1. Introduction
Japan’s phenomenal growth till the end of the 1980s is often credited to its unique brand of bank-loan capitalism, which is often identified as the "main-bank" system. This system of capital access was designed to provide Japan much needed funds in the early postwar period. Japan was then bent on reconstructing and modernizing its war-torn heavy and chemical industries, which required a huge infusion of investment. These industries are highly capital intensive in physical installations and scale-driven in operations and competitiveness. Hence, an enormous amount of capital had to be somehow mobilized and supplied, and this task was accomplished under government direction.
Some consider the main-bank system of corporate finance and oversight a "success," and present it as a model superior to securities-market capitalism:
The cross-country historical evidence, and the case of Japan, indicate that under certain conditions banks are better (or less expensive) able than securities market institutions to evaluate the credit-worthiness of borrowers and the viability of new projects, to monitor the ongoing performance of firms, and to rescue or liquidate firms in distress (Aoki and Patrick, 1994: xxi-xxii. Italics added).
Proponents of the Japanese model even urge the transition economies in Central and Eastern Europe to emulate it, on the ground that these economies are in a comparable stage of economic transition and reconstruction as Japan was from a centralized war-time economy to a market economy at the end of World War II. Furthermore, the transition economies are so much in need of capital, and a substantial block of privatized company stock is now in the hands of "insiders"–mostly the workers’ councils in Poland, both managers and workers in Russia, or the enterprise councils in Hungary–and institutions because of the underdeveloped stock markets. In Aoki and Kim’s (1995: 20) words:
The cash-starved transition economies need, therefore, to develop a workable system of corporate governance. The experience of Japan immediately after World War II was to use banks to monitor enterprise performance in transition in a way compatible with insider control. The history and socioeconomic conditions of Japan and the postwar international environment are indeed different from those faced today by the transition economies, but the problems that gave rise to the development of a "control-oriented" banking system are similar: insider control and the need for large amounts of external financing, while the capital market was underdeveloped (italics added).
Insider control came into existence in postwar Japan in terms of shareholding by the main banks of their client corporations’ stock, especially within the keiretsu group. "[In the transition economies] privatized enterprises tend to be owned by other enterprises, banks, and the state; thus, corporate groups similar to Japan’s keiretsu may emerge" (Aoki and Kim, 1995: 21).
Should the transition economies really try to adopt the Japanese model? Or should they consider two other alternatives: the Anglo-Saxon model of securities-market capitalism and the German model of universal banking?
Here it is also worth noting that Michael Jacobs, who headed a special office set up to study the competitiveness of American business during the Bush administration (1988-92), criticized the American system of corporate finance as "short-termism" or "myopia," and praised both the long-term-oriented Japanese and German systems:
... there are lessons to be learned from Germany and Japan that can be applied in any financial system. Obviously, a long-term perspective beats a short-term mentality, but there are more specific principles. The dominant investors in Japan and Germany are sophisticated owners with long-term horizons; banks work closely with their customers through good times and bad; corporations are held accountable for their performance; and poor performers are restructured in an evolutionary manner with the participation and consent of owners and creditors, rather than through revolutionary changes brought on by a takeover. Government regulators work cooperatively with business, often facilitating investor/manager relationships rather than enacting measures to insulate them from one anther and letting the courts intervene to resolve disputes. Executive pay schemes are not the primary mechanism to encourage business leaders to make long-term decisions because the whole financial system discourages myopic behavior (Jacobs, 1991: 217, italics added).
Americans were so much concerned about their declining industrial competitiveness towards the end of the 1980s. It was in such a context that Jacobs made this rather rosy observation about the Japanese and German systems. In fact, in those days it was widely believed that Japan and Germany had a more effective, competitiveness-enhancing setup for corporate finance and oversight.
Yet the onset of the bull market in the United States has changed Americans’ perceptions 180 degrees. Now, America triumphs and considers its brand of capitalism the wellspring of superior corporate performance. America’s triumphalism is also buttressed by the dramatic turn of fortunes in Japan and Germany, whose economies slipped into the doldrums.
