The Rise and Fall of Abacus Banking in Japan and China phần 5 doc

The Fall of Abacus Banking in Japan 63ready, almost 70 percent of the color television sets and about 30 percentof VCRs are made overseas.. Japanese companies, like Uniden, the less tele

Total working hours are recognized internationally as long In the eyes of manyobservers, these differences symbolize the failure of workers to share Japan’ssuccess After all, we associate long working hours with poorly developed econ-omies, and short working hours with advanced industrial nations Japan seems

to be an anomaly in this regard.7

Compounding the problem of small houses, long working hours, and

a high cost of living is a poor infrastructure that lags behind those ofother industrialized countries ‘‘In areas ranging from roads to sewersystems to airports, Japan is said to be so far behind her counterparts inthe West as not to deserve the label of an advanced developed country.’’8Japan’s main sewage system, for instance, serves only 40 percent of thepopulation, compared to 73 percent and 95 percent of the populationserved by the corresponding U.S and British sewage systems.9In 1990,the average urban Japanese enjoyed 2.2 square meters of park space,compared to 19.2 for the average American living in New York City, 30.4for the average urban Englishman, and 37.4 for the average urbanGerman.10

Japan’s rapid rise of asset values, currency appreciation, and economicgrowth, in conjunction with unfavorable demographics, had anothernegative impact on the Japanese economy—the erosion of her competi-tive position Rapid economic growth, for instance, along with an aginglabor force, declining working hours, and tight emigration policies, cre-ated severe labor shortages that pushed labor costs higher.11Rising laborcosts and rising commercial leases, and especially the stronger yen, inturn priced many of Japan’s products out of world markets, contributing

to ‘‘hollowing out,’’ the transfer of traditional manufacturing operationsoffshore.12

Hollowization of the economy is closely related to the movement in exchangerates because the appreciation of the exchange rate will lead to the substitution

of imports for domestic production, the substitution of overseas production fordomestic production, and the shift in resource allocation from production of trad-able goods to production of nontradable goods.13

Indeed, the precipitous rise of the yen has made it difficult for Japanesecompanies, especially consumer electronics companies, to compete effec-tively in world markets without shifting production in overseas trans-plants to the United States, the European Union, and especially Asia Infact, according to some estimates, a 1 percent yen appreciation is fol-lowed by a 1.6 percent increase in Japanese investment in Asia.14 Al-

The Fall of Abacus Banking in Japan 63ready, almost 70 percent of the color television sets and about 30 percent

of VCRs are made overseas Japanese companies, like Uniden, the less telephone maker, have already relocated their manufacturing out-side of Japan.15A conformation of this trend is the reduction in Japan’ssurplus with the United States and an increase in China’s and SoutheastAsia’s surpluses with the United States on the one side and the rise oftrade deficits of these countries with Japan on the other side.16

cord-‘‘Hollowing out’’ had two major impacts on the Japanese economy

First, it weakened the traditional keiretsu relations, intensifying

compe-tition Second, it fueled a ‘‘softomization’’ of the economy (the growingimportance of services over manufacturing), which has contributed tothe slowdown of economic growth In 1995, the service sector providedfor 55.8 percent of the GDP and 59 percent of employment; the corre-sponding figures for the United States were 68.8 percent and 72.5 per-cent The industrial sector provided for 41.9 percent of the GDP and 34.6percent of employment; the corresponding figures for the United Stateswere 29.2 percent and 24.6 percent (see Exhibit 3.4)

As discussed earlier, Japan is further beset by demographic problemsarising from the aging of the country’s population, which has contrib-uted to the country’s labor shortage and has further challenged the coun-try’s three major labor institutions (lifetime employment, senioritywages, and enterprise unionism) and has strained Japan’s governmentfinance, turning her fiscal surplus into deficit In this sense, the countryfound herself in a situation where it criticized her trade partners, mainlythe United States In 1996, Japan’s combined central and local govern-ment deficit approached 7 percent of the GDP, one of the largest amongOECD countries.17

Last but not least, due to the continuing regulation of certain domesticsectors, Japan has been suffering from an accumulation crisis, the lack ofopportunities to re-invest profits accumulated in the export sector: Ac-cording to Hirsh and Henry,

The message of the multinationals is this: The low productivity and growth ofthis over-regulated marketplace no longer work for us Japanese firms across theboard have seen a dramatic deterioration in the break-even points and efficiency

of their Japan-based operations.18

Reflecting this trend, the former chairman of Toyota Motor Corporation,Shoichiro Toyoda, calls for a ‘‘shift from an economy burdened by reg-ulations to one in which the private sector can operate unfettered.’’19The

Source: OECD Observer (June/July 1996).

