Abstract
A few important changes and reforms of the Japanese economic and social system occurred in the 1990s and early 2000s. The system and policy of banking supervision were changed significantly. In addition, the legal system relating to business revitalization was reformed. These were reflections of the dramatic changes in the Japanese economy itself. They affected the behaviour of both individuals and firms and also defined a business trend in the banking industry in the 2000s and afterwards. The tougher banking inspection rules after the financial crisis raised fears that bank autonomy would be shrunk and create a contraction of banking activity. While the driving forces of the respective reforms were independent, the aggregated pressures and burdens of the reforms created great difficulties for the Japanese economy.
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Notes
- 1.
National bonds were underwritten by a syndicate of banks. The amounts of bonds were allocated to the banks in advance through bargaining.
- 2.
The Japanese name of the MOF was changed from Okura-sho to Zaimu-sho. The Okura-sho name had dated back to the beginning of the eighth century.
- 3.
Categories of the aggregate financial assets in 1996 were deposits 53.4 per cent, life insurance 23.1 per cent, trust funds 6.4 per cent, and stocks 6.1 per cent.
- 4.
In reality, some Japanese individuals show strong risk preference and speculate on high-risk financial products. A few fraud incidents related to financial speculation occurred repeatedly, but they were minor incidents.
- 5.
Kawamura (2010, p. 126) reported that the programme was launched suddenly to transform the Japanese securities markets to make them easily accessible to foreign investors.
- 6.
Nishimura (1999, pp. 165–177), a former head of the banking bureau in the MOF, reviewed that he had thought the financial crisis should be settled first then the Financial Big bang would be promoted. But in reality that process was not followed and the both went forward in parallel. He stated Financial Big Bang in Japan, a kind of financial revolution, would have never gone forward without the financial crisis, a kind of financial restructuring, but it was a kind of ‘creative destruction’ of Schumpeter.
- 7.
Dr. Takenaka had been a professor of Keio University in Japan.
- 8.
Muto (2010, pp. 285–287) evaluated that the new programme was effective for promoting disposal of NPLs.
- 9.
Omura and Mizukami (2007, pp. 212–219) did a main component analysis of Japanese banks management from FY1996 to FY2004 and showed that the regime change of the banking supervision policy of the FSA was found in FY2001 prior to Programme for Financial Revival. They state that the programme followed and strengthened the regime change.
- 10.
The banks with the public fund were obligated to report the actual performance of the plan to the FSA every two years.
- 11.
Mr. Hosoya accepted an offer to be the CEO of Resona Bank. He had been the former Executive Vice President of East Japan Railway Company.
- 12.
The banks were crucially important shareholders of listed firms in Japan’s stock market. Under the main bank system, the banks and private listed firms, including some unlisted firms, mutually held counterparts’ shares. The objective was to defend the management from ‘outside attack’, such as by greenmail. Suzuki (2008, pp. 213–217).
- 13.
The MOF insisted during international negotiations relating to the standard of the first of the Basel Accords that implied the premium of stocks held by Japanese banks should be included in net wealth. As a result, 45 per cent of the implied premium was set to be included in banks’ net wealth as Tier Two.
- 14.
The banks sold clients’ stocks at the market price to realize profits, but then bought them back immediately to maintain financial ties. As a result, implied profit disappeared and the book value rose. If the price decreased in the future, then the clients’ stocks would be an implied loss-maker.
- 15.
Shikano (2013, p. 198).
- 16.
Caballero et al. (2008) analysed this situation using the concept of ‘Zombie Lending’.
- 17.
Kawamura (ibid., p. 124) reported that the amount of 77 trillion yen was nearly equal to accumulated profits of the city banks for 30 years based on their annual average profits in the 1980s.
- 18.
The first pillar was the minimum requirement of capital for lending with a more accurate measure of a credit risk than before. The second was a process of scrutinizing the level of capital, which was decided by the management and verified by the financial authority. The third was an increase of effectiveness of market discipline through information disclosure.
- 19.
The Cabinet Office decided that the 14th business cycle after the collapse of the bubble economy began from a trough in January 2002 and ended at a peak in February 2008, experiencing the longest duration since World War II.
- 20.
Kuroda (2010, pp. 102–103) stated that Japanese banks lacked fundamental recognition of price change risk of collateralized real estate.
- 21.
During this credit crunch, Ishihara, a former governor of Tokyo, established Shin Ginko Tokyo in April 2004. It opened for business in April 2005 as a special bank for SMEs. Tokyo prefecture owned more than 80 per cent of the bank equity. It had advertised as making loans to SMEs generally without collateral. However, it reported large losses year-by-year. In FY 2007, three years after the inauguration of the business, the accumulated loss was estimated as nearly 100 billion yen, which exceeded the value of the equity. To avoid a situation of insolvency, Ishihara decided on a capital increase using the public funds of Tokyo prefecture in spite of huge opposition from taxpayers. The bank has only one branch together with its headquarters. This was obviously a case of failure.