Japan, in particular, has recently experienced a 1930s-style depression. Its banks have been hobbling with hundreds of billions dollars of bad loans (about $800) ever since the 1986-90 asset bubble was burst. In fact, the bubble itself was boosted by the banks’ reckless lending, which was in turn caused by the low-interest policy of the Japanese government intended to offset the so-called endaka [high-yen] recession (subsequent upon the 1985 Plaza accord). Japan’s moribund banks have so far received 7.46 trillion yen ($67 billion) in tax-payers’ money for recapitalization, and as much as $675 billion have been made available for disposing of their huge amounts in problem loans (as of the end of March 1999). They may require even more.
Why did the banks themselves fail to monitor their own lending operations, if they really had possessed such an acclaimed capacity to overseas their borrowers? Why didn’t the keiretsu groups which own their major bank’s shares (through cross shareholdings) exercise proper oversight as "sophisticated [supposedly] owners"? In the light of Japan’s calamitous banking debacle, one naturally wonders if Japan’s main-bank system worked as effectively as described by the proponents and if the Japanese experience could really serve as a model for the transition economies. Is it worth emulating the Japanese system?
2. Leitmotif
The themes of this paper are as follows: Japan’s government-orchestrated and protected main bank system did mobilize capital successfully–under a scheme of what may be called "infant-finance" protection analogous to the familiar "infant-industry" model in economic development-- to build up heavy and chemical industries during the early postwar period. Such a development finance approach was made all the more effective by the formation of the keiretsu groups (loosely knit oligopolistic combines) at home–and more importantly, by the original IMF system that sanctioned capital controls to maintain balance-of-payments equilibrium. Ironically, however, this heavily regulatory and protective regime, which was the backbone of the main-bank system, inevitably resulted in an accumulation of structural distortions (notably excess capacity, overdiversification, and overstaffing), the problems that have come home roosting in the present Japanese economy.
What the proponents failed or neglected to see is (i) that the main-bank system was part and parcel of Japan’s dirigiste bank-loan capitalism and not a mere benign form of "relationship banking" as is depicted, and (ii) that the government tended to procrastinate in deregulating its financial sector–and for that matter, the rest of the economy, even when Japan already had successfully emerged as a "mature adult financier" in the global economy (hence, this is comparable to the failed case of "infant industry" protection in which an "infant-turned grown-up industry" is still heavily protected and pampered). Such a state of economic inefficiency has, therefore, eventually reached such a level that it finally left no choice for Japan but to adopt a wide range of deregulations, including the recent "big bang" reform. Any policy maker in the transition economies should understand how the main-bank system functioned in terms of the totality–and consequences–of Japan’s developmental dirigisme, of which this system served as a subset.
3. Bank-Loan Capitalism, Japanese-Style
Throughout the world, banks serve as intermediaries in channeling savings into spending (investment and consumption). Indirect finance (bank loans) is thus ubiquitous, although in the highly advanced capitalist countries like the U.S., direct finance (stocks and bonds) plays a proportionately more important role in corporate finances. Hence indirect finance itself is nothing unique about the Japanese experience.
What is distinctive about it is that bank-based finance was once strategically micro-managed by the government (by the Ministry of Finance, which kept the Central Bank of Japan in its bailiwick) as an instrument of catch-up industrialization by way of channeling funds at a below-market-cost into target industries during the high growth period of 1950-1974. And in this process, its financial sector had to be heavily regulated and protected.
3.1. Central Bank-Based Finance
Any rapidly developing economy (as Japan was after World War II) requires increased finance. How to organize this is a critical issue in formulating a successful strategy for swift industrialization. In essence, two possible solutions exist. One is to borrow from overseas by running a current-account (CA) deficit (since CA = domestic savings - domestic expenditures). The other is to create credit internally through a country’s banking system with the help of its central bank. This second approach is self-reliant in development finance and allows the country freedom from dependence on foreign capital. The first approach may be identified as "CA-deficit-based finance," and the second as "central bank-based finance" (Ozawa, 1999).
Japan has relied more heavily on the second approach by minimizing borrowing from overseas. It also promoted domestic savings as much as possible by suppressing consumption. In fact, this self-reliant approach of financing economic development has been an ingrained policy ever since the start of Japan’s modernization in the mid-nineteenth century. And this required the economy to be shielded from cross-border capital flows in both directions in order to control and manage liquidity at home for capital formation--without fear of succumbing to the vagaries of foreign capital or losing domestic savings overseas. In the early postwar period, such capital controls were sanctioned under the original IMF system, so long as such controls are temporary and the country intended eventually to move towards capital liberalization.
