"Have Banks Contributed to Efficient Management in Japan's Manufacturing?"

This paper statistically reexamines the conventional view that the main bank relationship has been an important element of corporate governance in Japan. According to the view, in postwar Japan, the main bank relationship has contributed to efficient management of borrower firms in place of the capital market that disciplines corporate management in the Anglo-American economy. Our analysis finds that neither the main bank relationship nor other capital market factors, which the standard governance theory regards as important determinants of managerial efficiency, consistently influenced efficiency of manufacturing firms' management defined by the total factor productivity (TFP). Instead, market competition, particularly competitive pressures from abroad, is found to have consistently enhanced management efficiency. Thus, the conventional view exaggerates importance of the main bank relationship in the Japanese corporate governance framework.

Can the Financial Restraint Hypothesis Explain Japan's Postwar Experience?

While the Japanese banking sector seems to have disciplined borrower firms for inefficient management in the high growth era, its fragility was revealed by the serious non-performing loans since the early 1990s. According to 'the financial restraint hypothesis' advocated by Hellmann, Murdock and Stiglitz (1996), the comprehensive competition-restricting regulation was effective in motivating banks to prudently monitor their client firms by giving the banks excess profit opportunities. The financial deregulation started at the beginning of the 1980s undermined banks' profitability and induced the banks to shirk monitoring. Thus, according to the financial restraint hypothesis, the Japan's bank crisis in the 1990s was a consequence of the financial deregulation in the 1980s. This paper criticizes the financial restraint hypothesis, and proposes the alternative hypothesis that the banking sector was potentially fragile even before the 1980s because the government was unable to penalize inefficiently managed banks in credible ways. The manufacturing firms, which were disciplined by competitive pressures from abroad, reduced their reliance on bank credit in the late 1970s, and non-traded good industries such as real estate became major borrowers of bank credit in the 1980s. This structural change in the bank credit market revealed the potential fragility of the Japanese banking sector. The empirical analyses based on more than 1,600 manufacturing firms supports the alternative hypothesis this paper proposes.

Have Banks Contributed to Efficient Management in Japan's Manufacturing?

This paper statistically reexamines the conventional view that the main bank relationship has been an important element of corporate governance in Japan. According to the view, in postwar Japan, the main bank relationship has contributed to efficient management of borrower firms in place of the capital market that disciplines corporate management in the Anglo-American economy. Our analysis finds that neither the main bank relationship nor other capital market factors, which the standard governance theory regards as important determinants of managerial efficiency, consistently influenced efficiency of manufacturing firms' management defined by the total factor productivity (TFP). Instead, market competition, particularly competitive pressures from abroad, is found to have consistently enhanced management efficiency. Thus, the conventional view exaggerates importance of the main bank relationship in the Japanese corporate governance framework.

A Review of Japan's Bank Crisis from the Governance Perspective

Why has Japan suffered from the NPL problem for such a long time? We will answer to this question from a governance perspective that emphasizes important influence of the governance structure on bank management. In our opinion, Japan failed to motivate banks to play the role of monitoring essential to the bank-centered financial system. We will stress that there existed a vacuum of governance in the bank management in the sense that bank managers were not effectively disciplined as to attain sufficient prudence in there management. The vacuum of governance accounts for the fragility of the banking sector and, more importantly, the prolongation of the NPL problem in Japan.

SAKURAGAWA,Masaya, The Economic Analysis of Finacial Crisies

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Review of Capitalism and Freedom

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Una crisis bancaria en un sistema financiero centrado en los bancos: la experiencia japonesa de los años 90

A principios de los años noventa, Japón empezó a sufrir una crisis bancaria de la que no se ha recuperado aún. El autor de este artículo se pregunta por qué el problema de los préstamos de dudoso cobro ha afectado a Japón durante tanto tiempo y por qué el gobierno japonés no ha conseguido restablecer rápidamente la estabilidad bancaria. Investiga esta cuestión centrándose en el análisis del sistema financiero japonés, caracterizado por una íntima relación entre los bancos y sus empresas clientes que resta importancia a los mercados de capital. Estudia las ventajas e inconvenientes de este sistema, el papel que ha desempeñado en estos años de crisis y su interrelación con la política del gobierno

Crise bancaire, gouvernance privee et supervision

Cet article explique tout d'abord pourquoi, depuis le debut des annees quatre-vingt-dix, le secteur bancaire au Japon est confronte au grave probleme d'un volume excessif de creances douteuses. Puis il revient sur la genese du systeme financier de ce pays, axe sur les banques. Ce systeme, qui se caracterise par sa fragilite, a ete edifie apres la crise de la fin des annees vingt. Le controle exerce par l'Etat pendant la guerre a contribue a renforcer le poids des banques.