Table Of ContentCRISIS AND CHANGE IN THE
JAPANESE FINANCIAL
SYSTEM
Innovations in Financial Markets
and Institutions
Editor:
Mark Flannery
University of Florida
Other books in the series:
Cummins, J. David and Santomero, Anthony M.:
Changes in the Life Insurance Industry: Efficiency, Technology
and Risk Management
Barron, J.M., and Staten, M.E.:
Credit Life Insurance: A Re-Examination of Policy and Practice
Cottrell, A.F., Lawlor, M.S., Wood, J.H.:
The Causes and Costs of Depository Institution Failures
Anderson, S., Beard, T.R., Born, J.:
Initial Public Offerings: Findings and Theories
Anderson, S., and Born, J.:
Closed-End Investment Companies
Kaufman, G.:
Banking Structures in Major Countries
England, c.:
Governing Banking's Future
Hancock, D.:
A Theory of Production for the Financial Firm
Gup, B.:
Bank Mergers: Current Issues and Perspectives
CRISIS AND CHANGE IN THE
JAPANESE FINANCIAL
SYSTEM
edited by
TakeoHoshi
University of California, San Diego
Hugh Patrick
Columbia University
SPRINGER SCIENCE+BUSINESS MEDIA, LLC
Library of Congress CataIoging-in-Publication Data
Crisis and change in the Japanese financial system / edited by Takeo Hoshi,
Hugh Patrick.
p.cm. --(Innovations in financial markets and institutions)
Includes bibliographical references.
ISBN 978-1-4613-6977-6 ISBN 978-1-4615-4395-4 (eBook)
DOI 10.1007/978-1-4615-4395-4
1.Finance--Ja pan.2.Financial institutions--J apan. I.Hoshi, Takeo. I1.Patrick,
Hugh T. III. Series.
HG187.J3 C75 2000
332'.0952--dc21
()()-020395
Copyright@2000by Springer Science+Business Media New York
Originally published by Kluwer Academic Publishers, New York in 2000
Softcover reprint of the hardcover 1s t edition
AlI rights reserved. No part of this publication may be reproduced, stored in a
retrieval system or transmitted in any form or by any means, mechanical, photo
copying, recording, or otherwise, without the prior written permission of the
publisher, Springer Science+Business Media, LLC
Printed on acid-free paper.
TABLE OF CONTENTS
Contributors .................................................................................................. vii
Preface .............................................................................................................x i
1. The Japanese Financial System: An Introductory Overview
Takeo Hoshi and Hugh Patrick ...................................................... 1
PART I THE ORIGINS OF JAPAN'S BANKING CRISIS
2. What Caused Japan's Banking Crisis?
Thomas F Cargill ......................................................................... 37
3. Causes of Japan's Banking Problems in the 1990s
Kazuo Ueda. ............................................................................... 59
PART II RESPONDING TO CRISIS
4. The Stagnant Japanese Economy in the 1990s: The Need for
Financial Supervision to Restore Sustained Growth
Takatoshi Ito ............................................................................... 85
5. The Reorganization of Japan's Financial Bureaucracy:
The Politics of Bureaucratic Structure and Blame Avoidance
Nobuhiro Hiwatari .................................................................... 109
6. The Disposal of Bad Loans in Japan: The Case of the CCPC
Frank Packer. ............................................................................ 137
7. Bank Lending in Japan: Its Determinants and
Macroeconomic Implications
Kazuo Ogawa and Shin-Ichi Kitasaka ...................................... 159
8. The Postal Savings System, Fiscal Investment and Loan
Program, and Modernization of Japan's Financial System
Thomas F Cargill and Naoyuki Yoshino .................................... 201
vi TABLE OF CONTENTS
m
PART FINANCIAL STRUCTURE CHANGE AND THE BIG BANG
9. The Big Bang: Idea and Reality
Akiyoshi Horiuchi .................................................................... 233
10. The Big Bang in Japanese Securities Markets
Shoichi Royama ....................................................................... 253
11. Japan's Financial Big Bang: Its Impact on the Legal System
and Corporate Governance
Hideki Kanda .................................................................. , ......... 277
12. Big Bang Deregulation and Japanese Corporate Governance:
A Survey of the Issues
Michael S Gibson ..................................................................... 291
Subject Index ......................................................................... .315
THE CONTRIBUTORS
Editors
Takeo Hoshi is Associate Professor at the Graduate School of International
Relations and Pacific Studies (IRlPS) at the University of California, San Di
ego, where he has been on the faculty since 1988. In 1997-98 he was Tokio
Marine & Fire Visiting Associate Professor on the Faculty of Economics at
Osaka University. He has recently been appointed Editor of the Journal of the
Japanese and International Economies, after being Associate Editor since 1993.