In reconstructing its war-torn economy after World War II, Japan thus pursued central bank-based finance. The only way for Japan to create loanable funds without much borrowing from overseas was to make the most of the banking industry’s credit-creating capacity with the help of its central bank.
As is well known, the banking industry can create demand deposits (bank money) by a multiple out of any initial injection of liquidity into banks’ reserves, a phenomenon known as bank money multiplication under a fractional reserve requirement. The discount window is another channel through which additional liquidity can be created. The reserve requirement may also be lowered to allow the banks to have excess reserves to lend. All these liquidity-creating facilities can be extended for the purpose of providing even long-term credit for capital formation in the course of industrialization.
Central bank-based finance, however, entails the risk of inflation if expanded credit is used for nonproductive purpose such as consumption and speculative investments (as evidenced, for example, by hyperinflation throughout Latin America in the 1970s). Therefore, it requires a proper use and judicious supervision of the banking industry by both the government (in connection with its fiscal policy) and the central bank (in its monetary policy).
There are two other methods of investment finance: (i) selling equities (stocks) and (ii) borrowing by issuing debt instruments (bonds and other non-equity securities). These two alternatives lead to the growth of direct finance via the securities market.
The stock market in Japan initially did play a relatively important role as a source of funds for corporate investment at the start of postwar reconstruction. But bank loans were on purpose soon promoted for corporate finance under the guidance of the Bank of Japan, and equity finance quickly came to be overwhelmed by bank loans. Furthermore, the stock market (especially the Tokyo Stock Exchange or TSE) was meant only for large well-established corporations and not for startup (even if promising) companies which were badly in need of new capital. The latter had to show profits for a specified period of time to be qualified for stock listing; and even if qualified, they had to climb up the hierarchy of the stock markets, starting first with one of the country’s eight local bourses, the over-the-counter market, or on the TSE’s second section--and finally, under rigorous screening, on the TSE’s first section, a time-consuming journey taking as long as 20 years.
In order to control credit expansion, moreover, the government prohibited corporations from issuing bonds. A bond-issuing privilege was granted only to those policy-purpose financial institutions (mainly, three long-term credit banks and utilities) that were specifically designed to finance public purpose projects.
3.2. The Main Bank System
Under central bank-based finance, the Bank of Japan pumped reserves into Japan’s major city banks, which in turn extended industrial loans to their own groups of closely affiliated corporations, the groups known as the bank-led kinyu keiretsu (financial conglomerates). There were six such major kinyu keiretsu that competed vigorously in arranging a set of heavy and chemical industries (such as steel mills, petrochemical complexes, heavy machinery shops, and shipyards) for their own group. This approach was called the "one set" principle, which made each keiretsu itself practically a semi-economy. The six keiretsu banks were led by their main bank in corporate finance, an arrangement that came to be known as the "main-bank" system.
Consequently, two peculiar monetary phenomena were then observed in Japan: a high dependence for liquidity of commercial banks on the Bank of Japan, which was identified as a "system of overloan (or overlending)," and an in-tandem dependence of the corporate sector on the city banks, which was called "overborrowing." Overlending describes a situation in which banks extended more loans than justified by the funds they received from depositors or investors, since banks’ lending capacity was augmented by additional liquidity from the Bank of Japan. Overborrowing means a condition in which corporations heavily depended on borrowing from their major banks–more heavily than from any other sources–for funds (Suzuki, 1987). Indeed, overlending and overborrowing were some of the distinct features of Japan’s bank-loan capitalism.
Under the main-bank system, moreover, and because of companies’ dependence on banks for funds, there soon emerged close relations between the two, and banks were assigned the role of overseers on client companies’ business performance. This relation banking developed almost naturally since most keiretsu corporations used to be the zaibatsu corporations in the prewar days. Each keiretsu main bank (e.g., the Mitsubishi Bank) was in charge of providing all the necessary banking services and funding for its affiliated companies (e.g. Mitsubishi Trading Company, Mitsubishi Heavy Industries, Mitsubishi Shipbuilding Company, etc.). The bank held affiliated companies’ shares up to the 5% legal maximum (initially the 10%) in cementing close ties with them, who in turn held the bank’s shares in reciprocation. This practice of cross-shareholdings created "captive owners" on a mutual basis, since the purpose of shareholding was not for short-term trading for profits but for becoming the owners of each other, thereby making long-term commitments to their business relations. All these features made up a unique form of intra-keiretsu corporate alliance.
