Investor Right in Historical Perspective: Globalization and the Future of the Japanese Firm and Financial System

The evolution of investor right in Japan is examined in a historical perspective since the prewar period and in relation to the evolution in firm-specific skill formation. First, we will show that the investment in firm-specific skills spread from the top to the bottom in a firm system. Second, we will show that the delegation of control right of physical assets to employees was caused in order to accommodate the rapid technological changes. The weak investor right in Japan evolved through a rational choice of asset holders (shareholders and landlords), who delegated part of control right over their assets to actual producers (managers, workers, and tenant farmers) in order to maximize the benefits of firm-specific skill formation by them. A cautious approach is needed in adjusting the investor right to global standards: a stronger investor right would enhance allocation efficiency of financial resources, but it could be harmful to organizational efficiency based on investment in firm-specific skills.

Were Banks Really at the Center of the Prewar Japanese Financial System?

For many years, the dominant view of the Japanese financial system before World War II has been that industrial bank-type banks were at the center, and research emphasizing the role played by capital markets has generally been in the minority. Recent years, however, have seen the publication of research highlighting the development of prewar stock markets, which has sparked a debate challenging the accepted theory. This paper contains a comprehensive reconsideration of the roles played by banks and stock markets from both a quantitative and a qualitative perspective. On the quantitative side, it examines the structure of assets and liabilities in the private nonfinancial sector and long-term data on fund-raising by major manufacturing and public-sector enterprises. It concludes that while the private nonfinancial sector was in general strongly dependent on bank borrowings, when the focus is narrowed to large enterprises there was a high degree of dependence on equity fund- raising. While diachronic trends can be seen in these characteristics, it is clear that they stem from differences in data coverage and not from any basic changes in systems. On the qualitative side, the paper compares the roles played by banks and stock markets in two areas: resource allocation functions (information production functions and risk-bearing functions) and corporate governance functions. While stock markets did play some role in corporate governance, the paper concludes that resource allocation functions were only exhibited within a narrow group of wealthy individuals. On the other hand, banks played a large role in resource allocation functions by supplying risk money, but the paper concludes that their corporate governance functions were insufficient.Prewar Japan; Financial system; Banking; Stock markets; Corporate governance; Risk bearing; Information production

News and the Dollar/Yen Exchange Rate, 1931-1933: The End of the Gold Standard, Imperialism, and the Great Depression

According to the efficient market hypothesis, news in Tokyo is responsible for the exchange rate changes during the Tokyo market hours, while the U.S. news is responsible for changes in the New York hours. The intra-daily dynamics of the $/yen exchange rate from December 1931 to November 1933 is analyzed. Japan's decision to go off gold in December 1931 depreciated yen by 30% in a month, mostly in the Tokyo market. During 1932, the yen depreciated another 30%, mainly due to Japan's aggression in China and resulting diplomatic isolation. In 1933, the yen appreciated against the dollar, mainly in the New York market, due to the U.S. decision to go off gold. However, exchange rate volatility and its sensitivity to news declined over the two year period, because of increasing capital controls. Changes in the interest rate differential was found insignificant for the changes in the exchange rate. Political regime changes, such as a decision to go off gold, most influenced the exchange rate for the period considered. There were no policy decisions by Japan to cause yen depreciation to promote export and limit import in 1931-33.

Review of Hoshi and Kashyap's Corporate Financing and Governance in Japan

Examining the development of the Japanese financial system since the Meiji era, Hoshi and Kashyap derive a number of interesting propositions on the evolution of bank-centered financing, its contribution to rapid growth, and its future transformation. They argue that the piecemeal approach to deregulation is one of the main reasons for the current banking crisis, and conclude that Japan will shift to a capital market-based financial system like the one in the United States or in prewar Japan. Hoshi and Kashyap's work makes an important contribution as a coherent long-term overview of Japan's bank-centered financial system.