He received a Bachelor of Arts in Social Sciences from the University of Tokyo
in 1983, and a Ph.D. in Economics from Massachusetts Institute of Technology
in 1988.
Hugh Patrick is R. D. Calkins Professor of International Business at Colum
bia Business School. He is Director of the Center on Japanese Economy and
Business, and also serves as Co-Director of the University's APEC Study Cen
ter. He is Chair of the International Steering Committee of the Pacific Trade
and Development (PAFTAD) conference series. He received his B.A. from Yale
University in 1951 and M.A. degrees in Japanese Studies (1955) and Econom
ics (1957) and his Ph.D. in Economics (1960) from the University of Michigan.
Authors
Thomas F. Cargill is Professor of Economics at the University of Nevada at
Reno. He is a member of the Advisory Council of the Korean Economic Insti
tute of America in Washington, D.C. He has been a Visiting Scholar and Re
searcher at the Bank of Japan (1984,1994), the Japanese Ministry of Finance
(1987), the Japanese Ministry of Posts and Telecommunications (1992), and
Keio University (1997). He received a B.S. in Economics from the University
of San Francisco in 1964 and a Ph.D. in Economics from the University of
California, Davis in 1968.
Michael S. Gibson is an Economist in the Trading Risk Analysis Section, Di
vision of Research and Statistics of the Board of Governors of the Federal Re
serve System, Washington, D.C. where he does research in empirical finance.
In addition to working at the Fed, he was on the faculty of the University of
viii CRISIS AND CHANGE IN THE JAPANESE FINANCIAL SYSTEM
Chicago Graduate School of Business for two years. He earned his B.A. in
Economics from Stanford University (1988) and his Ph.D. in Economics from
MIT (1993).
Nobuhiro Hiwatari is Professor of Contemporary Japanese Politics at the In
stitute of Social Science, University of Tokyo, where he has been teaching since
1993. He has also taught Japanese political economy at the University of Cali
fornia, Berkeley (1996-97) and Columbia University (1998-99) and was a Vis
iting Scholar at Harvard University and Cambridge University (St. John's Col
lege). He has a Ph.D. from the University of California (1989) and Doctorate of
Laws from the University of Tokyo (1990).
Akiyoshi Horiuchi is Dean of the Center for International Research on the
Japanese Economy and Professor in the Department of Economics at the Uni
versity of Tokyo, where he has been on the faculty since 1984. Previously he
was on the faculty at the Institute of Economic Research, Hitotsubashi Univer
sity and the Department of Economics, Yokohama National University.
Takatoshi Ito is serving as Deputy Vice Minister for International Affairs in
the Ministry of Finance, currently on leave from Hitotsubashi University, where
he is Professor at the Institute of Economic Research. Previously he was Senior
Advisor in the Research Department of the International Monetary Fund in
Washington, D.C., Professor of Economics at the University of Minnesota be
tween 1979 and 1988, and a Visiting Professor at Harvard University from 1992
to 1994. Professor Ito received a B.A. and M.A. in Economics from Hitotsubashi
University in 1973 and 1975, and a Ph.D. in Economics from Harvard Univer
sity in 1979.
Hideki Kanda is Professor of Law at the University of Tokyo. His main areas of
specialization include commercial law, corporate law, banking and securities regu
lation. He served as Visiting Professor of Law at the University of Chicago Law
Schoolin 1989, 1991 and 1993, and as Visiting Professor at Harvard Law School
in 1996. Professor Kanda received an LL.B. from the University of Tokyo (1977).
Kazuo Ogawa is Professor of the Institute of Social and Economic Research at
Osaka University. In 1998-99 he was a Visiting Scholar at the Department of
Economics, University of California, San Diego. Previously he taught at Kobe
and Kyoto Universities, and served as Chief Research Economist at the Eco
nomic Research Institute of the Economic Planning Agency. In 1986-87, he
was a Visiting Scholar at the Department of Economics, Yale University. Pro
fessor Ogawa received his B.A. and M.A. in Economics from Kobe University
and a Ph.D. in Economics from the University of Pennsylvania.
