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 Anil K Kashyap 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 ISBN 0-262-08301-9 (hc : alk paper) Finance—Japan—History Banks and banking—Japan—History Corporations— Japan—Finance—History Corporate governance—Japan—History I Title HG187.J3 C67 2001 332.1'0952—dc21 2001030439 Contents Foreword by Stanley Fischer Acknowledgments xi List of Figures xiii List of Tables xv List of Boxes xix Introduction vii Creation of a Modern System Wartime Transformation The Keiretsu Era Bank Interventions 15 51 91 145 Benefits and Costs of Keiretsu Financing Transformation through Deregulation The 1990s: Crisis and Big Bang The Future Bibliography Author Index Subject Index 305 329 347 351 267 185 219 This page intentionally left blank Foreword Stanley Fischer 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 Its theme 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 government not repay war debts and the attempt to restructure the zaibatsu First Deputy Managing Director, International Monetary Fund Views expressed are those of the author, and not necessarily of the International Monetary Fund viii Foreword In the 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 mostly 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 financing 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 financial 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 diversify 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 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 the Japanese system Foreword ix However, they 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 system, that will make it possible to follow and understand the unfolding of this critical story in the coming years 344 Bibliography Suzuki, Sadahiko, and Richard W Wright 1985 “Financial Structure and Bankruptcy Risk in Japanese Companies.” Journal of International and Business Studies 16: 97–110 Suzuki, Yoshio 1980 Money and Banking in Contemporary Japan New Haven, 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Loan Market and Contractual Transactions in Japan).” Kin’yu- Kenkyu- 2: 47–76 Wallich, Henry C, and Mable I Wallich 1976 “Banking and Finance.” In Hugh Patrick and Henry Rosovsky, editors, Asia’s New Giant: How the Japanese Economy Works, pp 249–315 Washington, DC: The Brookings Institution Weinstein, David E 1995 “Evaluating Administrative Guidance and Cartels in Japan, 1957–1988.” Journal of the Japanese and International Economies 9: 200–23 Weinstein, David E 1997 “FDI and Keiretsu: Rethinking US and Japanese Policy.” In Robert Feenstra, editor, The Effects of U.S Trade Protection and Promotion Policies, pp 81–116 Chicago, IL: University of Chicago Press Weinstein, David E, and Yishay Yafeh 1995 “Japan’s Corporate Groups: Collusive or Competitive? An Empirical Investigation of Keiretsu Behavior.” Journal of Industrial Economics 43: 359–76 Weinstein, David E, and Yishay Yafeh 1998 “On the Costs of a Bank Centered Financial System: Evidence from the Changing Main Bank Relations in Japan.” Journal of Finance 53 (2): 635–72 West, Mark D 1999 “Information, Institutions, and Extortion in Japan and the United Stated: Making Sense of Sokaiya Racketeers.” Northwestern University Law Review 93 (3): 767–817 White, William R 1998 “The Coming Transformation of Continental European Banking?” Bank for International Settlements Working Paper Number 54 346 Bibliography Yafeh, Yishay 1995 “Corporate Ownership, Profitability, and Bank-Firm Ties: Evidence from the American Occupation Reforms in Japan.” Journal of the Japanese and International Economies 9: 154–73 Yamaguchi, Kazuo 1988 “Yokohama Sho- kin Ginko- to Bo- eki Sho- sha (Yokohama Specie Bank and Trading Companies).” In Kazuo Yamaguchi and Toshihiko Kato- , editors, RyoTaisen Kan no