Crisis and Change in the Japanese Financial System PDF
Preview Crisis and Change in the Japanese Financial System
CRISIS AND CHANGE IN THE JAPANESE FINANCIAL SYSTEM Innovations in Financial Markets and Institutions Editor: Mark Flannery University of Florida Other books in the series: Cummins, J. David and Santomero, Anthony M.: Changes in the Life Insurance Industry: Efficiency, Technology and Risk Management Barron, J.M., and Staten, M.E.: Credit Life Insurance: A Re-Examination of Policy and Practice Cottrell, A.F., Lawlor, M.S., Wood, J.H.: The Causes and Costs of Depository Institution Failures Anderson, S., Beard, T.R., Born, J.: Initial Public Offerings: Findings and Theories Anderson, S., and Born, J.: Closed-End Investment Companies Kaufman, G.: Banking Structures in Major Countries England, c.: Governing Banking's Future Hancock, D.: A Theory of Production for the Financial Firm Gup, B.: Bank Mergers: Current Issues and Perspectives CRISIS AND CHANGE IN THE JAPANESE FINANCIAL SYSTEM edited by TakeoHoshi University of California, San Diego Hugh Patrick Columbia University SPRINGER SCIENCE+BUSINESS MEDIA, LLC Library of Congress CataIoging-in-Publication Data Crisis and change in the Japanese financial system / edited by Takeo Hoshi, Hugh Patrick. p.cm. --(Innovations in financial markets and institutions) Includes bibliographical references. ISBN 978-1-4613-6977-6 ISBN 978-1-4615-4395-4 (eBook) DOI 10.1007/978-1-4615-4395-4 1.Finance--Ja pan.2.Financial institutions--J apan. I.Hoshi, Takeo. I1.Patrick, Hugh T. III. Series. HG187.J3 C75 2000 332'.0952--dc21 ()()-020395 Copyright@2000by Springer Science+Business Media New York Originally published by Kluwer Academic Publishers, New York in 2000 Softcover reprint of the hardcover 1s t edition AlI rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, mechanical, photo copying, recording, or otherwise, without the prior written permission of the publisher, Springer Science+Business Media, LLC Printed on acid-free paper. TABLE OF CONTENTS Contributors .................................................................................................. vii Preface .............................................................................................................x i 1. The Japanese Financial System: An Introductory Overview Takeo Hoshi and Hugh Patrick ...................................................... 1 PART I THE ORIGINS OF JAPAN'S BANKING CRISIS 2. What Caused Japan's Banking Crisis? Thomas F Cargill ......................................................................... 37 3. Causes of Japan's Banking Problems in the 1990s Kazuo Ueda. ............................................................................... 59 PART II RESPONDING TO CRISIS 4. The Stagnant Japanese Economy in the 1990s: The Need for Financial Supervision to Restore Sustained Growth Takatoshi Ito ............................................................................... 85 5. The Reorganization of Japan's Financial Bureaucracy: The Politics of Bureaucratic Structure and Blame Avoidance Nobuhiro Hiwatari .................................................................... 109 6. The Disposal of Bad Loans in Japan: The Case of the CCPC Frank Packer. ............................................................................ 137 7. Bank Lending in Japan: Its Determinants and Macroeconomic Implications Kazuo Ogawa and Shin-Ichi Kitasaka ...................................... 159 8. The Postal Savings System, Fiscal Investment and Loan Program, and Modernization of Japan's Financial System Thomas F Cargill and Naoyuki Yoshino .................................... 201 vi TABLE OF CONTENTS m PART FINANCIAL STRUCTURE CHANGE AND THE BIG BANG 9. The Big Bang: Idea and Reality Akiyoshi Horiuchi .................................................................... 233 10. The Big Bang in Japanese Securities Markets Shoichi Royama ....................................................................... 253 11. Japan's Financial Big Bang: Its Impact on the Legal System and Corporate Governance Hideki Kanda .................................................................. , ......... 277 12. Big Bang Deregulation and Japanese Corporate Governance: A Survey of the Issues Michael S Gibson ..................................................................... 