The Fall of Abacus Banking in Japan 65lack of opportunities reinforces the hollowing out of the economy (dis-cussed earlier), eventually feeding into the speculative frenzy that will

be discussed in the next chapter

In short, Japan’s early efforts to open her markets to foreign productsand competition, especially the hyperliquidity that followed the PlazaAccord, had a mixed impact on her economy On the one side, it accel-erated the country’s economic growth, boosting equity and real estateprices On the other side, it raised the country’s already high cost ofliving, further opening the gap between the country’s production andconsumption potential, leading to a hollowing out In the meantime, un-favorable demographics raised the country’s government deficit, whilederegulation limited investment opportunities in a number of domesticsectors Life became even more expensive for Japanese consumers, andcompetition became even tougher for Japanese producers

To address these new challenges, Japan reversed some of her earliermeasures and accelerated others To contain hyperliquidity and risingasset values, the BOJ tightened up the money supply, raising the officialdiscount rate five times, from 2.5 percent in 1989 to 6 percent in 1990; italso imposed restrictions on land transactions and bank loans Japan’sbroad money supply dropped from 10 percent in November 1990 tobelow 1 percent in 1992 before bouncing back to around 3 percent in

1994 (see Exhibit 3.5)

In the meantime, as part of the ongoing GATT negotiations and theestablishment of the WTO, Japan continued to slash tariff and non-tarifftrade barriers in line with her major trade counterparts Specifically, withthe exception of some agricultural products and alcoholic beverages, Ja-pan slashed tariffs to 2.6 percent, well below the 3 percent level for theUnited States and the 2.9 percent level for the European Union.20Tariffscontinued to drop even further after the establishment of the WTO (seeExhibit 3.6) Product standards and certification systems were adjusted

in line with those of other industrialized countries The Electrical ances and Material Control Law, for instance, simplified certification forforeign appliances and electric products The Measurement Law simpli-fied the procedure for the importation of measurement devices, and a24-hour import clearance service was established

Appli-Japan further continued to make progress in such highly protectedsectors as agriculture and finance In the agricultural sector, for instance,under pressure from the country’s two main beef suppliers, Australiaand the United States, Japan reached an agreement that provided a two-stage liberalization of beef imports In the first stage, from 1988 to 1990,

Exhibit 3.5

Japan’s Broad Money Supply Growth

Source: Bank of Japan.

import quotas were raised from 274,000 metric tons to 394,000 metrictons, maintaining a 25 percent tariff In the second stage, from 1991 to

1993, quotas were raised from 472,000 metric tons to 680,832 metric tons,and tariffs were raised to 50 percent

In the financial sector, Japan continued to deregulate deposits, rities commissions, and currency transactions

secu-• June 1992: Revision of laws regulating financial system is approved

• June 1993: Interest rates on time deposits are fully liberalized

• October 1994: Interest rates on demand deposits are liberalized

• November 1996: Deregulation of fixed commissions on securities begins

• June 1997: The Financial Supervisory Agency (Kinyu Kantokucho) is established

to oversee the fairness and transparency of the financial system, a functionpreviously performed by the MOF

Exhibit 3.6

Average Tariff Cuts Achieved in the Uruguay Round for Industrial Goods

Source: World Trade Organization, 1996.

Eco-• 1998: Amendments are made to the Bank of Japan Law to eliminate one of thetwo former policy-making agencies (the Directors Meeting) and to strengthenthe other (the Policy Board), turning it over to the sole policy-making body ofthe BOJ.

• April 1998: The Big Bang; Foreign Exchange and Foreign Trade Law takeseffect, liberalizing cross-border transactions; commissions on stock transactions

in excess of 50 million yen are deregulated; investment trusts are created; nancial disclosure rules are strengthened; and the diversity and efficiency offinancial markets are improved

fi-The reversal of monetary policy, the continuation of government regulation, unfavorable demographics, the soaring yen, and tighter landfinancing rules took a new toll on the economy, again most notably onthe banking sector Tight monetary and fiscal policies, for instance,caused a prolonged economic stagnation, eliminating a risk cushion, acondition for abacus banking Indeed, Japan’s economy slid into theworst stagnation and recession in the postwar period The GDP droppedfrom 6.1 percent in 1988 to 5 percent in 1991 and to negative territory

de-by 1994 (see Exhibit 3.7), and with the economy sliding into the recession,unemployment increased from 2.5 percent in 1991 to 3 percent in 1994

As economic growth declined, real disposable income growth and ings followed suit Real disposable income growth fell from 6 percent in

sav-1998 to less than 5 percent in 1993, while the savings rate dropped from

16 percent in 1987 to 12 percent by 1994.21Low savings in turn loweredthe flow of deposits, especially since regulation provided investment al-ternatives M2 (a broad measure of money supply) growth declined fromabout 10 percent in 1987 to 2 percent by 1993, while M2 ⫹ CD (certifi-

The Fall of Abacus Banking in Japan 69cates of deposit) declined from nearly 12 percent in 1987 to nearly 0percent in 1993 Such a decline in the flow of deposits in turn compelledbanks to raise lending rates and scale back credit Credit growth ratesfell from 5.5 percent in 1990 to nearly 3 percent in 1995.22