Yokohama Sho-kin Ginko- (Yokohama Specie Bank during the Inter-War Period), pp 145–207 Tokyo: Nihon Keiei-shi Kenkyu- -jo Yamaichi Sho- ken 1958 Yamaichi Sho-ken-shi (History of Yamaichi Securities) Tokyo: Yamaichi Sho- ken Yamamoto, Yu- zo- 1989 “Meiji Ishin-ki no Zaisei to Tsu- ka (Public Finance and Currencies during Meiji Restoration),” in Mataji Umemura and Yu- zo- Yamamoto (Eds.) Nihon Keizai-shi 3: Kaikou to Ishin (Japanese Economic History Vol 3: Opening Port and Restoration) Tokyo: Iwanami Shoten, pp.111–72 Yamamura, Kozo 1967 “The Role of the Samurai in the Development of Modern Banking in Japan.” Journal of Economic History 27: 198–220 (Jun) Yamamura, Kozo 1974 A Study of Samurai Income and Entrepreneurship: Quantitative Analyses of Economic and Social Aspects of the Samurai in Tokugawa and Meiji Japan Cambridge, MA: Harvard University Press Yamamura, Kozo 1976 “General Trading companies in Japan – Their Origins and Growth.” In Hugh Patrick with Larry Meissner, editors, Japanese Industrialization and its Social Consequences, pp 161–99 Berkeley, CA: University of California Press Yamamura, Kozo 1982 “Success That Soured: Administrative Cartels in Japan.” In Kozo Yamamura, editor, Policy and Trade Issues of the Japanese Economy: American and Japanese Perspectives Seattle, WA: University of Washington Press Yamamura, Kozo, editor 1997 The Economic Emergence of Modern Japan Cambridge: Cambridge University Press Yamamura, Kozo, and Yasukichi Yasuba, editors 1987 The Political Economy of Japan, vol 1, The Domestic Transformation Stanford, CA: Stanford University Press Yasuoka, Shigeaki 1998 Zaibatsu Keisei-shi no Kenkyu- (A Study in the Formation of the Zaibatsu) Tokyo: Mineruba Shobo Yoshino, Michael Y, and Thomas B Lifson 1986 The Invisible Link: Japan’s Sogo Shosha and the Organization of Trade Cambridge, MA: The MIT Press Young, Alexander K 1979 The Sogo Shosha: Japan’s Multinational Trading Companies Westview Zenginkyo (Federation of Bankers Associations of Japan) 1989, 1994 The Banking System in Japan Tokyo Author Index Abegglen, J., 100 Adams, T F M., 15, 18, 27, 63, 68, 70, 74, 86, 99, 100, 101, 131, 139 Ahmadjian, C., 201 Allen, G C., 10, 63, 91 Aoki, M., 93, 111, 200 Arisawa, H., 99, 102 Asajima, S., 47, 48 Asakura, K., 155 Bank of Japan 15, 24, 29, 33, 46, 57, 62, 64, 65, 78, 99, 105, 131, 139, 257, 281, 287 Beasley, W., 19, 54 Beason, R., 209 Burks, A., 19 Bush, L., 19 Cai, J., 97 Calder, K., 121 Cameron, R., 91 Cargill, T., 18, 206 Caves, R., 200 Chan, K., 97 Claessens, S., 199 Cohen, J., 54, 60, 62, 63, 81 Craig, A., 54 Crawcour, S., 15, 17, 22 Dempster, P., 91 Dewenter, K., 194 Diamond, D., 189 Djankov, S., 199 Dower, J., 67 Drysdale, P., 13 Eads, G., 205 Edo, H., 77 Eguchi, H., 32, 112 Emi, K., 32, 112 Fairbank, J., 55 Feldman, R., 220 Fujino, S., 38 Fujiwara, I., 81, 95 Fukao, M., 203 Gerlach, M., 201 Goldsmith, R., 15, 19, 22, 33 Gorton, G., 288 Goto, A., 193 Grinblatt, M., 212 Hadley, E., 9, 10, 66, 70, 71 Hall, J., 17 Hamada, K., 91, 220 Hamao, Y., 253 Hanley, S., 17 Hashimoto, J., 47 Hein, L., 95, 146, 147, 148 Hirota, S., 104, 237 Hiwatari, N., 271 Horiuchi, A., 91, 115, 192 Hoshi, T., 63, 73, 111, 127, 191, 195, 196, 203, 227, 253, 281, 283, 288, 295, 314, 315 Hoshii, I., 68, 70, 74, 86, 97, 99, 100, 101, 131, 139 Hutchison, M., 18 Inoue, H., 323 Ito, M., 32, 112 Ito, T., 18, 101, 279 Johnson, C., 149, 205 348 Author Index Kaizuka, K., 101 Kajiwara, K., 155 Kanda, H., 324 Kaplan, S., 127,192 Kashyap, A., 127, 191, 195, 196, 201, 227, 281, 283, 288, 295, 314, 315 Kasuga, Y., 48 Kato, T., 193, 201 Katz, R., 205, 206, 209 Kawamura, Y., 154 Kester, C., 97 Kitagawa, H., 115, 130, 220, 249, 250, 252 Klapper, L., 199 Komiya, R., 139, 205, 206 Krause, L., 121 Kunimura, M., 104, 237 Kurosawa, Y., 115, 131, 220, 249, 250, 252 Kuwayama, P., 