For example, this system of capital access and control is cogently described in Aoki (1988: 148-149):
Although the management of the [Japanese] firm may be insulated from the discipline exercised through the stock market, it is placed under close monitoring by financial intermediaries, particularly when it has to rely on borrowing from the bank for financing investment. The so-called "main bank" of a company, which is a major stockholder of the company and serves as an organizer of long-term loan consortiums to the company on a regular basis, plays an especially strategic role in monitoring. The main bank is in the position of being briefed about the company’s general business and affairs in the capacity of a major stockholder and is able to scrutinize the company’s strategic investment plan in the capacity of a major lender. It often sends its representative to the company’s board of directors. Thus the main bank cum major stockholder has considerable ability to closely monitor its customer companies...
What is descried above, however, is nothing unique about the Japanese system. In essence, this type of banking is relationship banking and is practiced in other countries as well. German universal banking is a prime example. Even in the United States, this form of banking once was indeed practiced many decades ago–in the days of J. P. Morgan. And the House of Morgan behaved just like the Japanese main bank did:
Bankers typically sat on their customers’ boards, owned their stock, and consulted regularly with senior management about long-term strategies and short-term operating plans–practices that remain the norm in Japan and Germany. And there is evidence that equity investors felt a sense of confidence knowing that sophisticated financiers such as J.P. Morgan and his partners were looking out to ensure that companies were well run and that the investors’ capital was being used efficiently. In fact, just the presence of a Morgan banker on a company’s board was associated with a substantial increase in the value of a company’s stock." (Jacobs, 1991:143-144; italics added).
So, what were the true characteristics of the Japanese model? In the first place, it was customary until the early 1970s that new stock was issued at par (50 yen in most cases) rather than at market value and sold to existing shareholders on a preemptive right basis (Ide, 1998). As for bonds, corporate bond issue was basically restricted only to public utilities and long-term credit banks, whose bonds were then placed with city banks. The issuance of commercial paper was not permitted until 1987. They could not raise capital abroad, either. Foreign exchange controls were firmly in place. They were thus straight-jacketed by a web of regulations and customs and had to secure funds from their main banks. There was not much choice.
In addition, financial institutions themselves were strictly harnessed in business activities. They were compartmentalized into specialized lines of business and assigned markets (e.g., separation of the lending business from underwriting and trading in securities and the trust business; separation of short- and long-term finance; separation of markets by size of customer) in order to channel funds into specific areas--and isolated under protection from the outside world in order to maintain an independent monetary policy and control. Initially, for cross-border banking, only the Bank of Tokyo was given the role of a foreign exchange bank to deal with exchange transactions.
Japan’s financial industry was supposed to be remodeled on the American system after World War II, but how did the Japanese government manage to set up this state-orchestrated regime of development finance? It so happened that the Allies actually left Japan’s war-time control-oriented economic bureaucracy largely intact for the purpose of maintaining the administrative command channel for postwar economic relief and reconstruction. Postwar economic mandarins, who had previously worked on the Greater East Asian Co-prosperity Sphere Plan during the war, took advantage of the situation and extended their control-oriented approach to Japan’s early postwar economic policy.
It was, therefore, not so much relationship banking per se but a whole dirigiste protection-cum-regulatory regime that made the Japanese model unique. And indeed, as the financial sector began to be liberalized in the 1980s under the external pressure from the IMF, the OECD (of which Japan became a member in 1964), and the United States (of course), and more importantly, as corporations began to accumulate internal funds, the main-bank system started to crumble.
In short, these unique features of Japan’s bank-loan capitalism did enable Japan very quickly and decisively to rebuild and modernize the heavy and chemical industries. But these activities were sowing seeds for a bubble that would later occur–and for the serious structural problems of overcapacity, overdiversification, overstaffing, and over-indebtedness at both industry and corporate levels, the problems which would inexorably result as Japan’s comparative advantage eventually shifted from those physical-capital intensive industries to more knowledge-based ones. These problems are now haunting the Japanese economy.
