Transcript Japan

Japan Financial Crisis
By: Sander Chau
Winslow Han
Postwar Financial System
• Bank-based system with underdeveloped
stock and bond market.
• Stable system – no threat of new entry
• Safe but inefficient system
• Postwar system could not last forever
• Banks grew too large but restricted by
many restrictions
4 Basic Causes of Bank Difficulties
• Failure to create prudential regulatory
system
• Macroeconomic mismanagement
• Effects of Globalization
• High rate of financial innovation
Prudential Regulatory System
• Deregulation of the system took place
without creating a effective system
• Generates competition
• Profit no longer guaranteed
5 Macroeconomic Policy Mistakes
• Interest Rates were at postwar lows
• Not easing monetary and fiscal policies in
the early 90’s
• Relying excessively on easy monetary
policies in the mid 90’s
• Fiscal Stimulus through supplementary
budgets in the mid 90’s, too little too late.
• Wrong optimistic forecast for ‘97
Effects of Globalization
• Economic and financial policies subject to
foreign pressures
• World’s largest creditor nation: Japanese
financial institutions engaged in foreign
lending and portfolio investment
• Flourishing of a free global capital market
• Big Bang deregulation creates competition
in Japan home market from foreign
financial institutions
Financial Technology Innovation
• Wide range of new financial derivatives
• Mostly American and some European
players
• Japanese banks unable to learn
• The most capable Japanese are hired
away by foreign firms
Banking Sector Problems
• Mergers and failures have left Japan with
7 major banks
• Low profitability for more than 10 yrs
• Banks depend too heavily on revenue
from lending
• Government sponsored financial
institutions
• Evergreening
Comparison to US Banks
• Interest Margin of Japanese banks 1.2%
compared to 3.3 to 3.5% of assets
• “Other Revenue” 38% revenue from
lending operations compared to US 73%
of lending revenue
Government Sponsored Institutions
• Japan Post: post office and largest deposittaking institution in the world
• Heavily subsidized
• 9 times the branches of all city banks
• Same rate on deposits, explicit government
guarantee, no maintenance fee, lower rate on
lending, no prepayment penalties
• Strong government resistance to address this
problem and no public recognition of the losses
that these government institutions have made
with explicit subsidies
Table 1: An Overview of the
Japanese Financial System
Total
Assets
Number Of
Institutions
Branches
Employess
Trillion
% of GDP
Deposits
Outstandin
g
Loans and
Discount
Outstandin
g
Trillion
Trillion
Banks
City Banks (Consolidated)
7
2853
104847
410
81.9
260
238
227
12221
238760
436.4
87.2
289.2
259
2444
11197
173709
394
78.8
317
154
Life Insurance
43
15807
380864
184
36.7
0
47
Other Insurance
59
4869
87501
33
6.6
0
4
293
2256
94898
95
19
0
0
Postal Savings
1
24773
62422
242
48.3
239
0.7
Government Financial Institution
8
311
11250
166
33.2
0
159
3082
74287
1154251
1960.4
391.7
1105.2
861.7
Others
Cooperative Financial Institutions
Non-depository financial institutions
Remaining
Public Financial Institutions
Total Financial System
Bank Problem Example
• 1.1 trillion yen of public funds injected into Asahi and
Daiwa Banks
• March 2003: Asahi and Daiwa Banks merge into Resona
Bank (5th largest)
• Resona granted another 1.96 trillion yen
• September 2003: Resona records loss of 1.76 trillion yen
for period between Mar-Sept 03 (90% capital provided,
disappears)
• Regulators principal aim to avoid large bank failures
• Little attention to future viability of recapitalized banks
• Regulators did not systematically force other banks to
reassess their risk ratings
• Gives little incentive for Banks to restructure
Book Value and Adjusted Capital in
the Japanese Banking Sector
Mar-89
Mar-91
Mar-93
Mar-95
Mar-97
Mar-99
Mar-01
Mar-03
Market Value of
Shares
A
97.1
77.7
56.4
52
54.1
47.1
44.5
23.2
Book Value of
Shares
B
23.2
33.1
34.5
39.8
42.9
42.7
44.3
23.2
Reported Book
Value of
Bank
Capital C
22.5
30.2
31.8
32.3
28.5
33.7
36.7
24.8
Defered Tax
Assets
D
0.0
0.0
0.0
0.0
0.0
8.4
7.3
10.6
Estminated
Underreserv
ing E
N/A
N/A
N/A
N/A
15
4.6
7.6
5.4
Adjusted Capital
C+ ((AB)*.05)-D-E
66.8
57
44.9
39.6
20.2
23.4
21.9
8.8
Equity Capital
Held by the
Govt
0.0
0.0
0.0
0.0
0.0
6.3
7.1
7.3
32839
26292
18591
15140
18008
15887
13000
7873
Nikkei225 Stock
Price
Average
Conclusion
• Cumulative loan losses by banks since 1990 is
91.5 trillion yen (18% of current Japanese GDP)
• Tax payer burden very likely at least 100 trillion
yen (20% of GDP)
• Solutions:
–
–
–
–
Banks must shrink in size
Find alternative means of income other than lending
Recapitalization and restructuring
Reining in of Government sponsored financial
institutions