139 Lawrence, R., 13 Lifson, T., 121 Lincoln, E., 201, 236 Lockwood, W., 10 Mabuchi, M., 225, 226 Majluf, N., 213 Matsukata, M., 22 Matsumoto, K., 36, 37 Matsuo, J., 231, 234 Matsuzawa, T., 60 Milhaupt, C., 271 Miller, G., 271 Miller, M., 187, 211 Minami, R., 15 Minton, B., 192 Miwa, Y., 46 Miyajima, H., 71, 75, 88 Miyazaki, Y., 93 Miyoshi, M., 19 Modigliani, F., 187, 211 Montalvo, J., 192 Morck, R., 125, 192 Morikawa, H., 10, 27, 32, 48 Moulton, H., 30 Munshi, K., 202 Murakami, Y., 205, 209, 323, 324 Mutoh, H., 208 Myers, S., 213, 218 Nakamura, M., 192 Nakamura, T., 15, 27, 51, 54, 91 Nakaso, H., 279, 280 Nakatani, I., 200, 201 Nakazato, M., 18, 97 Noguchi, Y., 51 Odagiri, H., 193, 200 Ohkawa, K., 15 Okazaki, R., 192 Okazaki, T., 44, 46, 51, 61, 62, 81 Okimoto, D., 205 Okuno, M., 81 – Otsuki, B., 65, 77 Ott, D., 33 Ozaki, R., 95, 151 Packer, F., 111 Pascale, R., 158 Patrick, H., 17, 32, 91, 93, 107, 111, 220 Pechman, J., 101 Pedlar, N., 19 Peek, J., 275, 288 Petersen, M., 38 Poterba, J., 97 Rajan, R., 38, 189 Ramseyer, M., 18, 46, 97, 146 Reischauer, E., 54 Reischauer, H., 22 Roberts, J., 121 Roehl, T., 121, 200 Rohlen, T., 107, 158 Rosen, R., 288 Rosenbluth, F., 234 Rosengren, E., 275, 288 Rosovsky, H., 91 Saito, T., 147, 149 Sasaki, Y., 13 Sawai, M., 63 Schaede, U., 26 Scharfstein, D., 127, 191, 195, 196 Schiffer, H., 22 Schumpeter, E., 55 Sekiguchi, S., 121 Sheard, P., 93, 111, 145, 146, 151, 193, 195 Shibagaki, K., 63 Shimizu, Y., 252 Shinohara, M., 15 Shleifer, A., 125 Singleton, K., 191 Soviak, E., 19 Stalk, G., 100 Standard and Poor’s 288 Author Index Stiglitz, J., 211 Suzuki, M., 61 Suzuki, Y., 99, 104, 106, 111, 131, 139, 206, 208, 220 Takasugi, R., 150 Takeda, H., 10 Tamaki, N., 18, 19, 24, 27 Tatsuta, M., 103 Teranishi, J., 19, 37, 65, 108, 111, 130, 131, 220 Tilton, M., 205, 209 Titman, S., 212 Trewartha, G., 91 Trezise, P., 206, 208 Tsuda, H., 77 Tsuru, S., 91 Tyson, L., 205 Uchida, S., 225, 237 Ueda, K., 13, 228 Uekusa, M., 200 Vestal, J., 208, 209 Vishny, R., 125 Wakita, Y., 225 Wallich, H., 91, 97, 103, 111 Wallich, M., 91, 97, 103, 111 Warther, V., 194 Weinstein, D., 13, 201, 205, 209 West, M., 97 White, W., 32 Yafeh, Y., 13, 77, 192, 201 Yamada, T., 97 Yamamoto, Y., 17 Yamamura, K., 17, 20, 120, 121, 205, 208, 209 Yasuoka, S., 10 Yoshino, M., 121, 206 Young, A., 121 Zysman, J., 205 349 This page intentionally left blank Subject Index acts See statutes aging of Japanese society, 289 bad loans, 281 as a percentage of GDP in the late 1990s, 283t classification of loans that the FSA uses in bank examinations, 281 government capital injection, 280 level of bad loans at all banks by the various definitions in the late 1990s, 282t risk management loans, 281 bailouts See bank interventions bank asset composition bank profitability and assets composition, 1955–75, 128t bank profitability and assets composition, 1911–36, 45t structure of bank assets and deposits, 1975, 248t structure of bank assets and deposits, 1996, 249t bank-centered financing See bank-centered system bank-centered system, 1, 290 bank consolidation, 31, 58 “one prefecture, one bank”, 57 bank debt as a percentage of firms assets, 247t, 315t, 316t bank-dominated financial system See financial system bank failures capital injections, 277 Chuo Trust, 280 first wave of banking troubles, 272 Fukutoku Bank, 273 Hanwa Bank, 272 Hokkaido Takushoku Bank, 276 Hyogo Bank, 268 in the 1920s, 92 Iyo Bank, 272 Kofuku Bank, 273 Kyoto Kyoei Bank, 273 Midori Bank, 268 Namihaya Bank, 273 Naniwa Bank, 273 nationalization, 279 Nippon Credit Bank, 279 Taiheiyo Bank, 272 Toho So- go Bank, 272 Tokyo Watanabe Bank, 29 To- yo- Shinkin, 272 Wakashio Bank, 272 Yamaichi Securities, 276 bank interventions, 145, 181 bankers on the boards of directors, 126, 257 bank rescues, 93, 198 Daisho- wa Paper, 164–168 