Economic stagnation and excess capacity turned asset inflation intodeflation, eliminating yet another condition of abacus banking Stock andland prices began to come back to earth, profits dropped, and bank-ruptcies soared By 1994, the Nikkei average was back to around 15,000,and land prices dropped by 30 percent, an issue which will be furtheraddressed in the next chapter

Economic stagnation was associated with diminishing corporate itability that reduced corporate investment, eliminating a third condition

prof-of abacus banking The prprof-ofit-to-sales ratio, for instance, fell from 4 cent in 1988 to 1.5 percent in 1993.23Lower profitability in turn took itstoll on corporate investment and corporate borrowing Nominal corpo-rate investment growth fell from 18 percent in 1988 to ⫺12 percent in

per-1993.24The annual growth of loans to the property industry fell from 15percent in 1989 to below 5 percent in 1992 Corporate bankruptcies in-creased from around 6,000 in 1989 to 12,000 in 1992 In addition, thecurtailing of a long-standing BOJ policy of overlending further con-strained the ability of banks to extend corporate loans In fact, in 1990,the BOJ ordered banks to scale back corporate lending by 30 percent.25

The loosening up of keiretsu relations undermined the loan

diversifi-cation function of the main bank, eliminating a fourth condition of

ab-acus banking In 1990, the share of the big six keiretsu groups in current

income dropped to 13.3 percent, and their share in the workforcedropped to 4 percent from the corresponding shares of 16.9 percent and4.0 percent in 1985 In the meantime, the percentage of non-financialshares held by banks dropped from around 17 percent in 1988 to around

15 percent in 1997, while the percentage of bank shares held by financial firms dropped from 45 percent in 1988 to 40 percent in 1997.26The percentage of equity of Bank of Tokyo of Mitsubishi held by othercompanies dropped from 26 percent in 1990 to 14 percent in 1998.27

non-In short, the tightening of fiscal and monetary policy in the early 1990seliminated most of the conditions of abacus banking But what presented

the final blow to abacus banking was the disbanding of the Gosou-sendan Houshiki, the ‘‘escorted convoy’’ system of financial regulation, the sailing

away of the MOF ‘‘destroyers’’ that protected Japanese banks both fromwithin and without competition (see Exhibit 3.8) Specifically, the contin-ued liberalization of demand and time deposits further intensified the

Exhibit 3.8

The Disbanding of Gosou-sendan Houshiki

competition between the banking and non-banking industries, raisingdeposit rates Worse, coming later than earlier, deregulation took fulleffect at a bad time for the Japanese banking industry, during a periodwhen economic slowdown and asset deflation had already had a per-vasive impact According to Nukazawa,

In the financial sector the regulation and protection of segregated financial dustries in the name of preserving the stability of the financial system lasted too

in-The Fall of Abacus Banking in Japan 71long No doubt it is difficult to get the timing right when outdated regulationsneed to be removed The Japanese version of Big Bang now being readied willdeal this sector a severe blow just when it is on its knees, and I can sympathizewith the people working in it.28

Compounding the problem of poor timing of deregulation is the consistency in which it was introduced Specifically, while on the oneside the MOF lifted a number of financial regulations, it maintained itstight controls over bank management Deregulation unleashed compe-tition, but deprived bank managers the freedom to take the appropriatemeasures to deal with the new environment As Tanaka observes: ‘‘The1980s saw the rapid deregulation of interest rates, but it did not bring

in-an atmosphere of freedom for bin-anking executives to develop their tutions’ operations as they thought best.’’29

insti-In short, under external and internal pressures, Japanese policy makersinitiated a number of measures that took the Japanese economy on aroller-coaster ride, known as the bubble economy, and its burst, a coursethat led to the decline and fall of abacus banking Competition betweenbanking and non-banking institutions intensified, the interest rate spread

turned negative, corporations shifted from bank to equity financing, retsu relations weakened, economic growth and savings slowed down,

kei-and asset values declined

By the early 1990s, Japanese banks found themselves competingagainst their U.S and European counterparts in a fast-paced global econ-omy with more opportunities and more risks Japanese banks foundthemselves without the MOF apparatus that made things work, whichbrought an end to abacus banking and began the banking crisis, issuesthat will be addressed in the next chapter

NOTES

1 Quoted in Horvat (1998)

2 Ibid

3 According to some estimates of the Institute for International Economics

in Washington, non-tariff barriers double the cost to Japanese consumers of manyimported products In 1989, for instance, trade barriers cost Japanese consumers10–15 trillion yen, which translates to between 2.6 percent and 3.8 percent

4 C Prestowitz, ‘‘Getting Japan to Say Yes,’’ The Washington Post Weekly,

January 31–February 6, 1994

5 OECD (1993), p 49