- 22.
Kimura, a financial consultant who used to be a banker of the BOJ and who advocated the 30 firms issue during the financial crisis period, established Nippon Shinko Bank Ltd. in Tokyo, which specialized in loans to SMEs. However, the bank accumulated losses year-by-year and was deemed to be insolvent. Finally, he was arrested for fraud and an objection against the FSA’s inspection. The bank was liquidated by the FSA in 2010 and part of the deposit was curtailed under the rule of deposit insurance. This was the first case in Japan to which the pay-off scheme was applied after World War II.
- 23.
Uchida (2008, pp. 128–134) analysed that merits of relationship banking in Japan was found only in a case that Shin’yo Kinko and smaller financial institutions in non-competitive market were making a loan to small firms without sufficient hard information like financial statement.
- 24.
Tago and Nagahama (2005, pp. 238–241) stated that regional financial institutions rushed to sell mortgage loans, insurance product and investment trust products expecting an immediate profit. But they argued that the intrinsic value of strengthening relationship banking function was to provide an added value to a local client from a view point of problem solving and reduce commitment cost by receiving remuneration.
- 25.
Nikkeiren was established in 1948. It merged with Keizai Dantai Rengo (Keidanren) in 2002 to become the Japan Business Federation, Nippon Keizai Dantai Rengo (now Keidanren) which was the biggest profit party. The Keidanren chairman is called the Prime Minister of the Japanese business world.
- 26.
Naruse (2014, pp. 5–8).
- 27.
Noguchi (1995, p. iii) stated that the base of the economic system peculiar to Japan was formed in 1940 to prepare for the Japan–US war in 1941. The system objective was centralization of authorities to allocate economic and social resources for carrying out the war.
- 28.
The corporate taxation basic rate in Japan was 37.5 per cent in the 1990s. It was decreased to 30 per cent in the 2000s.
- 29.
This reduction of the effective corporate taxation rate to 29.7 per cent would be realized in FY2016 by the Abe Cabinet.
- 30.
Some categories are related to methods of consolidation. When a parent firm has more than half of the shares of a subsidiary, it must be consolidated.
- 31.
Sato (2003, 214–234) explains precisely how the change to market-value evaluation of financial products and impairment accounting system affected on self-assessment on asset quality of financial institutions as well.
- 32.
Even in the 2010s, some cases of firms’ concealing losses were disclosed. The top management of Olympus Corporation, world famous as an optical related product manufacturer, had concealed the loss of securities products made in the bubble economy nearly 20 years before. The ex-top management had continued a window-dressing settlement. The new CEO, a foreign businessman promoted from the top of a subsidiary in Europe, denied keeping it undisclosed. He was fired, but announced his innocence to the public.
- 33.
The market price of an asset is fundamentally decided in the market based on demand and supply. Generally, buyers estimate the value of an asset based on the future cash flow originating from the asset. Therefore, the value is expected to decrease when the present value of cash flow is expected to decline severely.
- 34.
The Cabinet Office ‘The potential growth rate of the Japanese economy’ (Feb. 2014).
- 35.
In some trials, dismissing employers were defeated even though the firm was probably in a condition of distress.
- 36.
The lifetime employment system functioned very well for both employers and employees. Employers were able to secure a long-term labour force at low cost during the high-growth era in the 1950s and the 1960s even when the labour force was in short supply. Employees were able to secure their jobs over a long term without fear of unemployment, although wages and salaries remained low.
- 37.
The lifetime income of a non-regular worker was estimated as one-third or one-fourth that of a regular worker.
- 38.
It is extremely difficult for unskilled young workers having only experience of a temporary job to find a regular job through their lifetime. The situation closely resembles those in Europe and the USA. However, there seem to be fewer opportunities of job training in Japan than in Europe and the USA.
- 39.
‘Statistics of Labour Force’ by the Ministry of Health, Labour and Welfare.
- 40.
Some firms were characterized as ‘black firms’ by the public because they forced workers to work long hours with low pay or do non-paid overtime work.
- 41.
Docherty, A. and Viort, F. ‘Better Banking’ (2014, p. 94).
- 42.
See note 18.
- 43.
In some cases, tax regulation for a loss differs from the accounting regulations in Japan.
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Nakano, M. (2016). Change in Banking Supervision Policy and Their Effects on Bank Behaviour: 2002–05. In: Financial Crisis and Bank Management in Japan (1997 to 2016). Palgrave Macmillan Studies in Banking and Financial Institutions. Palgrave Macmillan, London. https://doi.org/10.1057/978-1-137-54118-5_2
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