Transcript Presentation - Financial Institutions for Innovation and Development

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The Financial
Sector and the
Real Economy in
Japan
Ulrike Schaede
ウリケ・シェーデ
Professor of Japanese Business
Director, JFIT: Japan Forum for Innovation and Technology
School 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
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“Direct finance”
直接接金融
“Indirect finance”
間接金融
Macro 101:
How the Economy works in the Textbook
loans
Commercial
Banks
savings
SSUs
(households)
DSUs
(companies)
Bonds, stocks, CP, any IOU
Investment
Banks
This is driven entirely by the demand of DSUs
1933 GlassSteagall
Separation
1949 証券取引法
“Direct finance”
直接接金融
“Indirect finance”
間接金融
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What happened in the U.S.?
Holding companies
savings
loans
DSUs
(companies)
Commercial
Investments
Bank
- Banking
- M&A advice
- Insurance
- Mortgages
- Credit cards
- Bonds,
Private
equity
Investment
stocks,
CP, anydeals
IOU
- CDOs, and
other toxic
Banks
Investment
instruments
Bank
-
SSUs
(households)
1933 GlassSteagall
Separation
1949 証券取引法
1998 Sandy Weill merges Citi, Travelers and Salomon Brothers
1999 Goldman Sachs becomes publicly traded
1999 “Financial Services Modernization Act “ (Graham-Leach-Bliley Act)
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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?
“Direct finance”
直接接金融
“Indirect finance”
間接金融
(1) The Developmental State (1950-1987)
loans
Commercial
Banks
savings
SSUs
(households)
DSUs
(companies)
Bonds, stocks, CP, any IOU
Investment
Banks
Japan put this system on steroids, for the
government to guide money flows
1933 GlassSteagall
Separation
1949 証券取引法
+ What happened in Japan?
“Indirect finance”
間接金融
(1) The Developmental State (1950-1987)
loans
DSUs
(companies)
Commercial
Banks
savings
SSUs
(households)
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
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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
markets
 MOF 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
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Legal change in Japan

1997/8 banking crisis strikes in full forces




1998 revision of Antimonopoly Law



Huge government capital infusion into all banks
Long-term banks disappear as a category
Consolidation
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
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Shift in Corporate Finance
180,000,000
160,000,000
140,000,000
120,000,000
Bank Loans
100,000,000
80,000,000
60,000,000
Retained
Earnings
Bonds, Stocks,
etc.
40,000,000
20,000,000
0
'60
'62
'64
'66
'68
'70
'72
'74
'76
'78
'80
'82
'84
'86
'88
'90
'92
'94
'96
'98
'00
'02
'04
In million Yen; stock of financing outstanding for large firms (capital of ¥1 billion +; n=5,275)
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11
Debt-Equity Ratios
Calculated from 法人企業統計
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Loans outstanding, by interest rate
1970-2002
in 100 mil yen
900,000
800,000
700,000
600,000
500,000
400,000
300,000
200,000
100,000
0
less than 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%
0.25%
1970-Dec.
1980-Dec.
1990-Dec.
1995-Dec.
1999-Dec.
2000-Dec.
2001-Dec.
2002-Dec.
1996-Dec.
1997-Dec.
1998-Dec.
Source: Bank of Japan database
th
a
0. n 0
50 .
1. %- 25%
00 0
1. % .75
50 -1 %
.
2. % - 25%
00 1.
2. % - 75%
50 2.
3. % - 25%
00 2
3. % .75
50 -3 %
.
4. % - 25%
00 3
4. % .75
50 -4 %
.
5. % - 25%
00 4
5. % .75
50 -5 %
6. % - .25
00 5 %
6. % - .75
50 6 %
7. % .25
00 - 6 %
7. % - .75
50 7 %
8. % - .25
00 7 %
.
8. % - 75%
50 8
9. % .25
00 -8 %
9. % - .75
%
10 50% 9.2
5
.
10 00% - 9. %
7
.5
0% -10 5%
11
.
.0 - 1 25%
11 0% 0.
7
.5
-1 5%
0
12 % 1.
.0 - 25
0% 11 %
- 1 .75%
2.
25
%
Le
ss
in billion Yen
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Loan rates in 2002
50,000
45,000
40,000
35,000
30,000
At that time, banks’ lending
costs were between 3-5%
25,000
20,000
15,000
10,000
5,000
0
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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?
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Supporting the unproductive
economy?
 Zombie

firms:
Companies that have no viable business model, but receive
bank loans to pay loans outstanding
 Artificially kept alive: employment
 Hog resources: talent, productive assets, financial capital
 Drag 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
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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?
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The Next Big Thing: “Fintech”

Germany
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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