inefficient rescues, 198 Japan Line, 159–163 Maruzen Oil, 146–152 Mazda, 153–158, 168–179 Nihon Menka, 48–49 Sanko- steamship, 159–163 Sogo- , 180–181 Bank of Japan, 22, 28, 29, 55, 58, 77, 96, 197, 225, 226, 267, 308 origins, 22 low interest rate policy, 226 Bank of Tokyo Mitsubishi, 280 bank rescues See bank interventions banks, 18 bankers on the boards of directors, 126, 257 capital injection, 280 352 Subject Index banks (cont.) cleaning up of balance sheets, 72 compensating balances, 225, 252 competition over size, 197 composition of assets of ordinary banks, 1911–1936, 45t definitions of, in the early 1970s, 131 effective lending rate with compensating balances, 225 fee-based activities, 285 fee income, 286t foreign deposits, 314 gradual loss of market power, 252 long term lenders, 108 mega-mergers in commercial banking, 317 nationalization, 279 non-interest income, 284t ordinary banks ( futsu- ginko-), 23, 45t, 249 portfolio shifts of banks in the 1980s, 288 postwar bank relations, 78 profitability, 45t, 119, 123t, 283, 286t profitability of major US banks, 284t reasons why they were not broken up in the 1940s, 72 reconstructing financial institutions, 73 restrictions on private foreigners lenders in the 1950s, 94 structure of assets and deposits as of 1975, 248t structure of assets and deposits as of 1996, 249t subsidiary, 253, 254t, 321 bank services, 41, 86, 118, 285, 318 bankruptcy, 203 See also corporate restructuring and bank interventions Big Bang, 275, 288, 289, 311 comparison to 1986 British Big Bang, 289–290 initial corporate responses to, 295 key elements of, 292–293t scope of business open to banks after the Big Bang, 294t stated goals, 289 substance of the Big Bang, 289 bonds See corporate bonds and government bonds bond markets See also corporate bonds and government bonds bond financing, 238–239t changes in restrictions, 229 collateral principle, 30, 102, 229 collateral restrictions imposed by the Bank of Japan, 96 designated rating agencies, 230 drive for purifying the bond market, 30 issuers in 1964, 120t new products, 231, 233 bridge bank plan of June 1998, 277 budgets See fiscal policy business group, See also zaibatsu, keiretsu capital injections, 277 certificate of deposit (CDs), 232, 233 China War, 55 city banks, 301 defined, 131 identities over time, 301–305 number in the high growth era, 128 number in, 2000, 298 return on assets, 1976–97, 286t return on equity, 1976–97, 286t collateral See bond markets combines See business groups Commercial Code, 26, 231, 324 commercial paper (CP), 233 company-based trusts, 291 See also mutual funds consolidation of banks, 58, 295 control association (to-sei-kai), 62 convoy system(go-so- sendan ho-shiki), 111, 197, 271, 273 Heiwa So- go Bank, 114–115 in the high-growth period, 113 in the 1980s: Heiwa So-go, 114–115 Kawachi Bank, 113 Takachiho Sogo Bank, 113 Tokiwa So- go Bank, 113 Co-ops, 135 corporate bonds See also bond markets and government bonds amounts, 36t, 43t, 85t, 118t, 119t, 244t, 245t, 254t bank underwriting of, 42, 43t, 307 Bond Issuance Committee (Kisai-kai), 77, 102, 229 Bond Issuance Roundtable (Kisai Kondankai), 76, 102 bond issue criteria, 229 bond management companies, 231 convertible bonds, 103 equity-linked bonds, 237 in, 19th century, 26 Subject Index new products, 231 rating criteria, 229 unsecured bonds, 229, 230t, 264, 265 warrant bonds, 231 corporate financing patterns in the early 20th century, 33, 36t, 43t in the war years, 84, 85t in the high growth era, 115, 118t, 119t in the last quarter of the 20th century, 241, 244t, 245t in the 21st century, 314 corporate governance, 44, 87, 124, 254 in the early 20th century, 44 in the war years, 87 in the high growth era, 124 in the last quarter of the 20th century, 254 in the 21st century, 322 of zaibatsu, 47–48 stock