Contributors ix
Frank Packer is a Senior Economist in the Capital Markets Function of the
Federal Reserve Bank of New York. Dr. Packer is a member of the Basel work
ing group on credit ratings, which reports to the Bank for International Settle
ments (BIS). Dr. Packer has also been a Fulbright Scholar at the University of
Tokyo and a Visiting Scholar at the Bank of Japan. He received a B.A. in History
and Economics from Harvard University in 1981, an M.B.A. from the Univer
sity of Chicago Graduate School of Business in 1985, and a Ph.D. in Economics
and Finance from Columbia University's Graduate School of Business in 1993.
Shoichi Royama is President of Takaoka National College in Japan. Previ
ously he was Professor at the Osaka School of International Public Policy at
Osaka University, where he taught from 1969. His public activities include
membership in The Forum for Policy Innovations; the Board of Directors, Osaka
Securities Exchange; Member (Vice Chairman), Council on Finance, Ministry
of Finance, Japan; Board of Auditors, The Asia and Oceania Foundation, The
Daiwa Bank; Board of Directors, The Ishii Securities Market Research Foun
dation; and Board of Directors, The Japan Securities Research Institute. He
was on the Securities and Exchange Council of the Ministry of Finance; the
Council of The Suntory Foundation; and Board of Directors, The Matsushita
International Foundation. Professor Royama received his B.A. and M.A. in Eco
nomics from Tokyo University in 1963 and 1965, and a Doctorate of Econom
ics from Osaka University in 1982.
Kazuo Veda has been a Member of the Policy Board of the Bank of Japan
since Apri11998. Previously he was a Professor (from 1993) and an Assistant
Professor (from 1989) at the University of Tokyo, as well as Assistant Professor
at Osaka University (from 1982) and British Columbia University (from 1980).
He received his B.S. in Mathematics from the University of Tokyo in 1974 and
his Ph.D. in Economics from MIT in 1980.
Naoyuki Yoshino is Professor of Economics at Keio University where he has
been on the faculty since 1990. Previously he was an Associate Professor in the
Graduate School of Policy Science at Saitama University in Japan (1982-90),
and an Assistant Professor at the State University of New York at Buffalo (1979-
81). He is a member of the Asset Management Council of the Ministry of Fi
nance Trust Fund Bureau. He has been a Visiting Scholar at the Institute of Post
and Telecommunications, the Ministry of Finance, and the Bank of Japan. He
has served on numerous government councils, ministries and/or agencies, in
cluding most recently membership on the financial reform council under former
Prime Minister Kiichi Miyazawa. Professor Yoshino received an M.A. in Eco
nomics from Tohoku University in 1975 and a Ph.D. in Economics from Johns
Hopkins University in 1979.
PREFACE
As it enters the 21st century, the Japanese financial system is undergoing a
major transformation, a process accelerated by a sense of impending crises.
The banking system, dominated by large banks, has been suffering from seri
ous problems with nonperforming loans since the bursting of the stock market
and urban real estate bubbles at the beginning of the 1990s. Delay by regula
tory authorities and the banks themselves made matters worse and led to a
banking crisis in late 1997 and early 1998. Not expecting this, the Japanese
government in late 1996 inaugurated a Big Bang of comprehensive financial
deregulation designed to create "free, fair, and open financial markets." In late
1998 and early 1999 the government finally embarked on a major reform of the
banking system, including making available some ¥60 trillion ($500 billion at
120 yen/dollar) of government funds. The Ministry of Finance (MOF), which
had dominated the Japanese financial system and policy for most of the post
war period, has been deprived of most of the regulatory power it once pos
sessed. Japanese financial institutions now seem to care more about ratings
given by private agencies and other indicators in financial markets than in guid
ance by the MOE The changes underway are profound.
The purpose of this book is to describe, analyze, and evaluate this process.
The chapters address various issues relating to the transition of the Japanese
financial system from a bank-centered and relationship-based system to a mar
ket-based and competitive system. Questions taken up include: Why did Japa
nese banks get into such serious trouble? Why has the MOF lost its immense
power? How will the financial deregulation of the Big Bang further change the
Japanese financial system, including the huge government financial institutions
and postal savings? What are some broader implications of the transition?!
The book is divided into three parts. Part I considers the origins of Japan's
banking crisis. Part II focuses on five particularly important areas of major
actual and potential changes. Part III addresses the Big Bang and its effects and
potential systemic externalities.
Inevitably this project owes much to many people. Our first debt of gratitude
is to the authors, all distinguished and very busy specialists on various aspects
of Japanese finance. Preliminary versions of most of these chapters were pre
sented at the conference "The Japanese Financial System: Restructuring for
the Future" held at Columbia University in October 1998. That conference was
the catalyst for this project and volume. The authors have responded very con-
