The Public Financial System in Japan - Re-verification of the ballooning theory and the privileged government enterprise theory

The large weight of public financial institutions is often identified as one of the characteristics of the Japanese financial system. It is believed that reform of the private financial sector is not enough to revitalize the Japanese financial system, but reform of the public financial sector is crucial. There are various opinions concerning ideal public financial institutions, and heated debate continues. We would like to raise attention to the point that much discourse is based on the prerequisite that public financial sector is still increasing (i.e., the ballooning theory). However, only a small number of arguments present grounds for the prerequisite, and even in the case of those based on statistical analyses, such analyses are not rigorously verified. Under these circumstances, the first purpose of this paper is to reverify the ballooning theory of public financial sector which is used as a prerequisite for much of the discourse. Of course, although the ballooning theory may be overstated, private financial institutions cries for help strongly suggest that they are being squeezed by public institutions. The reason why public financial institutions that should be tightly regulated have such great power and oppress the private sector, which has been significantly deregulated in recent years, is often thought to be because so many privileges are given to public financial institutions as government enterprises (the privileged government enterprise theory). We agree that government enterprises have privileges, but if these are small, it is difficult to say that they are the main cause of the competitive dominance of government enterprises. The size of the privileges must be quantified to assess the privileged government enterprise theory. This is the second purpose of this paper. The following are the major conclusions of this paper. Concerning the public financial sector ballooning theory, various indexes prove that public financial activities had increased in share by around 1998, so from this aspect the ballooning theory is correct. However, this situation changed and since 1998 public financialactivities have either remained at the same level or have tended to decline. Further attention should be paid to the fact that when examining the relative size of public financial activities, the result varies significantly depending on how the area of interest is set. For instance, if finance is viewed as a risk bearing mechanism rather than a flow of funds, public involvement in finance in the U.S. may be greater than in Japan. Concerning the privileged government enterprise theory, it is true that Japan Post has privileges (e.g., the exemption of taxes as current expenses), but the estimate of 4.6 trillion over ten years by the Japanese Bankers Association is considered to be excessive. It may be judged that most of the privileges of the government enterprise have been eliminated during the establishment process of Japan Post and the conditions of government enterprise for competition are almost equalized with the private sector, On the other hand, government enterprise may become unable to bear the burden caused by restrictions imposed on them any longer (particularly the obligation of maintaining offices in remote areas), so how Japan Post can bear the burden must be considered. This paper is organized as follows. Section II examines the ballooning of the public financial sector, which is treated as the starting point of the debate concerning the reform of public financial system in Japan. Section III reverifies the privileges enjoyed by government enterprises. Section IV presents the conclusions of this paper.Public Financial System, Japan, ballooning theory, enterprise theory

Importance of regional financial institutions in regional economic development: Based on the results of corporate surveys in Japan's Tokai and Kansai regions

This paper has analyzed the relationship between medium/small firms and financial institutions based on the results of questionnaires prepared for medium/small firms in the Tokai and Kansai regions. With the development of telecommunication technology and progress in securities market infrastructure, there are fewer cases in which geographical distance poses a problem in financial transactions. However, financing for medium/small firms is expected to remain dependent on indirect finance, i.e., financing through their major trading bank, inasmuch as it will be necessary for financial institutions to play a major role in overcoming the problem of information asymmetry in that sector. More specifically, this type of relationship banking in which periodical and direct contact lends to increased company knowledge is thriving as a means to eliminate the issue of information asymmetry. The direct contact or communication, an integral part of relationship banking entail costs, and can become difficult when banks locate far from firms.Regional Finance; Japan; Bank; SME Finance

What Types of Small and Medium-sized Businesses Are Utilizing New Financial Products?

The increased diversification of fund rising methods among small and medium-sized businesses has been a major policy challenge in recent years, and private financial institutions are proactively striving to disseminate new financial technologies. However, this does not necessarily mean that every small and medium-sized business benefits from such technologies. It is difficult to analyze this aspect based on ready-made data. Fortunately, this paper can analyze the current status and challenges of the utilization of new financial products among small and medium-sized businesses by using unique survey questionnaires (Kansai RIETI Questionnaires). The results of responses from more than 2,000 companies showed that most companies began utilizing new financial products due to introductions by main banks, and it was seen that the diversification of fund rising methods among small and medium-sized businesses has developed as a result of efforts made by policy-making authorities and financial institutions. However, the rate of utilization of each financial method is as low as a few percentage points, and extremely small businesses or cash-strapped companies has not improved in terms of fund risings. Improved diversification was mainly found in excellent small and medium-sized businesses.Financing Products; SME Finance; Relationship Banking; Main Bank.