market-based system of, 258 corporate restructuring, 74, 182t See also bank failures and bank interventions bank involvement, 182 Daisho- wa Paper, 164–168 deconcentration in late 1940s, 68 economic purge of key officials, 71 inefficient rescues, 198 Japan Line, 159–163 Maruzen Oil, 146–152 Mazda, 153–158, 168–179 Nihon Menka, 48–49 recapitalization of frims after the war, 74 rescue operations led by banks, 93 Sanko- steamship, 159–163 Sogo- , 180–181 credit crunch of 1949, 65 crisis of 1927, 27 of 1929, 30 of 1990s, 267, 276 role of Kataoka, N., 29 crony capitalism, 199 cross-shareholdings, 124, 126, 322 of council members of the six largest keiretsu, 257, 258t unwinding of, 323 daihyo-ken, 155, 165, 167 daimyo- (local lords), 20 Daisho- wa Paper, 164–168 Daisho- wa Aitaka, 167 Tamai, E., 165 Marubeni, 167 353 Saito, R., 164 delistings, 202, 204–205t Deposit Insurance Corporation (DIC), 181, 271, 272 deposits See banks deregulation of financial markets, 227, 311 completion of, 289 deregulatory period, 219 effect on bank profits and portfolios, 283 piece-meal approach to, 311 slow and uneven deregulation that preceded the Big Bang, 288 specifics of, 275 Dodge stabilization See fiscal policy double taxation of dividends, 103 Earthquake of 1923 See Kanto earthquake economic crisis See crisis economies of scale, 207 economy, general conditions in the 1870s, 21 in the 1890s, 23 in the 1910s, 27 in the 1930s, 30 in the late 1940s, 64–65 in the 1950s, 94 in the 1970s, 220–225 in the 1980s, 226 in the 1990s, 267–268 endaka See yen appreciation end of high growth, 311 equity financing See stock market equity premium, 104 external funds See corporate financing patterns fear of foreign domination, 94 financial assets in the early 20th century, 32, 34–35t in the war years, 81, 82–83t in the high growth era, 112, 116t, 117t in the last quarter of the 20th century, 241, 242–243t in the 21st century, 313, 313t Financial Crisis Management Committee (Kin’yo- Kiki Kanri Iinkai), 277 financial debentures, 43t, 44, 108 See also bond markets and corporate bonds financial distress, 145, 190, 194 See also corporate restructuring distressed companies, 48 reducing the real costs of distress, 194 354 Subject Index financial group, 326t See also kereitsu and zaibatsu financial holding company, 291, 320 financial intermediaries, 262 See also banks Financial Reconstruction Commission (FRC), 279 Financial Services Agency (FSA), 280 Financial Supervisory Agency, 275, 279 financial system, 1, 185 after deregulation (early 1990s), 221 bank-dominated, 311 changing patterns, 306 during the rapid economic growth period, 92, 128 during the War years and Occupation, 52, 66, 87, 308 from the early 1950s to mid–1970s, 91 future of, 313 in the 21st century, 306 in the Tokugawa period, 17 in, 2000, 298 market-based, 275, 290 prior to the military build-up in the 1930s, 16 reform of, 289 stability of, 293 financial theory adverse selection, 186, 213 arm’s-length investors, 199 asymmetric information, 186 debt overhang, 218 demandable debt, 189 keiretsu and information problems, 191 lemon premium, 186 limited liability, 188 moral hazard, 187, 216 Myers-Majluf problem, 213 potential problems with arm’s length financing, 213 risk shifting problem, 218 role of debt holders, 188, 194 role of equity holders, 188, 194 shirking, 187 Fiscal Investment and Loan Program (FILP), 102 fiscal policy budget deficits, 222, 223t consumption tax, 268 Dodge stabilization, 65, 103 fiscal conservatism, 267 fiscal expansion, 221 government spending, 1965–83, 223t fixed exchange rate, 95 See also yen fixed-income investments, 100 Foreign Exchange Council, 290 foreign direct investment (FDI), 13 foreign lending See lending funding patterns See corporate financing gensaki, 232 gold standard See yen government bond comprehensive