Table Of ContentSahoko Kaji
Eiji Ogawa Editors
Who Will Provide
the Next Financial
Model?
Asia s Financial Muscle and Europe s
’ ’
Financial Maturity
Who Will Provide the Next Financial Model?
Sahoko Kaji Eiji Ogawa
●
Editors
Who Will Provide the Next
Financial Model?
Asia’s Financial Muscle and Europe’s
Financial Maturity
Editors
Sahoko Kaji Eiji Ogawa
Professor Professor
Keio University Hitotsubashi University
2-15-45 Mita, Minato-ku 2-1 Naka, Kunitachi
Tokyo 108-8345 , Japan Tokyo 186-8601 , Japan
ISBN 978-4-431-54281-0 ISBN 978-4-431-54282-7 (eBook)
DOI 10.1007/978-4-431-54282-7
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Preface
In the past 4 years, our faith in the present fi nancial model has been shaken in terms
of monetary, regulatory and exchange rate policies, as well as the business model of
the fi nancial sector itself. Past and present policies of the world’s most respected
central banks have come under fi re. Regulations that de fi ned the system underwent
major reviews. Fancy fi nancial instruments that provided new ways of fi nancial
intermediation and wealth creation were exposed as the culprits behind the near
fi nancial meltdown. And after ten successful years, Europe’s single currency came
under threat. In short, the established fi nancial model was not only unable to prevent
the crises but also arguably a cause.
Inasmuch as there are business cycles, economies recover at some point. However,
economic recovery is one thing, fi nding a fi nancial model conducive to stability is
quite another. To avoid the repetition of the near collapse of the global economy, we
cannot just aim for a simple recovery. Important questions are staring us in the face;
the broadest is whether the West is ceding its position as leader to the East. Without
agreeing on an answer to this broad question, we can ask who will provide the new
fi nancial model conducive to stability and prosperity. Clearly, we cannot go back to
business as usual. But if that is the case, what do we do now? As the crisis deepens,
the temptation is to change as little as possible, out of fear of the unknown. But no
change now means further trouble down the road. The world is in search of a new
fi nancial model.
Japan knows this search all too well. Back in the 1980s, Japan’s economy was
rapidly approaching the status of “number one”. In the middle of this fateful decade,
a bubble emerged in the Japanese fi nancial and real estate markets and while it lasted
gave the false impression of success and prosperity. Japan’s method of fi nancial
intermediation and fi nancial regulation changed in the eyes of the West from obscure
to commendable. The visibility and status of Japan’s banks, insurance companies
and securities houses soared in the global arena. Purportedly, Japan’s unique method
of fi nancial intermediation was superior in enabling long-term planning by borrow-
ers, supporting low unemployment and economic stability. Many thought that Japan’s
fi nancial model represented an alternative to the Anglo-American model and that it
should be adopted by fellow Asians and even eventually by those in the West.
v
vi Preface
Then we learnt that this was only an illusion. Japan’s bubble burst and was
followed by two “lost decades”. Japan’s fi nancial model not only did support long-
term business ties, but it also preserved cosy, unproductive relationships among
regulatory authorities, fi nancial institutions and fi rms.
After Japan’s fi nancial model lost its shine, life actually became simpler for the
Japanese. They just had to say “mea culpa”, abandon the Japanese way of fi nance
and adopt Western fi nance methods. This became a national goal. Many were the
meetings held, reports written, and papers and books published to press this point.
Under the banner of “from saving to investment”, households were encouraged to
move money out of savings accounts and into mutual funds, and schools were
encouraged to teach young children the principles of investing. Japanese fi nancial
authorities, as well as Japanese private fi nanciers, believed that all that was needed
to avoid another bubble was to adopt more Western methods of fi nance and policy-
making. The goal was clear, even if it was not being achieved soon enough.
However, this also proved to be an illusion. Unfortunately (or fortunately), before
Japan completely adopted Western methods of fi nance, the subprime crisis and
Lehman shock hit. This was followed by the euro crisis. The situation in Japan
today is not dissimilar to the early 1990s where some said “give us back the (Berlin)
wall”. Life was simpler when systems were classi fi ed as either Capitalist or
Communist. In the same way, life was simpler for the Japanese when fi nancial sys-
tems were divided into Western and Japanese. Now things are more complicated.
