Are Japanese Firms Becoming More Independent from Their Banks?: Evidence from the Firm-Level Data of the "Corporate Enterprise Quarterly Statistics," 1994-2009

The Ministry of Finance's "Corporate Enterprise Quarterly Statistics" (Hojin kigyo tokei kiho) is the only statistical source of well-balanced information about the financing behavior of Japanese firms. Indeed, there are few comparable sources available anywhere in the world. Using this firm-level data set from 1994 to 2009, I investigate the financing behavior of Japanese firms with over \10 million in paid-in capital. The conclusions contrast sharply with the conventional wisdom. Much of the research and policy discussions about Japanese finance begin from the premise that banks play a decisive role in firm behavior. This paper shows that firms have maintained a dependence on financial institutions well below the level that the conventional wisdom has claimed. Under the recent gzero-interest-rate, quantity easingh monetary policy, this gindependence of the firms from the banksh has increased further. This tendency is clearest among the smaller firms. In turn, this first conclusion raises doubts about the plausibility of the basic premise of research and policy debate on financial issues, and leads us to question whether observers may not have confused a gcrisis of financial institutionsh with a gfinancial crisish. Investigation into firm financing behavior under the gfinancial crisish from the end of 1997 to the beginning of 1999 does indeed suggest that it was a fiasco caused by the confusion of a gcrisis of financial institutionsh with a gfinancial crisish.

The Value of Prominent Directors

Observers of modern transitional economies urge firms there to ignore stock markets. Stock markets simply will not work in such environments, they explain. Firms should instead rely on debt finance, particularly bank debt. Only then will they be able to keep principal-agent (i.e., investor-manager) slack to manageable levels. Turn-of-the-century Japanese firms faced problems that closely mirrored those in modern eastern Europe. Yet in Japan, the successful large firms did not rely on debt. Instead, they raised their funds through the stock market, and took a variety of steps to mitigate the principal-agent slack involved. As one of those steps, they recruited prominent investors to their boards. Using data on firms in the cotton-spinning industry (arguably the most important industrial sector in turn-of-the-century Japan), we explore why the firms recruited prominent directors. First, we note that firms with such directors had higher profits than others. In part, they probably had higher profits because such investors had an eye for firms that would likely succeed. In part too, however, they seem to have had higher profits because those investors brought basic management skills -- they knew how to monitor and when to intervene. Second, prominence held constant, we find that firms did not have higher profits by having directors affiliated with a bank or with other spinning firms. One might have thought directors with access to a bank or spinning technology would raise profits at a firm. In fact, they did not, for banks did not have the funds to lend, and the technolgy was freely available. Last, we explore whether the directors certified firm quality on behalf of other investors. Although firms with prominent directors apparently did have an advantage in the capital market, we conclude that quality certification was at most a by-product (if even that) of the monitoring and intervention these directors performed.http://deepblue.lib.umich.edu/bitstream/2027.42/39663/3/wp279.pd

"Directed Credit? Capital Market Competition in High-Growth Japan"

Observers routinely claim that the Japanese government during the high-growth 1960s and 70s rationed and ultimately directed credit. It banned investments by foreigners, barred domestic competitors to banks, and capped loan interest rates. Through the resulting credit shortage, it manipulated credit to promote its industrial policy. In fact, the government did nothing of the sort. It did not bar foreign capital, did not block domestic rivals, and did not set maximum interest rates that bound. Using evidence on loans to all 1000-odd firms listed on Section 1 of the Tokyo Stock Exchange from 1968 to 1982, we show that the observed interest rates reflected borrower risk and mortgageable assets, and that banks did not use low-interest deposits to circumvent any interest caps. Instead, the loan market probably cleared at the nominal rates. We follow our empirical inquiry with a case study of one of the industies where the government tried hardest to direct credit: ocean shipping. We find no evidence of credit rationing. Rather, we show that non-conformist firms funded their projects readily outside authorized avenues -- so readily that the non-conformists grew with spectacular speed and earned their investors enormous returns.