accounts, 253 government bonds See also bond markets and corporate bonds secondary market for, 229 underwriting syndicate, 225 repudiation, 66t government bond time deposits, 229, 253 government spending See fiscal policy Hashimoto, R., 275, 289 history See origins hollowing out of the Tokyo financial market, 289 household savings See savings Industrial Bank of Japan (IBJ), 24, 55, 57, 159 industrial policy, 205 industry protection, 209 infant industry protection, 206 market failure, 206 recession cartel, 165 interest rates interest income for Japanese city banks, 286t liberalization of, 236, 252 on, 30 April 1973, 105t short-term prime rate, 104 International Digital Communication (IDC), 323 investment trusts, 97, 319 Japan Bond Research Institute, 230 Japan Credit Rating Agency, 230 Japan Development Bank, 102, 159, 208 Japan Line, 159–163 shipping industry, 159 Japan premium, 271, 274f Japan Trustee Services Bank, 296 Japanese Archipelago Rebuilding Boom, 285 Subject Index Ju- sen, 268–271 Resolution Corporation (JRC), 271 scandal, 268 Kanto earthquake, 28 keiretsu, 8, 10 and competition, 12 bankers on the boards of directors, 257 cost of financing, 185 finance, 94, 185, 310 Friday Club(Kinyo kai ), 11, 77 General Trading Companies (so-go- sho-sha), 120–121, 246 industrial policy and, 205 kigyo- shu-dan, 8, 11 kontserun, membership, 13 Presidents’ Council (shacho kai), 11, 77, 122, 124, 255 profitability, 200, 203 R&D Investment and, 193 risk aversion, 200, 202 Second Thursday Club (Ni-moku-kai), 11 White Water Club (Hakusui-kai), 11 Korean War, 94 labor conflict, 65 laws See statutes lending, 124 consortia, 124 foreign lending, 288 to small and medium enterprises, 250 shift into property-based lending, 288 life insurance, 100 liquidity constraint, 191 loans, 283 See also bank asset composition bank loans by type of collateral, 41f distribution of loans by borrower and duration, 251t from Japan Development Bank, 159 to small enterprises as a percentage of all loans, 287f to the real estate industry as a percentage of all loans, 287f loan trusts (kashitsuke shintaku), 109 Long-term Credit Bank (LTCB, cho-ki shin’yo- ginko-), 108, 110–111, 277, 278 macroeconomic developments See economy, general conditions main bank system, 93 See also bankcentered system 355 dependency, 255 relation to the wartime designation, 80t manufacturing firms changing financing patterns, 125t, 256t large manufacturing firms’ bank debt, 315t small manufacturing firms’ bank debt, 316t market for corporate control, 324 See also corporate governance maruyu- system, 101 Maruzen Oil, 146–152 international oil companies, 147 Union Oil Company, 146, 147 Wada, K., 147 Matsukata deflation, 21 Matsukata, M., 22 Mazda, 153–158, 168–179 Chrysler, 158 Fields, M., 179 Ford, 157, 168 Matsuda, J, 153 Matsuda, K., 153 Miller, J., 178 Murai, T., 155 Sumitomo Bank and, 153–158, 171–172, 177–178 Tatsumi, S, 171 To- yo- Ko- gyo-, 153 Wallace, H.DG, 174 Wankel rotary engine, 153 Yamasaki, Y., 155 Meiji economy, 17 See also economy, general conditions fukoku kyo-hei (“rich nations, strong army”), 17 Ito, H., 19 Samurai as investors, 20 shokusan ko-gyo- (“develop industry and promote industry”), 18 wakon yo-sai (“Japanese spirit, Western technology”), 18 Meiji Restoration, 16, 305 military expansion, 55 February, 26 Incident, 53 Hamaguchi, O., 30, 53 Inukai, T., 53 Japanese government in 1931–45, 53–54 Ketsumeidan, 53 Kwantung Army, 55 Manchurian Incident, 55 March Incident, 53 356 Subject Index military expansion (cont.) May, 15 Incident, 53 October Incident, 53 Takahashi, K., 28, 53, 55 Ministry of Finance, 24, 53, 54, 77, 101, 267, 268, 271, 272, 275, 290 Financial System Planning Bureau, 280 Foreign Exchange Council, 290 guidance, 271 Trust Fund Bureau, 102, 308 Ministry of Posts and Telecommunications (MPT), 101 Ministry of International Trade and Industries (MITI), 148, 169 Mitsui Trust, 280 Mizuho Financial Group, 295 Modigliani-Miller theorem, 187, 210 See also financial theory assumptions, 211 numerical example, 212 Moody’s, 230 moral hazard See financial theory moratorium of 1923, 29 munitions companies, 60, 308 See also wartime economy designated financial institutions system, 60, 78, 80t mutual funds See investment trust New York Exchanges, 204–205t 1940 system, 51 Nippon Credit Bank, 273, 279 Nippon Investors’ Service, 230 non-bank financial institutions, 136 Obuchi, K., 279 Occupation, 64, 87 auction of zaibatsu stocks, 70 economic purge, 71 Far Eastern Commission (FEC), 64 General Headquarters (GHQ), 64 Holding Company Liquidation Commission (HCLC, Mochikabu-Kaisha Seiri Iinkai), 68 MacArthur, D., 64 repudiation of war debts, 66t, 309 Supreme Commander of the Allied Powers (SCAP), 64 oil shock, 159, 221 one-stop-shopping (OSS), 320–321 ordinary banks See banks organ banks (kikan ginko-), 31 origins First National Bank (Dai-Ichi Kokuritsu Ginko- ), 18 ginko-, 18 gold standard, 27 Hypothec Bank of Japan (HBJ, Nihon Kangyo- Ginko-), 24 Industrial Bank of Japan (IBJ, Nihon Ko-gyoGinko-), 24 joint-stock companies, 21 Mitsui Ginko- , 21 ordinary banks ( futsu- ginko-), 23 Osaka Stock Exchange, 25 Tokyo Stock Exchange, 25 over-banking, 325 over-loan, 111 over-the-counter markets, 291 Postal Savings System (PSS), 101, 138, 206, 314 postwar inflation, 64 postwar restructuring See also Occupation cleaning up of balance sheets of munitions companies, 72 special account companies (tokubetsu keiri gaisha), 74 special managers (tokubetsu kanrinin), 75, 87 predictable technological progress, 207 Presidents’ Council (shacho kai) See keiretsu private savings See savings or financial assets Prompt Corrective Action (PCA), 275, 277 provision of funds to business See corporate financing patterns public offering, 103, 237 Rating and Investment Information, Inc., 230 Reconstruction Bank, 148 regulations See also statutes 50/50 principle, 95 for borrowers, 102–104 for financial intermediaries, 106, 197 for savers, 96 low interest rate policy, 76 real demand principle, 234 Three Bureaus Agreement of 1975, 234 repo See repurchase agreement repurchase agreement, 233 rescues See bank interventions Subject Index Resolution and Collection Bank (RCB), 273 return on assets for banks See bank profitability revaluation of corporate assets, 86 See also postwar restructuring Sanko- Steamship, 159–163 Ko- moto, T., 159 shipping industry, 159 Sanwa Bank, 146, 147, 272 Sanyo Securities, 276 Satsuma Rebellion See Seinan War savings, 260 See also financial assets financial surpluses, by sector, 1965–1996, 224f second oil shock, 226 securities firms-owned trust subsidiaries, 254 securities investment trusts (sho-ken to-shi shintaku) See investment trusts securities markets, 308 See also stock market and bond markets in 19th century, 25 limits on the role of, 75 segmentation of financial markets, 91 among types of banks, 249 basic logic for, 106 between banks and non-banks, 252 geographical, 106 reduced, 249 Seinan War, 21 shacho kai See Presidents’ Councils shareholder, 61 activism, 97 derivative lawsuits, 324 military government’s view of, 61 original shareholders for funding, 307 share-ownership survey, 323 shite groups, 97 Sho-wa depression, 30 See also economy, general conditions social security system, 222 Sogo-, 180–181 so-kaiya, 97 Specific Allowance for Loan Losses, 283 Standard & Poor’s, 230 See also corporate bonds statutes Act Concerning Foreign Investment of 1950, 94 Anti-Monopoly Act, 125, 255 See also Occupation 357 Article, 65 of the Securities and Exchange Act (1948), 107 Banking Act, 29, 275, 290 Commercial Code, 26, 231, 324 Convertible Bank Notes Act of 1884, 23 