Analysis of Japans Economic Structure

Analysis of japans Economic StructureThe Nipponese economic structure has always been perceived to be both(prenominal) stable and reliable. Despite periods of difficulty, the rules and regulation surrounding the Japanese banking industry micturate always attempted to have with any potential problems and to manage them both on an planetary and national level. However, there is an argument that the stringent nature of the regulation in itself has caused some problems for the sector, with many banks finding themselves in distressed positions having followed the approaches advocated by the interchange Ministry of Finance.Prior to the difficulties faced in the eighties, which will be discussed in greater detail later, the Japanese banks largely followed the guidance of the Ministry and felt safe in the acquaintance that there was a safety net in channelize should they fall into pecuniary difficulties. Japanese banking, as a whole, was not particularly profitable and preferably operated a cautious, yet extremely stable service. Despite this approach, the Japanese banking sector hit a substantial crisis in the 1980s, shocking not only those at bottom the Japanese banking schema, but also those involved in banking arond the globe.By studying the events that caused this period of difficulty and looking more specifically at the activities of one banking group, in particular, it is hoped that lessons can be drawn from the scenario that will prevent equal events happening again.Background to Japanese BankingThe bursting of the bubble in the 1980s did not just bob up from nowhere in fact, when the banking system within Japan is studied, for many decades before the bubble burst, it is clear to see that the foundations for this difficult snip had been laid some enormous time in advance of the events themselves.Post war Japan took a rattling segmented and internal approach to banking. Very few transactions were conducted internationally, with virtually all financing products universe offered to Japanese corporations. This worked in the main out-of-pocket to the mentality of the Japanese people they were stinging savers, therefore, the banks in Japan had a starchy flow of funds available to offer financing to Japanese corporations. As a general rule, city banks offered financing to larger corporations, whereas regional banks offered financing to small and more local businesses.In fact, international trading was so low conquer on the agenda that the government used the Bank of Tokyo in the 1950s and 1960s to deal with the contradictory exchange needs of the untaught and to act as the main foreign representative. Banks within Japan worked together, with the long call credit banks offering completely varied services to the commercial banks. The banks were very customer orientated, offering financing at incredibly cheap rate to come alive the economy, often at the expense of the banks profitability.All elements of the banking sector were managed closely by the Ministry of Finance which was largely responsible for all rate setting and banking tattleships. Mergers between banks seldom happened and when they did they were often unsuccessful due to the segregated nature of the different banks, thus making it difficult for companies to merge successfully in terms of culture, administration and ethos. constancy and low costs were the cornerstones of the Japanese banking sector and in this context Japan slowly became recognised on the international capital market radar due to the low cost of borrowing and the large amount of funds available. For example, when RJR Nabisco was taken over with a financing package of $25 billion, Japanese banks were central to providing the demand funds. Increasing global involvement led to six out of the ten top banks in the world based on asset size being Japanese, in the early 1990s.Bursting of the BubbleDespite what seemed to be an extremely solid and stable banking system, t he Japanese banking system suffered a terrible shock in the 1980s and 1990s, which resulted in a widespread financial crisis1.Prior to the 1980s, the banking system in Japan was relatively insular with little international exposure. As the Japanese banks began to deal more and more with other countries, they became increasingly attracted to different financial innovations and instruments, many of which were higher risk than previously undertaken. Not only did the influx of international pay encourage new innovations, but it also led to the Ministry of Finance having to relieven its grip on the regulation of the Japanese banking sector. Deregulation became necessary so that foreign banks were able to enter the Japanese market. There was a large amount of pressure placed on the Japanese government to ensure that deregulation took place, as it had a substantial change over surplus with other countries (i.e. it was exporting more darlings than it was importing, meaning that it relie d on good relations with these countries to maintain its trade position).The European banking system was also undergoing radical change and, as such, there was a growing need for other countries such as Japan to offer EU institutions check treatment. The combination of these factors led to the Ministry of Finance finally accepting that both domestic and international banks had to undergo a period of deregulation2.A combination of a loose financial policy and deregulation led to the increase in the supply of money and the decrease in the interest rate. Cheap lending rate and greater availability of credit led to many individuals and institutions pickings