+ The Financial Sector and the Real Economy in Japan Ulrike Schaede ウリケ・シェーデ...

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+ The Financial Sector and the Real Economy in Japan Ulrike Schaede ウウウ ウウウウ Professor of Japanese Business Director, JFIT: Japan Forum for Innovation and Technology School of Global Policy and Strategy グググググググ グググ University of California, San Diego ググググググググググググググ Ritsumeikan Univeristy, July 31, 2015

Transcript of + The Financial Sector and the Real Economy in Japan Ulrike Schaede ウリケ・シェーデ...

Page 1: + The Financial Sector and the Real Economy in Japan Ulrike Schaede ウリケ・シェーデ Professor of Japanese Business Director, JFIT: Japan Forum for Innovation.

+The Financial Sector and the Real Economy in Japan

Ulrike Schaede  ウリケ・シェーデProfessor of Japanese BusinessDirector, JFIT: Japan Forum for Innovation and TechnologySchool of Global Policy and Strategy   グローバル政策・戦略大学院University of California, San Diego  カリフォルニア大学サンディエゴ校Ritsumeikan Univeristy, July 31, 2015

Page 2: + The Financial Sector and the Real Economy in Japan Ulrike Schaede ウリケ・シェーデ Professor of Japanese Business Director, JFIT: Japan Forum for Innovation.

+Macro 101: How the Economy works in the Textbook

DSUs(companies

)

SSUs(household

s)

Commercial Banks

savingsloans

“Ind

irect

fin

ance

”間

接金

融“D

irect

finance

”直

接接

金融

Investment Banks

Bonds, stocks, CP, any IOU

1933 Glass-SteagallSeparation1949 証券取引法

This is driven entirely by the demand of DSUs

Page 3: + The Financial Sector and the Real Economy in Japan Ulrike Schaede ウリケ・シェーデ Professor of Japanese Business Director, JFIT: Japan Forum for Innovation.

+What happened in the U.S.?

DSUs(companies

)

SSUs(household

s)

Commercial Bank

savingsloans

“Ind

irect

fin

ance

”間

接金

融“D

irect

finance

”直

接接

金融

Investment Bank

Bonds, stocks, CP, any IOU

1933 Glass-SteagallSeparation1949 証券取引法

Investment Banks

Holding companies- Investments

- Banking- M&A advice- Insurance- Mortgages

- Credit cards- Private equity deals

- CDOs, and other toxic instruments

1998 Sandy Weill merges Citi, Travelers and Salomon Brothers 1999 Goldman Sachs becomes publicly traded1999 “Financial Services Modernization Act “ (Graham-Leach-Bliley Act)

Page 4: + The Financial Sector and the Real Economy in Japan Ulrike Schaede ウリケ・シェーデ Professor of Japanese Business Director, JFIT: Japan Forum for Innovation.

+The U.S. after the “Lehman Shock” global financial crisis

Large financial institutions are primarily proprietary dealers

Smaller banks specialize on smaller firms Competition with credit cards, leasing firms etc. Arms-length relations: price

Move to e-money?

Page 5: + The Financial Sector and the Real Economy in Japan Ulrike Schaede ウリケ・シェーデ Professor of Japanese Business Director, JFIT: Japan Forum for Innovation.

+ What happened in Japan?(1) The Developmental State (1950-1987)

DSUs(companies

)

SSUs(household

s)

Commercial Banks

savingsloans

“Ind

irect

fin

ance

”間

接金

融“D

irect

finance

”直

接接

金融

Investment Banks

Bonds, stocks, CP, any IOU

1933 Glass-SteagallSeparation1949 証券取引法

Japan put this system on steroids, for the government to guide money flows

Page 6: + The Financial Sector and the Real Economy in Japan Ulrike Schaede ウリケ・シェーデ Professor of Japanese Business Director, JFIT: Japan Forum for Innovation.

+ What happened in Japan?(1) The Developmental State (1950-1987)

DSUs(companies

)

SSUs(household

s)

Commercial Banks

savingsloans

“Ind

irect

fin

ance

”間

接金

Basic components:- Excess demand by companies after World War II- Rigid interest rate regulation ( 臨時金利調整法 TIRAL 1947)

- Fixed spreads; banks made more by lending more, SSUs got little- Cost of borrowing (r) kept low to foster growth- “Window guidance” by the Bank of Japan; other controls by MOF

- Pick winners for the big loans- Strict foreign exchange rules: all domestic, no foreign access

Page 7: + The Financial Sector and the Real Economy in Japan Ulrike Schaede ウリケ・シェーデ Professor of Japanese Business Director, JFIT: Japan Forum for Innovation.

+End of Financial Underpinnings of the Development State

1980s: “the 2 kokusaika” 国債化 : government bonds needed to be placed somewhere

Launch of competition between commercial and investment bnaks 国際化: large exporters lobbied for access to foreign financial

marketsMOF designated 300 firms allowed to issue bonds, etc.

