Naoyuki N Yoshino
NAOYUKI N. YOSHINO*
I would like to talk about the Japanese financial system and the ways in which Japanese society and Japanese government policy-making are changing that system.
One characteristic of the Japanese economy is its very high savings ratio. Our savings ratio, even now, is fifteen percent; the peak was twenty-three percent in 1974. Most of this savings is in time and savings deposits, which go primarily to banks or the post office, rather than into the securities, stock, and bond markets. While the U.S. securities market represents thirty-three percent of household savings, only six or seven percent of Japanese households own stock.1 The share of postal savings per household is more than twenty percent, which is one of the highest among all nations. As a result, twenty percent of household assets are controlled by the government.
There are several reasons why more than fifty-five percent of Japanese households’ portfolios have been deposited either in private banks or postal savings. Branch regulations implemented by Japan’s Ministry of Finance, intended to keep the financial system compartmentalized, have prevented large city banks from expanding their branches freely.2 Therefore, regional banks and small banks have been able to retain their banking business. Large city banks primarily made loans to large corporations, while regional banks made loans to each prefecture, and small banks (such as shinkin banks and credit cooperatives) provided loans to small businesses in their own regions. The categories of financial products and rates of interest provided by banks were regulated until 1986 for small denomination deposits. For this reason, branch networks were very important for accepting deposits. Furthermore, banks were competing for size, because the greater the number of deposits, the more profitable a bank would be. The allocation of household deposits can be explained by the number of branches of all kinds of banks.3 There are more than 24,000 post offices,4 and so more than twenty percent of household portfolios are put into postal savings.5
Postal savings, postal insurance, and welfare-national pensions are entrusted to the Trust Fund Bureau of the Ministry of Finance and allocated through government financial institutions (such as the Japan Development Bank and Housing Loan Corporation) and government agencies (such as the Japan Highway Corporation) to the Fiscal Investment and Loan Program (FILP) . The FILP was established in the 1950s to guide Japanese savings into certain targeted sectors to promote economic growth. More than twenty percent of FILP loans went to industry and technology sectors in the 1950s.6 The electric power, sea transport, shipbuilding, and machinery industries were targeted sectors.7 However, recently more than thirty percent of loans have been directed to housing, followed in priority by loans to small and mediumsized businesses and loans for the improvement of living standards, such as water supply and sewage.
The FILP system is undergoing significant reform. Postal savings, postal insurance, and welfare-national pension funds will stop entrusting their funds to the Trust Fund Bureau in the coming years. In the future, government banks and government corporations under the FILP system will issue their own bonds and raise their funds in the market. Furthermore, the transparency of the FILP system will be enhanced as the value of expected present and future subsidies from the government to each FILP organization is revealed by computing the present discount value of subsidies.
The Japanese financial system worked well in the past because Japanese society used to be one that was catching up to Western nations. Policymakers always followed the United States and the United Kingdom, and as a result, they knew what kind of industry would be growing in the future. With this knowledge, policymakers worked to ensure that funds were allocated to the appropriate sectors, and regulations were very important in accomplishing that. This reality helps explain the historical basis for the regulation of almost everything in the Japanese economy.
Things are changing in Japan today. Company employees in Japan have traditionally had lifetime employment, loyalty to the company, and a seniority-led system. When the Japanese economy was growing very rapidly-between ten and fifteen percent from 1955 to 1970-all of the workers could participate, and every year brought an increase in wages. That situation lasted until the late 1980s, when the country experienced very high asset-price inflation. During the late 1980s, stock prices almost doubled. Land prices went up almost three times between 1985 and 1989. And then, suddenly, monetary policy became tight, stock prices went down by almost half, and land prices went down by a third. As a result, the main commercial banks started to have bad loan losses. Since Japanese commercial banks made loans utilizing land as collateral, a land price decline of about one-third made it impossible for commercial banks to retain their collateral value.
During the period of asset-price inflation, many Japanese were excited, thinking the Japanese system was the best in the world. For the first time, we realized the Japanese system was a good one. Now we are very depressed-where should we go? Companies and people in Japan have lost their confidence. Many Japanese bankers did very well when they had the same goal; everybody worked hard to achieve that goal. But now Japanese society seems to have no goal. In which direction should we go?