speculative positions and making oft riskier investment than had previously been undertaken.Japan also found that property became a major issue, during the economic downturn. As Japan is a particularly mountainous country, land is at a premium and has always maintained a fair high value. For this reason, land was often used as co llateral on debts and as a seemingly solid investment. Land and equity prices continued to intensify however, in 1989, the Japanese government decided to try and control these spiralling prices by raising interest rates3.These increases in the interest rates led to a monolithic financial crisis with huge falls in the stock market and many of the previously entered into debts turning bad. Many banks began to flounder and a series of governmental bail-outs and fusions took place as the country struggled to regain control over the economy. Credit became difficult to obtain which, in turn, brought capital investment to an abrupt halt, further slowing down the economic performance of the country4.Zaitech Financing unmatchable of the main innovations in terms of investing opportunities that entered the Japanese banking arena, during the 1980s period of deregulation, was that of the Zaitech. Quite simply a Zaitech is a form of financial engineering which allows the banking institution to invest its surplus funds for a return. At the safest end of the scale, the Zaitech involves taking any corporate excesses and investing them in bank deposits. At the other end of the scale, a Zaitech could involve borrowing in the Eurobond market and using the finance to conduct speculative investments in bonds or property. It is this latter approach that many of the Japanese banks took during the period immediately after deregulation. The combination of low interest rates and high values of land support the banks to borrow at the low interest rate and invest in property, bringing in a healthy return.Furthermore, many Japanese companies recognised that they could tardily raise funds by issuing convertible bonds to the public. Between the years of 1984 and 1989, it was estimated that Japanese corporations issued a total of $720 million in securities, of which it was thought that around 80% were equities5.Japan also had the principle that corporations were not required to state how they invested liquid assets. This made it difficult for analysts to invent sensible judgments in relation to the risks that a sealed company was undertaking in the form of financial investments. This led to greater speculations and difficulties and caused the stock market values to plummet further still when interest rates were increased and the value of property began to slide.Background to the Sakura and Sumitomo Mitsui financial Group CaseAll of the turmoil above led to the eventual merger of Sakura with Sumitomo, in April 2002. Sakura bank really suffered, during the early 1990s, largely due to increasing costs, rising interests rates and falling profit margins. Its risk asset ratios, as required by the international body BASEL, were also substantially lower than is considered desirable and it continued to find it difficult to meet the capital adequacy rules.As much of the difficulty was perceived to be down to higher costs, Sakura set about reducing its costs by integrating staff function and information system technology, where possible. Although this had a supreme impact on the company, ultimately the main problem came from the increasing number of bad debts that the company had in its portfolio. The Ministry of Finance had traditionally been unwilling to allow banks to write off bad debt as this would not have given a positive view of the banking sector. Companies such as Sakura were not concerned about this as they simply followed the guidance of the Ministry of Finance, safe in the knowledge that it was protected by the government. However, as the financial climate worsened, there was growing concern that these bad debts would have to be written off. This took time, and during the early 1990s, the bad debt simply mounted as institutions (Sakura included) were reluctant to admit to the failings within their debt profile6.Sakuras segment in the banking sector was very much focussed on the retail banking end of things, with high numbers of mortgag es being given to domestic lenders. As property prices fell and interest rates rose, this factor also led to a substantial increase in the amount of loans that were defaulted on and yet more bad debt was accumulated7.Worse still, Sakura was competing largely against the Japanese Post Office with its retail banking offerings the Post Office had the advantage of being hugely subsidised, of having certain tax relief advantages and not having to seek approval to make changes such as opening branches. These advantages have made it particularly difficult for Sakura to offer customers competitive options.Recognising the difficulties facing the banks, the Japanese government offered a substantial bail-out to several(prenominal) banks, Sakura included, which helped to raise the amount of capital available to these banks which, although it was successful, did little to assist the economy, as a whole, as banks were still reluctant to lend any funds to consumers, make yet further economical di fficulties8.The MergerDespite the difficult times, Sakura did have some positive movements during the 1990s. One of its most successful ventures was the 50% involvement in the consortium Japan Net Bank which successfully opened an internet and ATM based banking offering.Sakura realised that it needed to form a strategical compact with another