291 Subject Index ......................................................................... .315 THE CONTRIBUTORS Editors Takeo Hoshi is Associate Professor at the Graduate School of International Relations and Pacific Studies (IRlPS) at the University of California, San Di ego, where he has been on the faculty since 1988. In 1997-98 he was Tokio Marine & Fire Visiting Associate Professor on the Faculty of Economics at Osaka University. He has recently been appointed Editor of the Journal of the Japanese and International Economies, after being Associate Editor since 1993. He received a Bachelor of Arts in Social Sciences from the University of Tokyo in 1983, and a Ph.D. in Economics from Massachusetts Institute of Technology in 1988. Hugh Patrick is R. D. Calkins Professor of International Business at Colum bia Business School. He is Director of the Center on Japanese Economy and Business, and also serves as Co-Director of the University's APEC Study Cen ter. He is Chair of the International Steering Committee of the Pacific Trade and Development (PAFTAD) conference series. He received his B.A. from Yale University in 1951 and M.A. degrees in Japanese Studies (1955) and Econom ics (1957) and his Ph.D. in Economics (1960) from the University of Michigan. Authors Thomas F. Cargill is Professor of Economics at the University of Nevada at Reno. He is a member of the Advisory Council of the Korean Economic Insti tute of America in Washington, D.C. He has been a Visiting Scholar and Re searcher at the Bank of Japan (1984,1994), the Japanese Ministry of Finance (1987), the Japanese Ministry of Posts and Telecommunications (1992), and Keio University (1997). He received a B.S. in Economics from the University of San Francisco in 1964 and a Ph.D. in Economics from the University of California, Davis in 1968. Michael S. Gibson is an Economist in the Trading Risk Analysis Section, Di vision of Research and Statistics of the Board of Governors of the Federal Re serve System, Washington, D.C. where he does research in empirical finance. In addition to working at the Fed, he was on the faculty of the University of viii CRISIS AND CHANGE IN THE JAPANESE FINANCIAL SYSTEM Chicago Graduate School of Business for two years. He earned his B.A. in Economics from Stanford University (1988) and his Ph.D. in Economics from MIT (1993). Nobuhiro Hiwatari is Professor of Contemporary Japanese Politics at the In stitute of Social Science, University of Tokyo, where he has been teaching since 1993. He has also taught Japanese political economy at the University of Cali fornia, Berkeley (1996-97) and Columbia University (1998-99) and was a Vis iting Scholar at Harvard University and Cambridge University (St. John's Col lege). He has a Ph.D. from the University of California (1989) and Doctorate of Laws from the University of Tokyo (1990). Akiyoshi Horiuchi is Dean of the Center for International Research on the Japanese Economy and Professor in the Department of Economics at the Uni versity of Tokyo, where he has been on the faculty since 1984. Previously he was on the faculty at the Institute of Economic Research, Hitotsubashi Univer sity and the Department of Economics, Yokohama National University. Takatoshi Ito is serving as Deputy Vice Minister for International Affairs in the Ministry of Finance, currently on leave from Hitotsubashi University, where he is Professor at the Institute of Economic Research. Previously he was Senior Advisor in the Research Department of the International Monetary Fund in Washington, D.C., Professor of Economics at the University of Minnesota be tween 1979 and 1988, and a Visiting Professor at Harvard University from 1992 to 1994. Professor Ito received a B.A. and M.A. in Economics from Hitotsubashi University in 1973 and 1975, and a Ph.D. in Economics from Harvard Univer sity in 1979. Hideki Kanda is Professor of Law at the University of Tokyo. His main areas of specialization include commercial law, corporate law, banking and securities regu lation. He served as Visiting Professor of Law at the University of Chicago Law Schoolin 1989, 1991 and 1993, and as Visiting Professor at Harvard Law School in 1996. Professor Kanda received an LL.B. from the University of Tokyo (1977). Kazuo Ogawa is Professor of the Institute of Social and Economic Research at Osaka University. In 1998-99 he was a Visiting Scholar at the Department of Economics, University of California, San Diego. Previously he taught at Kobe and Kyoto Universities, and served as Chief Research Economist at the Eco nomic Research Institute of the Economic Planning Agency. In 1986-87, he was a Visiting Scholar at the Department of Economics, Yale University. Pro fessor Ogawa received his B.A. and M.A. in Economics from Kobe University and a Ph.D. in Economics from the University of Pennsylvania. Contributors ix Frank Packer is a Senior Economist in the Capital Markets Function of the Federal Reserve Bank of New York. Dr. Packer is a member of the Basel work ing group on credit ratings, which reports to the Bank for International Settle ments (BIS). Dr. Packer has also been a Fulbright Scholar at the University of Tokyo and a Visiting Scholar at the Bank of Japan. He received a B.A. in History and Economics from Harvard University in 1981, an M.B.A. from the Univer sity of Chicago Graduate School of Business in 1985, and a Ph.D. in Economics and Finance from Columbia University's Graduate School of Business in 