4. The "Ginko Banare [Departure from Banks]" Phenomenon
In final analysis, ironically, the main-bank system has proved to be largely self-destructive: the more effective and the faster it was in facilitating Japan’s catch-up industrialization in heavy and chemical industries through subsidized capital formation, the sooner its loss of effectiveness. In addition, Japan’s subsequent stages of growth and the process of globalization (i.e., inevitable deregulations Japan had to implement in its financial sector) have both accelerated this paradoxical process.
Thanks to the low-cost capital made available under Japan’s central bank-based finance, big corporations, mostly in the keiretsu groups, grew quickly and accumulated internal reserves. Indeed, such a rapid expansion of internal reserves served an emancipator from dependence on banks, and itself was made possible because they did not need to pay out much dividends (post-tax payments), which were normally a 5 to 10 percent of the par value of shares, and paid mainly interest (pre-tax payments). This setup left greater retained earnings. In other words, the main bank system itself was responsible for promoting a rapid accumulation of retained earnings and thereby making the banks’ clients less dependent on loans–hence less susceptible to monitoring and more autonomous in investment decisions. This was identified as the "ginko banare [departure-from-banks]" syndrome in the Japanese media.
Moreover, as Japan entered the next phase of assembly-based, components-intensive ("differentiated Smithian") industries, notably automobiles and electronics, leaving behind heavy and chemical ("non-differentiated Smithian") industries, there soon emerged new world-class manufacturers. Many of these manufacturers actually did not originate as keiretsu firms which were supposedly best coached by their main banks. These new companies started out as outsiders (non-keiretsu upstarts) and have largely remained as such ever since.
A prime example is Toyota Motor Corporation, now the world’s most efficient car maker, which has had no affiliation either with any zaibatsu (in the prewar days since its establishment in 1937) or any major keiretsu (in the postwar period). In fact, the company has persistently avoided external debts. Yet it has been quite innovative and exemplary in management. Toyota innovated a world-renown manufacturing technology, "lean or flexible production" (Wormack, Jones, and Roos, 1990). The company also set up its own auto finance company out of its huge profits. Its internal reserves became enormous, so much so that Toyota itself came to be known as the "Toyota Bank." In short, Toyota’s growth and excellent performance practically had nothing to do with the main bank system.
Honda is another example, which early on had a hard time securing bank loans because of its initial status as an independent upstart firm outside the keiretsu circle. Only later on, the company came to be "affiliated" with the Mitsubishi Bank. Similarly, Sony was once even slighted by Japan’s industrial guardian, the Ministry of International Trade and Industry (MITI), when it sought permission to secure a license on the transistor from Bell Laboratory (U.S.) because of its unknown status, namely no affiliation with any keiretsu. Likewise, Matsushita Electric Industries quickly accumulated huge internal reserves and has ever since been practically free from external debt. It is also often called the "Matsushita Bank."
For all these cases (Toyota, Honda, Sony, and Matsushita–just to cite a few), it is clear that we cannot give credit to the keiretsu-centered main-bank system for their successful business performances. What mattered was, then, their own managerial capacity for self-governance.
We often fall into what may be called the "fallacy of bifurcation in perception." Bank loans (debt /indirect finance) and securities (direct finance) are not the only choices. Internal funds are another important source of finance. And once corporations become more self-reliant in finance, there is no reason for them to be dictated about how to run their own businesses by bank officials.
5. Adverse Consequences of dirigiste Bank-Loan Capitalism
Whatever the stage-specific effectiveness of the main bank system, it led to two major problems which now haunt the Japanese economy: (i) the overcapacity, overdiversification, and overstaffing of productive facilities in the manufacturing sector (with too many unprofitable divisions and subsidiaries and too many employees to be profitable) and (ii) the excessive number of banks (too many banks to be profitable).
As we discussed earlier, when bank-loan capitalism was at its zenith during the stage of Japan’s heavy and chemical industrialization, the main bank system functioned very well in promoting the keiretsu groups to enter capital-intensive, large-scale industries (such as steel and petrochemicals). Each group was induced to enter a range of these then- promising growth sectors in an overlapping manner. And vigorous rivalries at home forced them to look for overseas markets for excess supplies such scale-driven industries inevitably created: the more they produced–and exported, however, the lower the production cost because of scale economies–hence, the greater their export competitiveness. Japanese exports in those days were often likened to "torrential rains" and criticized as "predatory trade." Luckily, the West was in the Golden Age of Capitalism" (1950-1973) and able to absorb Japanese exports despite frequent trade frictions.