Characteristics of Japan’s Commodities Index and its Correlation with Stock Index

The commodity indexes associated with Japan’s commodity-futures markets were formed in 2008 and publicized by the Tokyo Commodity Exchange and the Tokyo Grain Exchange. In this paper, I used these indexes to analyze the properties of Japan’s commodity futures as portfolio investments, and could confirm that they possess investment characteristics that differ from stocks, and that commodity investors can enjoy favorable “diversified investment” effects if leveraged skillfully.commodity future; commodity index; Japan

Japanese Corporate Finance: What Factors Affect the Financial Decisions of Japanese Firms?: A Survey Result

In June 2005, a questionnaire survey was sent to 9000 companies in the Kansai Area (Osaka, Kyoto and Hyogo), the second largest economic block in Japan, with 2041 companies responding. This article introduces the results of this questionnaire survey. The greatest feature of this study is that, unlike previous works on traditional corporate finance, much information on unlisted companies is included. The dividend policy of Japanese companies, awareness of corporate governance, funding behavior, and bank selection behavior were analyzed. As a result, we found that being a consolidated subsidiary or a group member of an affiliation of companies greatly affects a company's financial activities, and that the capital adequacy ratio and size of the company are also important factors.

Importance of Regional Financial Institutions in Regional Economic Development: Based on the results of corporate surveys in Japan's Tokai and Kansai regions

This paper has analyzed the relationship between medium/small firms and financial institutions based on the results of questionnaires prepared for medium/small firms in the Tokai and Kansai regions. With the development of telecommunication technology and progress in securities market infrastructure, there are fewer cases in which geographical distance poses a problem in financial transactions. However, financing for medium/small firms is expected to remain dependent on indirect finance, i.e., financing through their major trading bank, inasmuch as it will be necessary for financial institutions to play a major role in overcoming the problem of information asymmetry in that sector. More specifically, this type of relationship banking in which periodical and direct contact lends to increased company knowledge is thriving as a means to eliminate the issue of information asymmetry. The direct contact or communication, an integral part of relationship banking entail costs, and can become difficult when banks locate far from firms.Regional Finance; Japan; Bank; SME Finance

Co-movement between Commodity Market and Equity Market: Does Commodity Market Change?

This paper, using Japanese market data, finds that although the correlation between equity markets and commodity market used to be negative or almost zero before around 2006, it has increased significantly after the global financial crisis in Autumn of 2008. In this sense, the commodity market lost its character as an alternative asset. However, the author argues that it is too early to conclude so because of several reasons.TOCOM; Commodity Futures; Japan; Index; Bubble

Commodity ETFs in the Japanese Stock Exchanges

The “Financial Big Bang” reforms during the latter half of the 1990s substantially transformed the Japanese financial system, but despite this, the level of risky assets that Japanese households have in their portfolio has not increased. One reason for this is the lack of knowledge necessary to invest in risky assets, such as stocks. Therefore, the Japanese government and financial industry have developed collective investment schemes such as investment trusts, which are an effective way to hold risky assets for retail investors who lack sophisticated investment knowledge. This paper analyzes commodity investment trusts and commodity ETFs as a method for investing in commodities.Commodity futures; ETF; Japan; Stock markets

Regional disparities and investment-cash flow sensitivity: Evidence from Chinese listed firms

In China, regional disparities are important. We examine the difference in the sensitivity of investment to cash flow between firms in inland regions and those in coastal regions. By using the financial data of Chinese listed firms, we found that firms in inland regions rely more on their internal funds in terms of their investment activities than those in coastal regions and that the sensitivity gap between inland and coastal firms widened in the recent contractionary monetary policy period. This suggests that firms in inland regions are harder to obtain outside funds due to unfavorable social and economic environments for inland firms. Our findings suggest that capital markets in China respond rationally to the potential impact of regional disparities on a firm’s performance.sensitivity of investment to cash flow; sensitivity gap; regional disparities; Chinese economy

A Comparative Study on Regional Finance in Japan and Korea: Evidence from Three Questionnaires

In this paper, to analyze the similarities and differences between the regional finance of Japan and South Korea (hereinafter, “Korea”), we compared questionnaires to small to midsize companies located in Korea’s Daegu/Gyeongbuk region with questionnaires to small to midsize companies located in Japan’s Kansai and Tokai regions. From the results, we were able to confirm that regional finance systems in Japan and Korea are very similar. For example, in the US, there is an overwhelming amount of small to midsize companies with only one partner bank, however, in Japan and Korea, having multiple partner banks is the norm. Therefore, the practice of having multiple partner banks should not be considered as being unique to Japan, rather, it can be inferred that such a phenomenon is natural in certain social, economical, and legal systems. Contrastingly, we found various differences between Japan and Korea. For example, in response to the question on the assessment of financial institutions, Korea firms gave the most positive assessment for “provision of funds,” whereas Japanese firms gave the most positive assessment for “knowledge on your companies.” These differences can be understood as the causes of the discrepancy between Japan and Korea in the level of economic development.Japan; Korea; SME Finance; Regional Banking.