1987-1991: the Bubble Everybody rushing to the stock market (incl. banks) Banks losing customers, make desperate and unwise loans Crash in 1991: Non-performing loan crisis Banking crisis 1998: end of the entire system

Page 8: + The Financial Sector and the Real Economy in Japan Ulrike Schaede ウリケ・シェーデ Professor of Japanese Business Director, JFIT: Japan Forum for Innovation.

+Legal change in Japan

1997/8 banking crisis strikes in full forces Huge government capital infusion into all banks Long-term banks disappear as a category Consolidation

1998 revision of Antimonopoly Law Allows holding companies: mergers of banks Revision of Securities Trading Act: abolish firewall

2015 is Japan still “overbanked”? Too many banks chasing too few customers “Cartel”-like behavior that crowds out alternative forms of

financing (e.g., venture capital)

Page 9: + The Financial Sector and the Real Economy in Japan Ulrike Schaede ウリケ・シェーデ Professor of Japanese Business Director, JFIT: Japan Forum for Innovation.

Nikkei Weekly Nov 23, 2009, p.4

Page 10: + The Financial Sector and the Real Economy in Japan Ulrike Schaede ウリケ・シェーデ Professor of Japanese Business Director, JFIT: Japan Forum for Innovation.

+Shift in Corporate Finance

In million Yen; stock of financing outstanding for large firms (capital of ¥1 billion +; n=5,275)

0

20,000,000

40,000,000

60,000,000

80,000,000

100,000,000

120,000,000

140,000,000

160,000,000

180,000,000

'60 '62 '64 '66 '68 '70 '72 '74 '76 '78 '80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04

Bank Loans

Bonds, Stocks, etc.

RetainedEarnings

Page 11: + The Financial Sector and the Real Economy in Japan Ulrike Schaede ウリケ・シェーデ Professor of Japanese Business Director, JFIT: Japan Forum for Innovation.

+

11Debt-Equity Ratios

Calculated from 法人企業統計

Page 12: + The Financial Sector and the Real Economy in Japan Ulrike Schaede ウリケ・シェーデ Professor of Japanese Business Director, JFIT: Japan Forum for Innovation.

+Loans outstanding, by interest rate1970-2002

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

800,000

900,000

in 100 mil yen

1970-Dec. 1980-Dec. 1990-Dec. 1995-Dec. 1996-Dec. 1997-Dec. 1998-Dec.

1999-Dec. 2000-Dec. 2001-Dec. 2002-Dec.

less than0.25%

1.75% 2.5% 3.0% 4.0% 4.5% 5.0% 5.5% 6.0% 6.5% 7.0% 7.5% 8.0% 8.5% 9.0% 9.5% 10% 10.5% 11% 11.5%

Source: Bank of Japan database

Page 13: + The Financial Sector and the Real Economy in Japan Ulrike Schaede ウリケ・シェーデ Professor of Japanese Business Director, JFIT: Japan Forum for Innovation.

+Loan rates in 2002

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000

in b

illio

n Y

en

At that time, banks’ lendingcosts were between 3-5%

Page 14: + The Financial Sector and the Real Economy in Japan Ulrike Schaede ウリケ・シェーデ Professor of Japanese Business Director, JFIT: Japan Forum for Innovation.

+Japan today

Large Banks Compete globally for huge projects Compete locally for small firms Still have substantial loans to large firms

Small Banks Continuing political influence on price

融資制度 government-guaranteed loans for non-performing regional firms Relationship banking highly important

Overall, Japan is still overbanked Regional banks, local banks, credit cooperatives, … Government banks for small firm finance, big firm finance, failing firm

finance Is Japan ‘s banking system supporting mostly the unproductive economy?

Page 15: + The Financial Sector and the Real Economy in Japan Ulrike Schaede ウリケ・シェーデ Professor of Japanese Business Director, JFIT: Japan Forum for Innovation.

+Supporting the unproductive economy?

Zombie firms: Companies that have no viable business model, but

receive bank loans to pay loans outstandingArtificially kept alive: employmentHog resources: talent, productive assets, financial capitalDrag down the economy overall

Zombie banks: banks that have mostly zombies as customers Kept alive by lack of political will Have little to do, which results in strange behavior

Page 16: + The Financial Sector and the Real Economy in Japan Ulrike Schaede ウリケ・シェーデ Professor of Japanese Business Director, JFIT: Japan Forum for Innovation.

+Advantages of this system

Welfare in disguise Keeps small firms alive, people employed Contributes to social stability Unclear whether it is more expensive

Prevents the excesses we see in the U.S. and Europe? Would Japan be better off turning more to the

market?

Page 17: + The Financial Sector and the Real Economy in Japan Ulrike Schaede ウリケ・シェーデ Professor of Japanese Business Director, JFIT: Japan Forum for Innovation.

+The Next Big Thing: “Fintech”

Germany Since 2010, 30% reduction in number of banks 1990: 4,700 banks, today: 1991 banks

Japan Similar trend, different way of counting Currently 198 “banks”

4 Mega banks (on top of world rankings) 4 Trust banks, 85 regional banks, 57 foreign banks, “others” Does not count cooperatives, etc.

Government initiative to reduce this number When this happens, new providers of capital may get

access