1993. Shoichi Royama is President of Takaoka National College in Japan. Previ ously he was Professor at the Osaka School of International Public Policy at Osaka University, where he taught from 1969. His public activities include membership in The Forum for Policy Innovations; the Board of Directors, Osaka Securities Exchange; Member (Vice Chairman), Council on Finance, Ministry of Finance, Japan; Board of Auditors, The Asia and Oceania Foundation, The Daiwa Bank; Board of Directors, The Ishii Securities Market Research Foun dation; and Board of Directors, The Japan Securities Research Institute. He was on the Securities and Exchange Council of the Ministry of Finance; the Council of The Suntory Foundation; and Board of Directors, The Matsushita International Foundation. Professor Royama received his B.A. and M.A. in Eco nomics from Tokyo University in 1963 and 1965, and a Doctorate of Econom ics from Osaka University in 1982. Kazuo Veda has been a Member of the Policy Board of the Bank of Japan since Apri11998. Previously he was a Professor (from 1993) and an Assistant Professor (from 1989) at the University of Tokyo, as well as Assistant Professor at Osaka University (from 1982) and British Columbia University (from 1980). He received his B.S. in Mathematics from the University of Tokyo in 1974 and his Ph.D. in Economics from MIT in 1980. Naoyuki Yoshino is Professor of Economics at Keio University where he has been on the faculty since 1990. Previously he was an Associate Professor in the Graduate School of Policy Science at Saitama University in Japan (1982-90), and an Assistant Professor at the State University of New York at Buffalo (1979- 81). He is a member of the Asset Management Council of the Ministry of Fi nance Trust Fund Bureau. He has been a Visiting Scholar at the Institute of Post and Telecommunications, the Ministry of Finance, and the Bank of Japan. He has served on numerous government councils, ministries and/or agencies, in cluding most recently membership on the financial reform council under former Prime Minister Kiichi Miyazawa. Professor Yoshino received an M.A. in Eco nomics from Tohoku University in 1975 and a Ph.D. in Economics from Johns Hopkins University in 1979. PREFACE As it enters the 21st century, the Japanese financial system is undergoing a major transformation, a process accelerated by a sense of impending crises. The banking system, dominated by large banks, has been suffering from seri ous problems with nonperforming loans since the bursting of the stock market and urban real estate bubbles at the beginning of the 1990s. Delay by regula tory authorities and the banks themselves made matters worse and led to a banking crisis in late 1997 and early 1998. Not expecting this, the Japanese government in late 1996 inaugurated a Big Bang of comprehensive financial deregulation designed to create "free, fair, and open financial markets." In late 1998 and early 1999 the government finally embarked on a major reform of the banking system, including making available some ¥60 trillion ($500 billion at 120 yen/dollar) of government funds. The Ministry of Finance (MOF), which had dominated the Japanese financial system and policy for most of the post war period, has been deprived of most of the regulatory power it once pos sessed. Japanese financial institutions now seem to care more about ratings given by private agencies and other indicators in financial markets than in guid ance by the MOE The changes underway are profound. The purpose of this book is to describe, analyze, and evaluate this process. The chapters address various issues relating to the transition of the Japanese financial system from a bank-centered and relationship-based system to a mar ket-based and competitive system. Questions taken up include: Why did Japa nese banks get into such serious trouble? Why has the MOF lost its immense power? How will the financial deregulation of the Big Bang further change the Japanese financial system, including the huge government financial institutions and postal savings? What are some broader implications of the transition?! The book is divided into three parts. Part I considers the origins of Japan's banking crisis. Part II focuses on five particularly important areas of major actual and potential changes. Part III addresses the Big Bang and its effects and potential systemic externalities. Inevitably this project owes much to many people. Our first debt of gratitude is to the authors, all distinguished and very busy specialists on various aspects of Japanese finance. Preliminary versions of most of these chapters were pre sented at the conference "The Japanese Financial System: Restructuring for the Future" held at Columbia University in October 1998. That conference was the catalyst for this project and volume. The authors have responded very con-
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