An example about the loyalty of companies: corporations and banks start job recruitment and hire new employees every April. Those hired participate in month-long training courses offered by the banks and corporations. Up until two years ago, all the trainees studied even on Saturdays and Sundays. Consequently, Saturday and Sunday sessions were planned this year. But nobody showed up! This example shows how much the Japanese people have changed. They no longer care about loyalty to the company, and many people have started moving from one company to another. Many undergraduate students say, “I just want to find ajob for five or six years,” to get as much benefit from the company as possible and then move to other companies. The reality of lifetime employment is over. Many banks have started to fire people when they reach their late forties or fifty; thus, the seniority-led system has also been destroyed. Under these circumstances, policymakers also have to worry about their actions.
An example about the market: as a Council Member in various Ministerial meetings, I participated on a committee concerned with deregulation of deposit rates of interest. Deregulation means allowing the interest rate to be determined by supply and demand, but the government official at the Ministry did not understand how the market works. So he asked me how the banks should set their deposit rates of interest. I recommended that banks allow the market to determine the rates, but he didn’t believe that would work. As a result, the rate of interest for small denomination time deposits was regulated until 1993.
Policymakers have started to understand market orientation. One of the differences between Prime Minister Hashimoto and previous prime ministers is he has set up the councils directly under his authority. For example, the Central Bank Reform Council used to be administered by the Ministry of Finance. As a member of the Central Bank Reform Council, I attended meetings at the Prime Minister’s office rather than in one of the ministry offices. Because the councils do not have government participants, we can freely discuss what would be good for Japan and what would be bad for the Central Bank. Those kinds of reforms did not occur in the past, but Prime Minister Hashimoto wanted to show leadership.8
Where should Japan go next? There are many, many regulations in Japan, especially overseeing the financial sector. Recently, Prime Minister Hashimoto announced several reforms. One of these reforms is to arrange fixed commission fees for the securities industries. Another is to give Japanese pension fund managers flexibility in determining their portfolios. Bank holding companies and other holding companies will be allowed access in the future. A securities company could set up a bank as its subsidiary, or a bank could set up a securities company as its subsidiary. If these holding companies are allowed, the Glass-Steagall Act will be obsolete. Foreign exchange in Japan is currently handled solely by commercial banks. As of April 1998, companies and corporations will also be allowed to handle foreign exchanges.
I hope that Prime Minister Hashimoto’s leadership will lead Japan toward a more market-oriented society, and that Japan will open up its market, thereby resuming its position as a strong country again. Thank you very much.
1. For data concerning financial assets and liabilities outstanding in Japan from 19631994, see Naoyuki Yoshino, The Historic Role of Policy-Oriented Financing in Japan’s Economic Development, As It Relates to the Current Issues Within Transitional Economies, in EXPORT-IMPORT BANK OF JAPAN, EXIM JAPAN SYMPOSIUM 1996: KNOWLEDGE TRANSFER FOR THE IMPROVEMENT OF INVESTMENT CLIMATES IN DEVELOPING COUNTRIES AND TRANSITIONAL ECONOMIES:JAPAN’s ROLE 61, 71 (1996).
2. For a breakdown of the types of financial institutions in Japan, see id. at 70.
3. See id. at tbl. 4.
4. See id. at 70.
5. See generally Naoyuki Yoshino, Effects of Financial Liberalization on Banks, Corporations, and Monetary Policy: Asset Price Inflation and Money Flow from Japan, in U.S.-JAPAN MACROECONOMIC RELATIONS, INTERACTIONS AND INTERDEPENDENCE IN THE 1980s: INCENTIVES, POLICIES, AND LEGACIES (1997).
6. See Seiritsu S. Ogura& Naoyuki N. Yoshino, The Tax System and the Fiscal Investment and Loan Program, in INDUSTRIAL POLICY OFJAPAN 121, 142 (Ryutaro Komiya et al. eds., 1988).
7. See id. at 151.
8. For further analysis, see Naoyuki Yoshino, Japan’s Independence Day, INT’L. ECON., Sept.-Oct. 1997, at 52.
* Professor of Economics, Keio University, Tokyo,Japan.
Copyright Georgetown University Law Center Spring 1997
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