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- 1. JAPANESE FINANCIAL SYSTEM 日本銀行 Qian Yao Sindy Chan Minh Hieu Pham
- 2. AGENDA • Overview • Financial system characteristics • Japan financial system v.s U.S system • The causes of Banking crisis 1990s • Japanese Big Bang • Japanese New Plan – Debt Moratoriums in 2009
- 3. Overview • Japanese modern financial system (Postwar) • Bank of Japan (BoJ): central bank (compared to Fed) was founded in 1882 • The Ministry of Finance (MoF): most powerful government agency • Tokyo Stock Exchange: founded 1878, world 3th largest stock exchange (Market cap: $3.3 trillion in Dec, 2011) • Financial system: • 12 City banks • 63 Regional banks • Special-purpose financial institutions- include long-term credit banks, specialized small business & industrial institutions • Security Firms (Big Four) • Insurance Companies
- 4. Regulatory System • Bank dominated financial system limited role of capital market (stock, bond) • Keiretsu (系列, group of affiliated enterprises) corporate governance • Stable system but inefficient • Limited role of capital market (stock, bond) • Heavy regulations • Government subsidized • Based on high savings • Banks tend to “over loan” with low interest rate
- 5. Keiretsu Financial Structure • Financial keiretsu are groups of firms, centered around “main bank”, and characterized by cross- shareholding and product linkages. • Big six keiretsu groups: Mitsui, Mitsubishi, Sumitomo, Fuyo, Sanwa, and Dai-Ichi. • The main bank own some shares (stocks) of the keiretsu firms (mostly). • Lessened the shareholder’s influence on managerial decision making
- 6. Keiretsu
- 7. Japanese Banking Structure • Consolidation - Mega Banking groups • Cross- or circular- shareholding. • Give preference to each other in business relation. • Facilitate information creation and exchange, reducing transaction costs & risk, etc.
- 8. Financial Structure Comparison ¥ JAPAN $ U.S • Bank-based financial • Market-based financial system system • Debt financing • Equity financing • Stability • Efficiency • Focused on stakeholders • Focused on shareholders • Based on private • Available price information information to all market participants • Achieving long-term • Maximizing individual short- benefits as a whole term benefits
- 9. ISSUES • Deflation (two periods) • Less competitive in international market • Economic stagnation • Causes of banking crisis during 1990s
- 11. Causes of Crisis Banking System in 1990s • Background: Plaza Accord • France, West Germany, Japan, the United States, and the United Kingdom, signed the accord on September 22, 1985 at the Plaza Hotel in New York City, to depreciate the U.S. dollar in relation to the Japanese yen and German Deutsche Mark by intervening in currency markets. • The exchange rate value of the dollar versus the yen declined by 51% from 1985 to 1987. • (220yen/$ 150yen/$)
- 12. Causes of Crisis Banking System in 1990s • To avoid exchange rate risk, large amount of Hot money money poured into Japanese market poured in • Quantitative easing • Speeding of the urbanization process Housing • Demand for houses and land increased speculation • Price of houses and land increased • Boom of manufacturing Bull market • Temptation of stock market
- 13. • Mitsubishi bought 51% shares of Rockefeller center in NYC for $850 million. • Sony bought Columbia Picture, Tristar Pictures and Four Seasons Hotel in Hamburg for $3.4 billion. • Panasonic bought Universal Picture for $6.1 billion. • Japan tree frog co bought Van Gogh’s work– sunflower • …..(real estate, enterprise, works of art, gold)
- 14. Bubble burst
- 15. • 1989.5 • Interest rate increased from 2.5% to 4.5%, which ended era of ultra-low interest rate • As money became tight, cost of making loans increased, all act of investment slowed down. • Real estate, Stock market, Corporate finance • Criticism of U.S on Japan for its closed trading between companies.
- 16. Conclusion • 1.After Plaza Accord, hot money inflows while Japanese market was not large enough to hold the huge production. • 2.Banks in Japan provided loans for the investment in real estate and stock market where prices were distorted , so exposed themselves into risks. • 3.Companies weakened the capability to resist crisis by cross-held shares. • 4.Boom in investment slowed down the development of real economy. • 5.Industries relocated in other countries and increased unemployment rate domestically. • 6. Change in monetary policy was too violent • 7. Interference of U.S.
- 17. Japanese Big Bang, 2001 • Deregulation of financial markets • Transform the Japanese financial market into an international financial market. Japanese financial institutions still have considerable bad debts. It is necessary to advance the financial system reform while paying utmost attention to the stabilization of the financial system itself.
- 18. New Plan – Debt Moratoriums in 2009 • Financial Services Minister, Kamei said “Moratorium won’t increase japan bad loans.” • Kamei vowed to push banks to extend more credit to small businesses. • The government will make allowances for any lenders.