bank, if it was to be able to compete with the other mega-bank structures that were being developed across Japan. It also needed to ensure that it had sufficient capital strength within the market. Discussions were entered into with several large banks and in April 2001 (a whole year ahead of schedule), an agreement was reached between Sakura and Sumitomo Mitsui fiscal Group9.This merger was interesting for several reasons. Firstly, the two companies did largely different things Sakura was a commercial bank and Sumitomo was a money centre bank. Although Sumitomo was highly regarded amongst its peers, all money centre banks were generally unde rperforming. Prior to the merger, Sumitomo had established itself (through a enunciate venture with Daiwa Securities) as a bank that would substantially increase its offerings in relation to investment banking. In contrast to this, Sakura had particular power in relation to retail banking, particularly with the new area of internet banking that it had upstartly entered into.Unlike other mergers, the one between Sakura and Sumitomo was done through traditional avenues with Sumitomo effectively taking over Sakura and renaming as Sumitomo Mitsui. In doing so, the merged company was then managed by a unified board of 30 directors.Operations were largely merged, which resulted in a large amount of cost saving and economies of scale were enjoyed across the whole company. In completing the merger, the newly formed Sumitomo Mitsui became the third largest bank in the world. The merger was not all plain sailing and many staff left the company, some voluntarily and some through redundancy. There were also cultural clashes as two rival firms merged and had to accept external interference in their work, which had traditionally been kept very segmented10.Over time, the merger has allowed the bank to become much more stable and to meet the Basel requirements, partly through diversification and partly through cost saving.Current Financial CrisisThe situation facing Japanese banks in the 1990s is not entirely different from that currently facing the US, the UK and much of the rest of the world. The similarities are perfect(a) the US, in particular, has been mounting up bad debts, support on overpriced property in exactly the same way as Japan did in the 1980s and early 1990s. Despite the seemingly similar issues that have led to the crisis in the US, as happened in Japan, there have been some differences which may allow the countries affected by the widespread credit calf love to avoid such a prolonged period of recession as the one that was experienced in Japan11.There are several reasons for this belief. Firstly, the US government reacted much more quickly and decisively when the emerging problems were first identified. In Japan, the Ministry of Finance attempted to maintain an approach of perceived stability for some time after a crisis became evident, allowing banks to store up bad debt for a considerable period of time.Also, other countries (and in particular the US) have much higher consumer spending, traditionally. One of the main reasons that the Japanese economy took so long to recover was due to the reluctance of individuals to spend any money that they had this is not likely to be such a large factor in the current crisis.However the health of the Japanese economy prior to its crisis should not be ignored. When Japan entered the period of spill in the 1980s, it was in a much more robust economic position than those countries being affected by the current credit crunch. It had a trade surplus, no borrowing and cash reserves. The US, on t he other hand, had debts of around 190% of the gross domestic product when it entered the credit crunch period. Japanese individuals were also keen savers and could, therefore, reduce their saving ratio to mitigate the impact of the recession. This approach is not as readily available in the US and UK.ConclusionsThere are stark lessons to be learned from the situation that Japan faced in the 1980s and 1990s. Whilst, on the face of it, the parallels drawn between the current financial crisis and that faced by Japan are worryingly similar, it should be noted that a large part of Japans problem came from a reluctance to accept that there ever was a problem. With quick reactions from the government and strategic mergers, such as the one discussed above, the lessons learned from the Japanese crisis can truly be put to good use.BibliographyAllen, Roy E., Financial Crises and Recession in the Global Economy, Edward Elgar, 2000.Amyx, Jennifer Ann, Japans Financial Crisis Institutional rigi dity and Reluctant Change, Princeton University Press, 2004.Ardrey, William J. IV, Pecotich, Anthony J., Ungar, Esta, Structure, commitment and strategic action for Asiatic transitional nations financial systems in crisis, International diary of Bank Marketing, 19, 1, 2001.Arestis, Philip, Baddeley, Michelle, Mccombie, John, What Global Economic Crisis? 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Sharpe, 2000.8 Valentine, Tom., Ford, Guy., Readings in Financial Institution Management Modern Techniques for a Global Industry, Allen Unwin, 1999.9 Ardrey, William J. IV, Pecotich, Anthony J., Ungar, Esta, Structure, commitment and strategic action for Asian transitional nations financial systems in crisis, International Journal of Bank Marketing, 19, 1, 2001.10 Kang, Myung-Koo, Japans Financial Crisis Institutional Rigidity and Reluctant Change, Pacific Affairs, 79, 2006.11 Mikitani, Ryichi, Posen, Adam Simon, Japans Financial Crisis and Its Parallels to U.S. Experience, Peterson Institute, 2000.