One of the two contrasting models was discredited, but blind faith in the remaining
one does not assure stability and prosperity. There is no longer a model, at least not
an obvious one, to work towards. Every country is looking for a new fi nancial
model. How do Asia and Europe compare in the quest for this model?
We need to seriously rethink how we conduct monetary policy and regulate the
fi nancial sector. How should central banks conduct monetary policy in crises? How
should fi nancial regulation be coordinated, and what kind of incentive should they
create to avoid a crisis, to recover from a crisis and to sustain growth? Another
important aspect of fi nance is exchange rate systems. What does the crisis in the
euro area tell us about exchange rate regimes in Asia and in general? These ques-
tions are even more pertinent with the increased, if not exploding, fi scal de fi cits and
debts in Japan and the West.
This conference volume records the cumulative result of three EUSI conferences
on these topics. The fi rst, held in December of 2009, was entitled “Financial Crises,
learning from Europe, learning from Asia”. The second and third, held in December
2010 and 2011, respectively, both shared the title of this volume; the agendas of
these two conferences essentially carry over into the content of this book.
First on the agenda is fi nancial regulation. Iain Begg and Atsushi Mimura discuss
the efforts to improve fi nancial regulation in the EU and in Asia, respectively. Their
analyses show that even as the EU takes steps in the context of integration, the “pre-
mium forum” for cooperation is moving to the G20 and the FSB (Financial Stability
Board), which include emerging economies and international authorities. Europe is
facing the triple task of getting its own house in order, leading the way in fi nancial
integration, while maintaining consistency with and seeking funds from the diverse
Preface vii
world outside the EU. In Asia, where the level of diversity is much greater than in
the EU, no concrete model of unique fi nancial regulation is emerging. This is not
necessarily a weakness because it shows that diversity is the norm in Asia.
The second topic is monetary policy. Francesco Drudi, Alain Durree and
Francesco Paolo Mongelli explain why central banks must have a clear policy objec-
tive and appropriate risk management. They also describe the European Central
Bank’s policies during the different phases of the crisis since August 2007. This is
followed by an assessment of unconventional monetary policy by Shigenori
Shiratsuka. The Bank of Japan’s policies in the late 1990s “demonstrate more simi-
larities than differences” with those taken by major central banks in the current
crisis. The asset sides of the central banks’ balance sheets re fl ect their choice
between emphasis on macroeconomic stability and fi nancial system stability. The
last paper on this topic is by Akira Ariyoshi, who states that Europe learnt very little
from the Asian fi nancial crisis and lists some lessons for Asia from Europe. A com-
mon underlying theme of all three papers is that monetary authorities in both Asia
and Europe face the same economic logic (the impossible trinity, moral hazard,
information asymmetry, importance of market expectations, the blurred line between
monetary and fi scal policy during crises). Every policy choice has a trade-off and all
policy authorities must choose the combination (including eclectic mid-points) of
costs and bene fi ts that is best under the circumstances.
The third topic is developments in the fin ancial sector. Carlo Altomonte and
Lorenzo Saggiorato point to another law of economics, i.e., the policy tools must be
at least as numerous as the policy goals. More speci fi cally, they stress the need to
complement short-term reactions to the crisis with regulatory changes that aim at
prosperity in the longer term. Such changes must enable the fi nancial sector to allo-
cate credit to high productivity fi rms in an environment characterised by fi rm het-
erogeneity. Mitsuhiro Fukao discusses the similarities (excessive monetary easing,
fi nancial deregulation and regulatory distortions) between Japan’s post-bubble cri-
sis and the present situation in the USA and Europe. Finally, Alicia Garcia-Herrero
and Daniel Santabarbara assess China’s banking reforms since 1998 and evaluate
the risk that the 2008 fi scal package may pose for Chinese banks in terms of asset
quality. One important weakness is the fact that “(b)ank lending continues to be
dependent on the interests of the public sector”, a clear case being the “bank
fi nancing of the fi scal stimulus package”. In terms of balance sheets, this exhibits a
curious and dismal coincidence with post-crisis Europe, USA and Japan, where
banks and governments are sustaining each other, as one unintended consequence of
fi scal expansion to avoid a fi nancial meltdown. This means that even after China
successfully reforms itself out of this interdependence, it may easily slip back into
the same structure in a crisis. The dissolution of such interdependence is one of the
goals of the European Banking Union (EBU) under construction. The EBU itself is
novel, and if in the process of forming the EBU Europe becomes the fi rst to empha-
sise the allocation of funds to competitive fi rms, it will be a refreshingly positive
silver lining of the crisis.
