The financial system in Japan.

What we are looking at here is the Japanese banking crisis that has been in chaos for so long. We will look at what started it, the implications that have risen over the years and what must the Japanese do in order for it to get its financial system back on track.

The ‘Asian miracle’ itself was the product of falling profit rates which began to emerge in the major capitalist economies from the mid-1970’s onwards as firms in the United States, Europe and above all Japan directed capital into the region in the search for cheaper labour and resources. For a time investment in Asia did provide a boost to profits, so much so that for the first half of the 1990’s economic expansion in the region accounted for half the increase in world economic output. But by 1995, the Asian boom was starting to falter. Overcapacity was developing in industries such as cars and computer chips, while the growth of exports, which have averaged around 20 percent per annum, declined to around 5 percent.

The form of the crisis that erupted in July 1997 was a currency and financial meltdown; its underlying content was the overaccumulation of capital in relation to the available surplus value. In other words, it signified the opening of a struggle by the competing sections of the capital to eliminate their weaker brethren.

The main reason why Japan got itself into so much debt was just plain old irresponsible lending. This has been a country where a relationship or personal reference could sometimes have as much weight as millions of dollars in collateral. Other loans became a problem because they were backed by property and stocks whose value was vastly inflated in the mid – 80’s, but then took a dive after Japan’s stock market started to plummet at the end of the decade.

Perhaps a good way to visualise how bad things can get is to look at a place where the impact of a bank’s failure has hit home. The collapse of Hokkaido Takushoku Bank preceded the nationalisation of the Long Term Credit Bank by nearly a year. It announced last November it would be closing it doors due to billions of dollars in bad loans. The news and its impact was analogous in some ways to what Detroit might be like if General Motors calls it quits.

Not only that, but behind this lending was the handling of loans which was the major factor behind the Asian financial crisis. There is 3 categories to how the loans were handled. The first one is improper bank management and the circumvention of rules. This is related to that regulators may not have known that they were breaking violations and also that they did know but did not enforce the rules. The second problem here is reckless real estate lending. This was the introduction of competition into a system not based on strict disclosure rules and monitoring but on “cartellized co-operation”, and, therefore, provides temptation and opportunities for shady deals.

The next is relationship business. This is based on when a leading firm or bank misuses its power and exploits affiliated companies by shifting to them especially risky business, regardless of the desires of the affiliate. So the non-banks were used for purposes of rule circumvention and transfer of risky projects but were left unsupported when their loans became irrecoverable.

The final one is Fraud. An argument can be made that fraud will always happen no matter how the regulatory system is designed If someone wants to cheat they will. There was a lot of insider trading among banks, such as the withdrawal of large amounts of deposits one day before Kizu Credit was closed. Other factors that occurred were bribery and deals done by so called “Mafia connections”. So we can see the reasons behind the bad loan situations that were responsible for the collapse of the Asian market. As a result of this crisis, Japanese banks under financial stress as financial deregulation narrows their spreads between borrowing money and lending money, the weak economy reduces demand for their services and huge losses on real estate and other loans depleted their capital. Concerns about the health of Japan’s banking system have forced even top Japanese banks to pay a premium to borrow in the interbank market, making Japanese banks less competitive both at home and abroad. Even the main – bank relationship that has historically locked Japanese customers to their primary bank is threatened under the strain of competition from securities markets and foreign banks with lower cost funds.

The true value of problem loans in Japan’s financial system has reached Y150,000 bn. (Dollars 1,200 bn.)

The consequences that have arisen as a result of this:
Japan’s banks have traditionally been among the world’s largest lenders. There is also the impact their turmoil is having on Japanese businesses and consumers, which also extends abroad.

As a result of this, banks like the Long-Term Credit Bank of Japan Ltd ( Nation’s 10th largest ) was declared insolvent. The bank was established to help finance post war growth, primarily dealt with corporate Japan. And most of its business of providing long term loans to big businesses had dried up years ago.

Worried consumers and companies have little desire to spend when they’re anxious about the future. If they’re spending less, that usually means less spent on imports too.

Complicating matters are international banking rules that require money to be set aside to cover problem loans. That means less money is available to lend, a worsening problem as more loans default in the weakening economy. It is not helped by the slowdown of the US economy. According to Thomas Donahue ( US Chamber of Commerce ), “We (in the US) are beginning to lay off workers in factories and in high tech industries. And these are people of every level, technically competent people, moderately educated, and workers without skills. We need them at every level. And they will all lose jobs if we lose the source of where we sell our products”. So in Japan unemployment has risen to 4.7%, just below record of 4.9%. If unemployment continues to rise then it could spell disaster in the economy as Japan is leader in technology.

In order for Japan to rebuild for the future, Japan is undertaking a plan known as the ‘Big Bang’ (previously done in the UK) which is a financial overhaul aimed at rebuilding a rickety banking system and changing the way the world’s second-largest economy does business. Nicknamed after similar British financial reforms in the 1980’s, the changes also are being touted as the engine behind Japan’s transformation from a society dominated by bureaucrats to one that is consumer driven. The Japanese consumer stands to benefit as well with an array of new investment and saving options. This plan is to be implemented sometime in 2001. Some of the changes like easing securities sales have already been implemented along with the lifting of restrictions on foreign currency trading.

Among the rules set out: Further liberalisation of sales of mutual funds and securities and broker’s commissions fees and the abolition of the securities transaction tax.

Tougher guidelines to keep banks from amassing too much debt.

Greater disclosures of corporate information which will allow investors to better judge whether a stock is a good buy.

The abolition of barriers between the work of banks, brokerages and insurers.

Also they should add more competition. Deregulation could break up the ministry of finance’s system in which bureaucrats make sure major players in any given industry get a piece of the pie, ensuring employment but keeping inefficient companies afloat.

Thus, there are signs the problems are finally being acknowledged by the government. Among other things, the Prime Minister of Japan had launched a $500 billion-plus financial stabilisation package which was announce earlier in the year. ( cnn.com ) Most of the money is earmarked for replenishing capital at banks so they will be encouraged to lend again. Also a plan to reduce the vulnerability of banks to stock market fluctuations by setting up a fund to buy part of their vast shareholdings.

To eliminate bad debt and restructure the banks means not only the closure or merger of financial conglomerates and financial institutions, but the sale of the assets which were financed by the loans.
With the presidential elections coming up each candidate has put forward their ideas on how to improve the falling economy. This can be good, as the Japanese people will vote for whom will they think will do the biggest clean up of the Japanese economy, so we could be looking at a brighter future in Japan.

Instead of sheltering banks from failure, the government must allow the cleansing action of the marketplace to operate, Unless and until Japanese banks are subject to the same forces facing their manufacturing counterparts they will be unable to compete on a level playing field. Thus, the recent rash of Japanese bank failures is actually a positive development giving the remaining banks a strong incentive to strengthen their balance sheets and to focus on profits rather than market share.

So we can see from our analysis the implications that have risen as a result of the Japanese collapse in the economy which have proved disastrous for the world’s second largest economy and also the plans that have been drawn up for the future in Japan. The plan known as the ‘Big Bang’ should help new growth and development in the financial system, as well as the recent decline in Japan, it should push it back among the ranks of the world’s leading financial centers.

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