But such an impetuous capacity building at home was doomed to cause the problem of overcapacity, once the world economy slumped and once other Asian economies, too, emerged as new suppliers of similar "input-driven" goods, Japan’s comparative advantage soon eroded in heavy and chemical industries. (This new competition itself was to a significant degree created and accelerated by Japanese multinationals’ headlong rush into Asia’s developing economies for local production.)
Especially within the keiretsu structure, overcapacity took the form of excessive diversification. Many companies ended up holding a large number of subsidiaries (their own suppliers and affiliated firms). Even the129-year old Mitsubishi group, the mightiest of Japan’s keiretsu, is hurting with its major member companies (such as Mitsubishi Electric, Mitsubishi Motors, Mitsubishi Chemical, and Mitsubishi Materials) all in lackluster business performances. So long as Japan enjoyed high growth, these bloated corporations could cross-subsidize less profitable operations with profitable ones. (Overcapacity in production in 1999 is estimated at more than Y80 trillion or $656 billion, equivalent to nearly 12 percent of GDP).
In the meantime, the banking sector, too, was inexorably headed for overcapacity. As Japan’s large corporations accumulated internal reserves, the banks began to lose customers for lending.
Besides, the restrictions on overseas borrowings were now gradually lifted, enabling corporations to issue bonds abroad (especially in the then-growing Eurodollar market). The "departure from banks" syndrome was synonymous with the appearance of an excess banking capacity. Having been the key policy instrument of bank-loan capitalism, the banks felt still protected by the government and guaranteed for bailout if anything went wrong. In fact, the Ministry of Finance publicly assured that no bank would be allowed to fail.
Indeed, it was against this backdrop that banks’ imprudent lending led to a short-lived bubble in Japan over the 1987-1990 period. It originated with the Plaza accord of 1985 that would soon drive up the yen phenomenally. Fearing the "high-yen" recession, the Bank of Japan pumped money into the economy. This made the banks awash in liquidity. Having lost many large borrowers, they had to look for new customers. The banks found small businesses, real estate firms, and construction companies as their new major customers. They also channeled loans through non-bank banks (housing-loan companies and consumer credit firms), since the latter were less strictly regulated than the banks themselves.
Low interest rates and the abundance of liquidity fueled the rising prices of stocks and real estate. Many Japanese firms issued new shares at home and bonds (including so-called "warrants" with equity-conversion-rights) abroad, and actively put the proceeds back into the market, driving stock prices even higher. This speculative activity was called zai-teku [financial engineering]. The banks became all the more eager to lend to anyone, especially those who had land, since the value of land soared as collateral due to speculative purchases. The rising stock prices in banks’ portfolios made their assets rise astronomically, thereby increasing their lending capacity. In those days, Japanese banks were accustomed to the government’s "too important to fail" assurance which clearly resulted in the familiar problem of "moral hazard." The bubble and its aftermath (so far, at least approximately $800 billion in problem loans and the credit crunch in the middle of recession) were nothing but the outcomes of the main bank system gone berserk.
It should also be mentioned that the stock market in Japan has often been "tampered." The Investment and Loan Bureau of the Ministry of Finance had intervened in the stock market from time to time to "stabilize" (i.e., manipulate) share prices by using the funds collected through the postal savings system. Until the mid-1980s, for example, the share prices of major Japanese banks remained nearly constant for long periods of time, since regulators wanted "to limit stock price fluctuations in an effort to influence the public’s perception of risk at banks" (Genay, 1999).
Because of a high level of insider control (almost two-thirds of shares are trapped in the web of crisscross holdings among affiliated companies), common equity investors had no power. Besides, stockholders’ annual meetings were usually held all on the same day so that investors with diversified portfolios could not attend all the meeting. To add insult to injury, so-called sokaiya (literally, "general meetings experts"), who expedite proceedings by unsavory means, were hired to suppress any questioning from common stockholders. The sokaiya had close ties with yakuza, Japan’s organized crime. Only recently, several corporate executives of large well-known Japanese corporations (including Japan Airlines, Nomura Securities, and Dai-Ichi Kangyo Bank) have been arrested or forced to resign because of their involvement with the sokaiya and organized crime.
