Hometown Investment Trust Funds: A Stable Way to Supply Risk Capital PDF
Preview Hometown Investment Trust Funds: A Stable Way to Supply Risk Capital
Naoyuki Yoshino · Sahoko Kaji Editors Hometown Investment Trust Funds A Stable Way to Supply Risk Capital Hometown Investment Trust Funds Naoyuki Yoshino Sahoko Kaji ● Editors Hometown Investment Trust Funds A Stable Way to Supply Risk Capital Editors Naoyuki Yoshino Sahoko Kaji Professor of Economics Professor of Economics Keio University Keio University 2-15-45 Mita, Minato-ku 2-15-45 Mita, Minato-ku Tokyo 108-8345 Tokyo 108-8345 Japan Japan ISBN 978-4-431-54308-4 ISBN 978-4-431-54309-1 (eBook) DOI 10.1007/978-4-431-54309-1 Springer Tokyo Heidelberg New York Dordrecht London Library of Congress Control Number: 2013935110 © Springer Japan 2013 This work is subject to copyright. 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Printed on acid-free paper Springer is part of Springer Science+Business Media (www.springer.com) Preface In the early 1990s, Japan’s real estate and stock market bubble burst and the economy went into a tailspin. The blame was put on Japan’s unique fi nancial intermediation, which was called the “collateral principle” because it allowed lending regardless of the viability of the project as long as there was collateral. Adopting Anglo-American ways of fi nance subsequently became a national goal in Japan. T wenty years later, the Lehman crisis nearly tipped the entire world economy into an abyss. Anglo-American ways of fi nance were discredited. To the Japanese, there was no longer a model that ensured success and stability. At around the same time, a catastrophic earthquake and tsunami struck north-eastern Japan. During the long and painful recovery process an acute need for fi nancing local SMEs and start- up companies came to light, and there was a simultaneous groundswell of desire among the Japanese people to help in and contribute to the recovery process. Many of these potential providers of capital were looking not for high returns but simply for an opportunity to do their own small share. Obviously, we needed a meeting place for these borrowers and lenders. In addition, Japan’s government budget de fi cit to GDP ratio breeched 200 %, and the ef fi ciency and effectiveness of public investment came into doubt. Private fi nancing with transparent performance was called for. This book explains the new form of fi nancial intermediation that thus emerged and became one of Japan’s national strategies. The new form of fi n ancial interme- diation is called the “Hometown Investment Trust” fund or HIT, re fl ecting its goal to connect fund providers and their hometowns. One of its earliest proponents was Naoyuki Yoshino, co-editor and author of the fi rst chapter explaining its back- ground. Once the idea of HIT was launched, a committee was formed at the Cabinet Of fi ce to study it. As it quickly became clear, the HIT concept blended in perfectly with two ongoing efforts. One was the post-Lehman effort by the private and public sectors in the area of real estate and infrastructure investment funds. In Chap. 2 , Atsuo Akai explains HIT in relation to Japan’s real estate and infrastructure investment funds and schematises the overall picture of the emerging fi nancial inter- mediation. The other of these ongoing efforts was the activities of a certain Japanese v vi Preface company established in 2000, Music Securities, which all started with one young drummer’s desire to raise funds for his fellow musicians. This young drummer, Masami Komatsu, is now CEO of the company and explains their operations in Chap. 3 . Chapter 4 , written by Norifumi Sugimoto, provides two concrete examples to elaborate how HIT contributes to post-disaster reconstruction. In Chap. 5 , written by Yuka Morita, we turn our eyes to Asia and Music Securities’ activities towards poverty reduction. Shuhei Shiozawa concludes the book in Chap. 6 with a summary and some thoughts on prospects for the future. As will become clear in the following chapters, the new method of fi nancial intermediation has three main advantages. Firstly, it contributes to fi nancial market stability by lowering information asym- metry and distributing risk. The pre-Lehman “originate and distribute” model ended in disaster, because the borrowers’ IOUs were submerged and dispersed deep inside complicated fi nancial instruments. Once markets lost faith in the ability of borrow- ers to pay back, nobody knew where the risks were. Everyone became suspicious of each other and credit markets froze. It was completely false to assume that “distrib- uting” risk in this manner contributed to stability. Information ended up being as asymmetric as it could possibly be. In contrast, the new method of fi nancial inter- mediation presented in this book contributes to stability because it l owers informa- tion asymmetry. Individual households (and fi rms, if they want to invest in other companies) are keen to obtain information on the borrowing fi r ms, mainly SMEs. The lenders are from the same “hometown” as, or share a hobby or taste with, the borrowers in which they take a personal interest. In addition, there is the low degree of both scale and concentration; both lenders and borrowers are relatively small and dispersed. Thus this fi nancial intermediation distributes risk but not in a way that renders them invisible. The second advantage of HIT is that it becomes a new source of much needed risk-capital. Financial regulations, notably the BIS capital adequacy ratio, are being tightened because banks and other fi nancial institutions are now recognised as a potential source of instability. This may contribute to lowering risk in a macro- prudential sense but is detrimental to the supply of risk capital. The situation is espe- cially serious for fi rms with low or no collateral. In this environment, this new type of fi nancial intermediation can be a new, important and stable source of risk capital. The third advantage of HIT is that it is project-driven. First there is the pool of projects, from which investors choose to invest in. This is what makes this different from arrangements such as the Grameen Bank, which start with a fund whose des- tinations are chosen later. Investors are not necessarily seeking high returns. Rather, they are eager to help a project that they feel strongly about, because the project is in their hometown, reduces poverty, contributes to recovery from disaster, or satis fie s their environmental concerns. For investors, this gives the added satisfaction of actually being able to “see” the thankful and smiling faces of the borrowers. In con- trast, investors cannot see where their money goes when investing in ordinary mutual funds. This will be a simultaneous publication in Japanese and in English. We aim to encourage policymakers, economists, lenders and borrowers from around the Preface vii world (especially in developing countries) to adopt this new form of fi nancial intermediation. HIT provides an alternative to existing direct and indirect fi nancial intermediation, both of which have proven to be prone to instability if not disaster. It cannot be foreseen at this stage what percentage of fi nancial intermediation will shift to this new method. In the event that HIT becomes at least as dominant as the more traditional ways of intermediation, it has the potential to increase employ- ment, at the SMEs as well as in the pool of retirees from fi nancial institutions. If the SMEs can borrow, they can hire. But in order for a system such as HIT to work well, the intermediaries between the borrowers and lenders must be experienced in the trade of fi nancial intermediation. There will subsequently be a high demand for people who have retired from (larger) fi nancial institutions after pursuing successful careers. It is our sincere hope that this volume will contribute to the increased recognition and use of this new method and ultimately to global fi nancial stability. The papers included in this volume were presented and discussed at a conference held in Tokyo at the end of September 2012. The fi nancial support of Nomura Securities for the conference as well as the publication is gratefully acknowledged. Tokyo, Japan Naoyuki Yoshino Sahoko Kaji Contents 1 The Background of Hometown Investment Trust Funds ........................ 1 Naoyuki Yoshino 2 Supply of Risk Capital for Regional Development in Japan ................... 15 Atsuo Akai 3 Hometown Investment Trust Funds in Japan .......................................... 33 Masami Komatsu 4 Hometown Investment Trust Funds for Regional Development ............. 49 Norifumi Sugimoto 5 HIT as a Form of Microfi nance in Asia .................................................... 73 Yuka Morita 6 Concluding Remarks and the Way Forward ............................................ 85 Shuhei Shiozawa List of Contributors .......................................................................................... 93 Index ................................................................................................................... 97 ix
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