The fi nal topic is the exchange rate regime. Helmut Wagner starts out by
con fi rming that “(r)eal convergence is an original goal of the European integration
viii Preface
process” and shows that there “was no uniform institutional and structural conver-
gence within the E(M)U”. He also warns against hastily constructing such a union
without incentive mechanisms that lead to structural convergence. Thus, Wagner
presents an expanded version of the “economist” argument, in that structural and
economic convergence must come before monetary convergence. In contrast, Eiji
Ogawa’s discussions are “monetarist” in giving priority to regional monetary coop-
eration to reduce misalignments of Asian currencies, which in turn adversely affect
international trade and investment, while stressing the importance of holding “a
sound fi scal position”. Then, Paola Subacchi and Stephen Pickford take us back to
the “economist” (expanded to include structural) view and warn that policymakers
who fail to address the longer-term structural problems do so at their peril, risking a
euro break-up. Sahoko Kaji discusses the possibility of using the exchange rate
regime (single currency) as a tool to advance such reforms, in the fi nal chapter.
All our commentators provided additional information, new angles and direc-
tions for further research.
The chapters of this book show that “the new fi nancial model” has not yet
emerged out of the crises. But they provide useful clues, contrasts and comparisons,
by explaining the different approaches taken by Europe and Asia, even as both come
under the same economic logic. If Europe provides a fi nancial model in an “ever
closer union”, Asia would seem to do so under diversity, not just in terms of stages
of economic development and economic systems but also in policy choices between
the two corner solutions. Europe is becoming the fi rst in the world to cede such a
degree of sovereignty. Asia shows that some diversity and an eclectic approach
(such as capital controls) may actually be bene fi cial.
The real test is whether either, or both, can achieve sustainable prosperity.
We would like to thank the European Commission for making EUSI possible and
all participants of the three EUSI conferences for their high-level intellectual input
and camaraderie. The Japan Society of Monetary Economics, Mizuho Financial
Group and the Hitotsubashi-Keio Support Project for Strategic University
Collaborations provided generous fi nancial support for the conferences. We are also
grateful to Springer Japan for their patience and cooperation. Last but not least, our
thanks go to all the EUSI staff, in particular Ms Tomoko Fujino who played an
important part in making this publication possible.
Tokyo, Japan Sahoko Kaji
September 2012
Contents
Part I Financial Regulation
The EU’s Approach to Improving Financial Regulation............................. 3
Iain Begg
Asia’s Approach to Improve Financial Regulation ...................................... 21
Atsushi Mimura
Comment Paper to Chapters “The EU’s Approach
to Improving Financial Regulation” and “Asia’s Approach
to Improve Financial Regulation” ..................................................................... 29
Jun Inoue
Comment Paper to Chapters “The EU’s Approach
to Improving Financial Regulation” and “Asia’s Approach
to Improve Financial Regulation” ..................................................................... 31
Satoshi Koibuchi
Part II Monetary Policy
The European Central Bank and Implications
of the Sovereign Debt Crisis ........................................................................... 35
Francesco Drudi, Alain Durré, and Francesco Paolo Mongelli
Comment Paper to Chapter “The European Central Bank
and Implications of the Sovereign Debt Crisis” ................................................ 61
Soko Tanaka
Evolution of Quantitative Easing ................................................................... 63
Shigenori Shiratsuka
Comment Paper to Chapter “Evolution of Quantitative Easing” ...................... 81
Toshiki Jinushi
ix