"The Effectiveness of Economic Controls: The Early Postwar Years in Japan --- Part II: Political Economy of Economic Controls"(in Japanese)

Despite the many economic studies documenting the problems governments face in trying to control or guide economic growth, the literature on postwar Japan posits an exception: during the first three years after World War II, the Japanese government (working with the Allied occupation) effectively promoted growth. Through a variety of price, quantity and import controls (collectively called the "keisha seisan hoshiki," or the "priority production method"), it boosted production in several vital industries -- most prominently coal and steel. This did not happen. The early postwar Japanese government merely continued the controls it had used during wartime. Those controls had not promoted growth during the war, and they did not promote it after. Instead, they simply created the predictable combination of official shortages and black-market supplies. By the late 1940s the economy started to revive, but it did not revive because of these command schemes. Instead, it revived because these bureaucrats abandoned their attempts at control. They did not abandon the controls because of any change of heart. Instead, they abandoned them because voters made them abandon the controls. In 1948 Japanese voters threw out their socialist coalition cabinet and installed the predecessor to the modestly right-of-center governments that would rule Japan for the next half century. That government then ended the controls and imposed monetary discipline. Crucially, the Japanese government did not shift economic policy because of any pressure from Washington. Instead, it shifted from socialist-oriented controls to a more market-oriented approach before the Washington shift (symbolized by Dodge's arrival) usually credited with the transformation. Before then, interventionist American bureaucrats had dominated occupation policy, and backed the growth-retarding controls implemented by the Japanese government. The dynamics between the occupation bureaucracy and the Japanese government are crucial. During the early post-war years, interventionist bureaucrats ran the Allied occupation. Similarly interventionist Japanese officials had then used pressure from those Allied bureaucrats to hold at bay their domestic rivals who (having seen first-hand the failure of economic controls during the war) hoped to dismantle the wartime control structure. During the first years of the occupation, these interventionists successfully kept the controls in tact -- but brought about an economic disaster. Under strong electoral pressure, in 1948 their non-interventionist rivals prevailed. Shortly thereafter (crucially -- thereafter, not before), non-interventionists in Washington forced a similar shift in Allied policy as well. All this should put in perspective the role that the Allied occupation played in the Japanese recovery. Fundamentally, occupation bureaucrats did not promote economic recovery; during the early post-war years, they dramatically retarded it. Japan did not grow because of occupation policy; it grew in spite of it. And the shift toward healthier economic policies did not begin in Washington; it began among Japanese voters, and began in opposition to Washington. We begin by showing the ineffectiveness of the "priority production method" and the intellectual origins of the myth of its efficacy (Sections 2-3). To make the point in more detail, we take the coal industry as a case study (Section 4). We then turn to the electoral determinants of Japanese policy (Section 5), and conclude by exploring the effect of the occupation (Section 6).

"The Legislative Dynamic: Evidence from the Deregulation of Financial Services in Japan"

In many ways, the current financial distress in Japan traces itself to the limited range of non-bank financial intermediaries available. That limited availability is itself a creature of regulation. By examining the recent deregulation of commercial paper issues by financial intermediaries, we explore the dynamics of the regulatory process that originally contributed to -- if not caused -- the current distress. We also use this case study to explore the dynamics of the Japanese legislative and regulatory process more generally. We characterize deregulation as a bargain between banks and the newer non-bank intermediaries: the banks acquiesced to commercial paper issues by non-banks, while the non-banks agreed to the regulatory jurisdiction of the Ministry of Finance. The non-banks obtained a cost-effective way to raise additional funds; the banks brought their new competitors within their regulatorily enforced cartel. At a specific level, the dynamics illustrate the classic Stiglerian theory of regulation; at a more general level, they illustrate the trans-national economic logic to the Japanese legislative and regulatory process.

