Table Of ContentDick Beason and jason james
THE POLITICAL ECONOMY
OF JAPANESE FINANCIAL
MARKETS
Myth versus Reality
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The Political Economy
of Japanese Financial
Markets
Myths versus Reality
Dick Beason
Associate Professor
University ofA lberta
and
Jason James
Strategist
HSBC Securities
Tokyo
© Dick Beason and jason james 1999
Softcover reprint of the hardcover 1st edition 1999 978-0-333-57933-6
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To Mariko, Leslie and Miles
Contents
List of Tables ix
List of Charts X
List of Japanese Terms and Acronyms xii
Part I Development of the Intermediated Structure
1 Introduction 3
2 The High Degree of Intermediation: the Financial
Structure, 1954-75 23
3 Towards a More Liberal Structure 41
Part II Breakdown and Towards Maturity
4 End of the Party (but not the end of the world) 67
5 Japan's Financial Crisis 82
Part III Institutions
6 Institutions, Accounting Practices and Incentives in
Japanese Equity and Other Financial Markets 103
7 Political Change and the Financial Markets 159
8 Public funds, 'Price-Keeping Operations', Deregulation
and 'Big Bang' 172
Part IV Some Sticky Questions
9 The Cost of Capital in Japan and Semantics of the
Bubble 209
10 Japanese Equity Market Valuation 229
11 Concluding Remarks 291
References 293
Index 295
vii
List of Tables
2.1 Nature of Assets and Liabilities 28
2.2 Sources of Funds 33
2.3 Breakdown of Assets 38
4.1 Estimates of Equation ( 4) corrected for Second Order
Serial Correlation 79
6.1 The Japanese Pension Fund Market 125
6.2 Pension Fund Asset Allocation (March 1996,
market values) 126
6.3 Pension Fund Exposure (1) 127
6.4 Pension Fund Exposure (2) 127
6.5 Japanese Pension Fund Shortfalls(¥ million) 132
8.1 Public Pension Fund Reserves and Returns 183
8.2 Employee Pension Fund Returns, FY 1990-95 184
8.3 Estimated Privatization Proceeds (¥billion) 188
10.1 Correlation Coefficients on Models 233
10.2 Regression Analysis 234
10.3 Converting between Nominal and Real Returns 255
10.4 Double-counting: a simple example-Case I 269
10.5 Double-counting: a simple example-Case II 270
ix
List of Charts
3.1 Value of Bond Issued 62
3.2 Outstanding Value of Bonds 63
4.1 Money Supply Adequate 71
4.2 Currency and Prices 72
4.3 Wholesale & Import Price Deflation 73
4.4 CPI & Expenditure Deflator 74
5.1 Nikkei Average 83
5.2 Land Prices 83
5.3 Bankruptcies 89
5.4 Debt: Equity Ratio 93
5.5 Official Discount Rate 94
5.6 The Interest Rate Menu 95
6.1 Life Insurance Company Asset Breakdown
(November 1996) 111
6.2 Life Insurance Company Planned Returns
(highest available) 117
6.3 Japanese Corporate Pension Assets (March 1996) 124
6.4 Non-life Insurance Company Asset Breakdown
(October 1996) 138
6.5 Japanese Equity Investment Trusts, Market Value
(¥trillion) 143
6.6 Japanese Bond Investment Trusts, Market Value
(¥trillion) 144
6.7 Nokyo Mutual Insurance Asset Breakdown
(December 1996) 156
8.1 Bank of Japan Rinban Operations from 1993 174
8.2 The FILP System-'Inputs' and 'Outputs' 181
8.3 FILP Interest Rates(%), 1989-1997 182
10.1 Japanese Equity PER (Parent, Prospective) 230
X
List of Charts xi
10.2 Earnings Yield Gap (Long Bond Yield-Prospective
Earnings Yield) 236
10.3 Earnings Yield Gap Model 237
10.4 Earnings Yield Ratio (Long Bond Yield Prospective
Equity Earnings Yield) 238
10.5 Earnings Yield Ratio Model 238
10.6 Dividend Yield Ratio (Long Bond Yield 4
DividendYield) 239
10.7 Dividend Yield Gap (Long Bond Yield-
Dividend Yield) 240
10.8 Dividend Yield Gap Model 241
10.9 Price/Cash Flow Model 242
10.10 Cash Flow Yield Ratio Model 242
10.11 Cash Earnings Yield Gap Model 243
10.12 Cash Earnings Yield Gap 244
10.13 Price/Book Ratio 244
10.14 Short Earnings Yield Ratio (3 month Euro-yen rate -
Prospective Earnings Yield) 245
10.15 Short Earnings Yield Ratio Model 246
10.16 Cross-held Percentage of Japanese Equities 275
10.17 TO PIX Earnings Yield Ratio
(adjusted for cross-holdings) 278
10.18 Net Extraordinary and Tax Ratio 289