Corporate Accounting Temporary Measures Act, 73 See also postwar restructuring Corporate Reconstruction and Reorganization Act, 73 See also postwar restructuring Earthquake Bill Discounting Loss Guarantee Act, 28 Excessive Concentration of Economic Power Act, 69 See also Occupation Financial Institutions Accounting Temporary Measures Act, 73 See also postwar restructuring Financial Institutions Reconstruction and Reorganization Act, 73 See also postwar restructuring Financial Reconstruction Act, 279 Financial System Reform Act of December 1998, 290 Financial System Reform Act of 1992, 253 Foreign Exchange Act Reform of 1998, 290 Foreign Exchange and Trade Control Act Reform of 1980, 232 Foreign Exchange Act, 275, 290 Insurance Business Act, 290 Investment Trust Act of 1998, 291 Long-Term Credit Bank Act of 1952, 108 Munitions Companies Act of 1943, 60, 62 See also wartime economy National Bank Act, 18, 20 National General Mobilization Act (NGMA) of 1938, 55 See also wartime economy Rapid Recapitalization Act, 279 Oil Industry Act, 148 Savings Bank Act of 1893, 24 Secured Debenture Trust Act (SDTA), 26 Securities and Exchange Act of 1948, 73, 86, 290 Securities Investment Trust Act of 1951, 98 Stock Exchange Act of 1878, 25 Temporary Funds Adjustment Act (TFAA) of 1937, 54 See also wartime economy Temporary Interest Rate Adjustment Act of December 1947 (TIRAL), 104 358 Subject Index statutes (cont.) Transfer of Administrative Authority Act, 62 See also wartime economy stock financing by listed firms, 1972–98, 240t Stock Issuance Adjustment Roundtable (Zo-shi Cho-sei Kondankai), 76, 103 stock market See also corporate financing patterns bubbles, 226 capitalization, 40t in prewar Japan, 38 issuance criteria, 103 reforms in the 1980s and 1990s, 236 restrictions on equity financing in the high growth era, 96, 103 returning the premium of market relative to book, 104 stock-collateralized financing, 307 Sumitomo Bank, 153–158, 171–172, 177–178 Sumitomo Mitsui Banking Corp., 295 Swiss Banking Corporation (SBC), 278 takeover threat, 324 tax deduction of insurance premiums, 100 Tokyo offshore market, 234 Tokyo Stock Exchange, 204–205t See also stock market importance of, prewar, 38 size of, 1920–40, 39t To- yo- Ko- gyo- See Mazda trade surplus in the early 1980s, 226 transparency of financial system, 293 Trust Banks (shintaku ginko-), 108, 109, 231 trustee bank, 231 UFJ Group, 296 wartime economy Bank Funds Utilization Ordinance of 1940 (BFUO), 57 Control of Corporate Finance and Accounting Ordinance, 61 Corporate Profits, Dividend, and Fund Raising Ordinance of 1939, 57, 61 Emergency Cooperative Lending Consortium, 56t financial controls, 54, 58–59 Financial Enterprises Reorganization Ordinance of 1942, 58 Japan Savings Bank, 59 Munitions Ministry, 60 National Financial Control Association, 56 neighborhood association, 81 war’s end, 63, 69 wartime financial control, 56–57t World Bank, 94 World Depressions, 30 See also economy, general conditions World War I, 27 wrap accounts, 291 Yanagisawa, H., 280 yen adoption of gold standard, 23 Bretton Woods system, 220 fixed exchange rates, 95 internationalization of the Yen, 236 Joint US-Japan Ad Hoc Group on the Yen-Dollar Relationship, 234 Louvre Accord, 226 Nixon shock, 220 Plaza Accord, 226 return to gold, 30 Smithsonian system, 220 Yen appreciation, 226 zaibatsu dissolution, 9, 68 families, 62 honsha, 8, 62 Mitsubishi, Mitsui, monitoring, 47 scale of the major Zaibatsu at War’s end, 69 Shinko- (New) zaibatsu, stockholdings of zaibatsu holding companies, 70 Sumitomo, Taisho- zaibatsu, Yasuda, zaitech, 166 zero bank borrowing, 257t .. .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 Anil K Kashyap The MIT... 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... 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