"Toward a Theory of Jurisdictional Competition: The Case of the Japanese FTC"

The Japanese antitrust agency (the J-FTC) holds a jurisdictional monopoly over most issues. Because overlapping jurisdictions would enable politicians to gauge relative bureaucratic performance, this monopoly prevents politicians from monitoring the agency on most issues. In response, J-FTC bureaucrats have chosen not to enforce those statutory provisions like criminal penalties that firms might contest. Consequently, firms face virtually no criminal sanctions for violating the antitrust statute. Most Japanese markets are still competitive -- but primarily because they are large, fluid, and easy to enter. The J-FTC enforces the law only in areas where politicians can monitor its performance, and politicians have the information they need to monitor only on issues about which they care deeply. All else equal, monopolist agencies will regulate less actively than competitive agencies. Yet politicians do not win elections by creating agencies they cannot control, and even monopolist agencies will regulate actively when politicians can gauge their performance. In equilibrium, therefore, politicians will grant agencies a jurisdictional monopoly over electorally important issues only when they have access through other sources to information by which to monitor their bureaucrats.

"Banks and Economic Growth: Implications from Japanese History"

In the 1950s and 60s, Alexander Gerschenkron claimed that banks facilitate economic growth among "backward" countries. In 1990s and 2000s, many theorists similarly claim that banks promote growth. Banks do so by their superior monitoring and screening capabilities, they reason. Through those capabilities, banks reduce informational asymmetries and the attendent moral hazard and adverse selection, and thereby improve the allocation of credit. As a fast-growth but allegedly bank-centered economy, Japan plays an important part in these discussions of finance and growth. In early 20th century Japan firms relied heavily on bank debt, observers argue. Those firms with preferential access to debt outperformed the others, and those that were part of the zaibatsu corporate groups obtained that preferential access through their affiliated banks. With data from the first half of the century, we ask whether Japanese banks performed the roles Gerschenkron and modern theorists assign them. Notwithstanding the usual accounts, we find that they did not. Japan was not a bank-centered economy; instead, firms relied overwhelmingly on equity finance. It was not an economy where firms with access to bank credit outperformed their rivals; instead, firms earned no advantage from such access. And it was not a world where the zaibatsu manipulated their banks to favor affiliated firms; instead, zaibatsu banks loaned affiliated firms little more (if any) than the deposits those firms had made with the banks. During the first half of the last century, Japanese firms obtained almost all their funds through decentralized, competitive capital markets.

"Conflicts of Interest in Japanese Insolvencies: The Problem of Bank Rescues"

Economists and legal scholars routinely posit an implicit contract between Japanese firms and their principal lender (called their "main bank"). Under this arrangement, the bank implicitly agrees to rescue the firm (through financial and managerial help) when times turn bad. Out of court, it rescues the firm from insolvency. Not only does it save the investments specific to the troubled firm, it lowers the use of costly bankruptcy proceedings and cuts the costs of those bankruptcy procedures it does occasionally invoke. Given the creditor-shareholder conflicts of interest that arise as firms approach insolvency, such arrangements would seem unstable. Yet according to a long sociological tradition, conflicts of interest are inherently less problematic in Japan than in the West. According to the emerging economic and legal tradition, Japanese economic actors do face those conflicts, but keep them in check through reputational concerns, close-knit ties, and government supervision. Using two datasets of troubled firms from the 1970s and 1980s, we ask whether Japanese main banks in fact rescue distressed borrowers. We find no evidence that they do: large Japanese firms fail; when large firms approach insolvency main banks do not increase the share of the firm's debt they bear; stronger ties between distressed firms and their main bank do not facilitate loans; and troubled firms do not try to preserve their main bank relationship. Instead, the claim that Japanese banks implicitly agree to rescue firms is sheer myth. Conflicts of interest do indeed matter in Japan -- and they matter enough to prevent precisely the incentive-incompatible rescue deals that scholars in the field so routinely posit.