities firms Revision in investment trust market Banks and trust banks can sell investment trusts after 1998 Rapid growth in this market Changes Deregulation of segmentation began in 1993 Financial firms allowed to enter markets outside their territories through subsidiaries But securities subsidiaries of banks could not Conduct stock brokerage because that is the most profitable for securities companies Or do underwriting of securities because of potential conflict of interest Lots of new entry since 1999 Orix trust bank formed from Orix corporation People can make deposits using phone or internet Mitsubishi trading entered securities investment and trading business 12

13 Changes Allowing banks to issue strait bonds (which only long term credit banks could do) Allowing more institutions to offer defined contribution pension plans Improved transparency Consolidated accounting rules went into place in 1998 Old rules allowed profit shifting because subsidiaries were defined only in terms of share held, not in terms of control Breakdowns of cash flow in 2000 Changes Improved corporate governance Since 1993 the cost of filing derivative actions for shareholders has fallen to less than that in the US After 2001, deposits are only guaranteed up to the first 10 million Revised anti-trust law Law restricted firms from holding companies in unrelated sectors Since 1997 companies are allowed to be holding companies Changes Foreign exchange liberalization Japanese people can buy foreign securities freely and access foreign mutual funds If Japanese financial institutions can not compete, they will not get funds Deregulation is necessary and critical for Japanese firms to be able to compete MOF must keep the Japan premium from making Japanese banks uncompetitive Changes Prominence of banks and insurance companies exists because of pension restrictions Stable shareholding is a critical feature of keiretsu Stable shareholding exists in part because financial institutions do not need to maximize returns on their stock portfolios Regulation plays a role through Absence of competition in banking and insurance Regulation of brokerage fees Lack of consolidated reporting and tax breaks for small enterprise which encourages vertical groups 13

14 Changes The Big Bang is likely to dramatically change these relationships Consider merger between Sakura and Sumitomo Expect a decline in the banking sector Initially seen for large firms Likely to decline even more rapidly for small firms as stock exchange liberalization and venture capital emerges End of interlocking shares implies greater ease of foreign direct investment Greater productivity growth as corporate governance improves Foreign Direct Investment 100 million 14