Corporate Financing and Governance in Japan: The Road to the Future PDF
Preview Corporate Financing and Governance in Japan: The Road to the Future
Corporate Financing and Governance in Japan This page intentionally left blank Corporate Financing and Governance in Japan The Road to the Future Takeo Hoshi and AnilKKashyap The MIT Press Cambridge, Massachusetts London, England ©2001 Massachusetts Institute of Technology All rights reserved. No part of this book may be reproduced in any form by any electronic or mechanical means (including photocopying, recording, or information storage and retrieval) without permission in writing from the publisher. This book was set in Palatino by The MIT Press. Printed and bound in the United States of America. Library of Congress Cataloging-in-Publication Data Hoshi, Takeo. Corporate financing and governance in Japan : the road to the future / Takeo Hoshi and Anil Kashyap. p. cm. Includes bibliographical references and index. ISBN0-262-08301-9 (hc. : alk. paper) 1. Finance—Japan—History. 2. Banks and banking—Japan—History. 3. Corporations— Japan—Finance—History. 4. Corporate governance—Japan—History. I. Title. HG187.J3 C67 2001 332.1'0952—dc21 2001030439 Contents Foreword by Stanley Fischer vii Acknowledgments xi List of Figures xiii List of Tables xv List of Boxes xix 1 Introduction 1 2 Creation of a Modern System 15 3 Wartime Transformation 51 4 The Keiretsu Era 91 5 Bank Interventions 145 6 Benefits and Costs of Keiretsu Financing 185 7 Transformation through Deregulation 219 8 The 1990s: Crisis and Big Bang 267 9 The Future 305 Bibliography 329 Author Index 347 Subject Index 351 This page intentionally left blank Foreword Stanley Fischer1 It has been clear since the early 1990s that the future of the Japanese financial system is critical to the future of the Japanese economy, other economies in Asia, and indeed the global economy. Much has been achieved in reforming and strengthening the banking system, but much remains to be done. Nor is it obvious what type of financial system and system of corporate finance will emerge when the Japanese Big Bang deregulation program is completed. Hence this book by Takeo Hoshi and Anil Kashyap—whom I had the pleasure to meet, teach, and learn from, when they were students at MIT—is especially timely. It is also exceptionally interesting. Itstheme is that the past is prologue—and that the future is more likely to be similar to the pre–World War II Japanese financial system, and to the current United States and London-based financial systems, than to the post–World War II Japanese financial system that many think of as an essential part of the Japanese economy. To establish this, Hoshi and Kashyap take us through the history of the Japanese financial system since the Meiji era. They divide the history into four periods. The first runs from the Meiji restoration through some point in the 1930s, when Japan began preparations for war. They argue that the Japanese financial system during that period was more like the modern United States system than the post–World War II system in Japan. Firms, including medium-size enterprises, received most of their funding through the capital markets, both bond and stock markets. The banks were important but not dominating. The second period ended after the postwar restructuring of the economy that resulted from the Allied insistence that the Japanese gov- ernment not repay war debts and the attempt to restructure the zaibatsu. 1. First Deputy Managing Director, International Monetary Fund. Views expressed are those of the author, and not necessarily of the International Monetary Fund. viii Foreword Inthe 1930s and through the war, the Japanese government took control of the allocation of credit, restricting the rights of shareholders, and using the banks to implement its preferences. And then at the end of the war, the banks took the lead in establishing business plans as companies were restructured, and in helping implement them. It was during this period that the banks became the dominant financial institutions. The third period ran from the early 1950s to the early 1970s. This was the period of the Japanese miracle, at the end of which the Japanese economy was the second largest in the world, despite its relatively underdeveloped financial system. Savings options for individuals were limited, so most savings went to banks, which intermediated them most- ly to large industrial companies. The government ran balanced budgets, and did not need to develop the bond market. The fourth period, a period of slow deregulation, is ending now: Hoshi and Kashyap date its end at March 2001, when the Big Bang deregulation process was completed. During this period market financ- ing options were permitted for firms, but savings options for individuals were still relatively restricted. Corporations began to borrow in the bond markets, but the banks and other corporations bought most of the bonds. Operating restrictions on banks were lifted only gradually, so that even though they were losing their blue-chip customers, the banks could not offer new products and services to try to retain them. Hoshi and Kashyap argue this is why the banks went into new lines of business in the 1980s, including lending to smaller firms and the real estate sector, and hence why the banks got into such trouble in the 1990s. The banks also moved abroad, as capital controls were lifted. The authors argue that many of the current difficulties of the Japanese finan- cial system result from the mismanaged process of financial deregulation that allowed borrowers to shift away from bank financing, but pushed savers to continue using banks, while denying banks the right to diversi- fy their lending activities. The analysis is buttressed with a wealth of data and case studies, which make this not only a persuasive story, but also an interesting one. It ends in Chapter 9 on the brink of the fifth period. Savers’ options will be fully liberalized, but at the same time the banks will be able to expand their business lines. The authors recognize that there are many ways the deregulated system can develop, but make the case that the most likely outcome is a system closer to that of the first period, and the United States and United Kingdom systems, than the system of the third period, which many people think of as theJapanese system. Foreword ix However, they do not see a smooth path ahead for the banking system. The banks, they say, “are destined to shrink massively”—the Japanese banks cannot remain the largest in the world while being among the least profitable. It is of course far from certain that Hoshi and Kashyap’s scenario will eventuate. But even if it does not, the reader of this book will have been given the essential elements of history, and the data and trends in the sys- tem, that will make it possible to follow and understand the unfolding of this critical story in the coming years.
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