- 19. Summary of the New Plan – Debt Moratoriums • Debtors pretend they will pay later • Banks pretend that the defaulted loans will be repaid • Banks will be forced by the government to lend more money to debtors • Japan’s debt moratorium is a final desperate attempt to “save the system” • It will move private bad debt onto the already over leveraged public balance sheet & encourage debt repudiation on a massive scale.
- 20. Biggest Impediment to Future Bank Lending • Growing trend of debt repudiation is directly sponsored and encouraged by the Government, which seeking to encourage more lending at the same time. • Consumers having trouble paying their debts can now have debt forgiveness, loan modifications, rate reductions, etc.
- 21. Prediction of Outcomes 1. Unqualified borrowers would borrow more than they could afford to pay back. 2. Charging high, risk-based interest rates would hurt the most economically vulnerable borrowers. 3. Lower down-payments would encourage borrowers to walk away from their obligations. 4. Non-minority or well-off borrowers would see subprime loans as a way to buy larger homes or speculate in flipping homes.
- 22. Questions ?
Hinweis der Redaktion
- Due to the volatile fluctuation in exchange market, capital made up of T-bill had a large amount of accounting losses. To avoid exchange rate risk, money poured into Japanese market. Meanwhile, Japanese government decided to provide subsidy to export industries, started quantitative easing, which brought surplus capital.Surplus capital find place to be invested, that is real estate. The market gradually became a snowball which turned bigger and bigger. You can see construction site everywhere.After second world war, there was a boom in manufacturing , which brought real economy into a prosperous state. The upward trend not only raised the profile of companies and managers but also attracted more people to invest money in it.Not only individual investors make such decisions but also companies chose to invest in stock money to gain more than interest earnings.To keep stock price high:Buy stocks from each other Everyone believed the price will improve higher and higher, no one suspect it.
- Representative of wealthSoul of America Avoid the decrease of value
- Shares held in each other had to be issued in market, the suddenly change was bound to bring prices in stock market decreasing.Once panic appears, the market must collapse.
- Deregulation of financial marketsJapanese Financial system transform the Japanese financial market into an international financial market with conditions similar to those of New York and London in 2001.Personal financial assets of 1,200 trillion yen could be invested in the market as desired.Considering these circumstances, with such a heavy regulations and low competition is in the Japan market, it is natural to have such a immediate reform of the financial market.As of today, Japanese financial institutions is still having considerable bad debts, and they are still in the processof coping with them. In order to avoid any unexpected confusions, it is necessary to advance the financial system reform while paying utmost attention to the stabilization of the financial system itself.
- Japan has decided to expand policies by forcing banks to agree to debt moratoriumsThe Japanese Financial Services Minister: “Japanese banks’ bad loans won’t be driven higher by thedebt moratorium by those struggling small companies.”“I’m not going to leave small companies in the lurch unable to get loans”“We’re going to get financial institutions to provide these firms with more loans,Kamei vowed to push banks to extend more credit to small businesses after bankruptcies hit a 6-year high in Japan.The government will make allowances for any lenders whose capital ratios fall because of the moratorium legislation.
- (1) Debtors pretend they will pay later(2) Banks pretend that the defaulted loans will be repaid(3) Banks will be forced by the government to lend more money to debtors who cannot repay what they already owe(3) And the banks will not have to set aside loan loss reserves on the defaulted debt. (4) Japan’s debt moratorium is a final desperate attempt to “save the system” by preventing deeply indebted, income poor borrowers from defaulting on debts that can no longer be serviced. (5) It will move private bad debt onto the already over leveraged public balance sheet and will encourage debt repudiation on a massive scale.
- (Start with) In many cases, Debt that cannot be repaid,won’t be repaidare relatively minor compared to the burden of continued payments.(1)Ironically, the biggest impediment to future bank lending is the growing trend of debt repudiation directly sponsored and encouraged by the Government, which seeking to encourage more lending at the same time.(2) Consumers having trouble paying their debts can now choose from a long list of government programs for debt forgiveness, loan modifications, rate reductions, 125% loan to value mortgages and more programs on the way. (3) There is no longer any shame or embarrassment associated with defaults and bankruptcy. (3) Defaulting on debt has become a rational choice for many with little repercussions.
- Unqualified borrowers would borrow more than they could afford to pay back.Charging high, risk-based interest rates would hurt the most economically vulnerable borrowers.Lower down-payments would encourage borrowers in financial trouble to simply walk away from their obligations without trying to work something out.Non-minority and/or well-off borrowers would see subprime loans as a way to buy larger homes or speculate in flipping homes.