Moreover, in the securities brokerage industry, the tobachi (literally, "flying") practice--under which brokerage firms’ prime customers were guaranteed for profits-- was so rampant. In fact, this illegal practice finally cost Yamaichi Securities, Japan’s oldest and fourth largest, its demise after a century’s existence in November1997.
The Japanese system was a clear case of "insider control" not only in the benign sense that the majority bloc of the capital share is held by "friendly" affiliated banks and companies--but also and more importantly, because the government controlled the whole financial sector in such a way to encourage the use of stocks not as investment instruments per se but as a tool to support the main bank system through cross-shareholding. Politicians and big businesses profited from the rigged stock markets at the cost of small investors. It was the Japanese version of "crony capitalism." This macro-financial "insider control" scheme thus has turned out to be a bleeding ground for corruption–and the subsequent disastrous banking mess that had to be cleaned up with the use of hundreds of billion dollars in tax-payers’ money.
6. Concluding Observations
The proponents of the Japanese model for a possible application to the transition economies in Central and Eastern Europe base their arguments on the two similarities in the prevailing economic conditions between these economies and early postwar Japan: insider control and a dire shortage of capital.
The dearth of capital is ubiquitous in the transition countries. Banks surely can supply funds. But it is worth recalling that the main bank system worked in Japan because the securities markets were discouraged to develop, and because Japan’s financial sector was isolated from capital inflows. Hence, there was early on no choice for corporations but to rely on bank loans. Once corporations began to accumulate internal reserves, however, the "departure-from-bank" syndrome occurred. And as capital controls began to be lifted, companies increasingly borrowed from overseas, thereby accelerating this departure process.
The catching-up countries all are now exposed to the forces of global financial capitalism–under the political pressure from the IMF, the World Bank, and the United States or what Jagdish Bhagwati aptly calls the "Wall Street-Treasury complex" (Bhagwati, 1998). In other words, "CA-deficit finance" is the order of the day. A regulatory and protective regime of "central bank-based finance" would no longer be accepted and executable. The transition countries are compelled to accept free capital flows–unless they are willing to brave it out like Malaysia which turned up its nose at the U.S.-led global financial complex by imposing capital controls. Or unless they adopt a Chinese-style control economy. The transition economies have no enabling environment for Japanese-style main bank system.
As stressed before, the system was part and parcel of Japan’s dirigiste bank-loan capitalism. Japan was able to institute this system because its bureaucracy had an administrative power (handed over from its war-time regime under the occupation authorities) to impose it in such a way that corporations had no alternative but to depend on their main banks for huge amounts of funds they needed to reconstruct and modernize capital-intensive heavy and chemical industries. The transition economies in Central and Eastern Europe are not likely to opt for heavy dirigisme after so many decades of failed communist totalitarianism. Surely relation banking might be developed, but certainly not by government decree or direction. It can be created not by an intentional institutional scheme but autonomously if lenders and borrowers see usefulness and profitability in such a banking arrangement. Besides, the forces of global financial forces are so strong that relation banking itself is weakening. This trend is in the making even in Germany. Moreover, the Japanese financial sector itself is no longer finding useful or desirable the main bank system, which after all has seen its best day back in the mid-1970s. The tide of securities-market capitalism is rising on the shores of every market economy.
In sum, Japan’s much-lauded main-bank system was more than a benign form of relational banking in which banks serve as a custodial overseer’s role. It was a government-orchestrated instrument to force-feed the development of capital-intensive heavy and chemical industries so that the economy would be able to achieve rapid "input-driven growth," a la Paul Krugman (1994). And because of the deep involvement of the government, it has been accompanies by a heavy cost of institutional rigidification and inertia and the problem of moral hazard. It has culminated in the current financial disaster that would be solved only through drastic measures of deregulation. Interestingly enough, in its drive to catch-up growth, South Korea, too, introduced its own chaebol-cum- "lead-bank" system of bank-loan capitalism, a clone of Japan’s keiretsu-cum-"main bank" system–and is now being confronted with the basically similar structural problems of overcapacity, overdiversification, and excessive debts.
The transition economies are in search of an appropriate architecture for corporate finance and governance. The analysis presented in this paper strongly suggests that a great deal of caution needs to be exercised in considering the Japanese main bank system of the by-gone days as a possible model–especially in this age of deregulation, marketization, and globalization.
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