Analysis of Japans Economic Structure

Analysis of japans economic StructureThe lacquerese economic structure has always been compreh eradicate to be both stable and reliable. in spite of extremitys of difficulty, the rules and regulation surrounding the Nipponese commiting industry suffer always attempted to great deal with each potential capers and to manage them both on an international and national level. However, there is an argument that the stringent nature of the regulation in itself has caused some problems for the heavens, with many an separate(prenominal) an opposite(prenominal) entrusts finding themselves in distressed positions having followed the approaches advocated by the central Ministry of Finance. foregoing to the difficulties face up in the 1980s, which will be discussed in greater detail later, the Japanese banks largely followed the guidance of the Ministry and felt safe in the intimacy that there was a safety net in bewilder should they fall into financial difficulties. Japanese b anking, as a whole, was not particularly profitable and instead ope sayd a cautious, provided extremely stable service. Despite this approach, the Japanese banking sector hit a substantial crisis in the 1980s, shocking not only those in fightdly the Japanese banking trunk, but also those involved in banking arond the globe.By studying the events that caused this period of difficulty and expression more specifically at the activities of one banking group, in particular, it is hoped that lessons can be drawn from the scenario that will go along same events happening again.Background to Japanese BankingThe bursting of the bubble in the 1980s did not just get under ones skin from nowhere in fact, when the banking schema inwardly Japan is studied, for many decades before the bubble burst, it is clear to live that the foundations for this difficult time had been laid some considerable time in advance of the events themselves.Post war Japan took a in truth segmented and internal approach to banking. Very few transactions were conducted internationally, with to the highest degree all funding products existence offered to Japanese corporations. This worked in the main referable to the mentality of the Japanese plurality they were recherche savers, therefore, the banks in Japan had a steady flow of funds easy to offer support to Japanese corporations. As a general rule, city banks offered support to larger corporations, whereas regional banks offered financing to diminished and more local businesses.In fact, international trading was so low down on the aggoalum that the political sympathies used the Bank of Tokyo in the 1950s and 1960s to deal with the external change needs of the land and to act as the main foreign representative. Banks within Japan worked together, with the long termination credit banks offering completely variant services to the commercial banks. The banks were very customer orientated, offering financing at incredibly ch eap rank to stimulate 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 carnal knowledgeships. Mergers amidst banks rarely 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 mix in successfully in terms of culture, administration and ethos.Stability and low costs were the cornerstones of the Japanese banking sector and in this context Japan slowly became recognised on the international great(p) 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 necessary funds. Increasing global involvement conduct to sextuplet out of the ten top banks in the world based on a sset size being Japanese, in the early 1990s.Bursting of the BubbleDespite what seemed to be an extremely solid and stable banking system, the 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 find than antecedently undertaken. Not only did the influx of international finance encourage new innovations, but it also led to the Ministry of Finance having to relinquishn 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 trade surplus with other countries (i.e. it was exporting more redeeming(prenominal)s than it was importing, meaning that it relied on good relations with these countries to concord its trade position).The European banking system was also undergoing radical change and, as much(prenominal), there was a growing need for other countries much(prenominal) as Japan to offer EU institutions equal treatment. The combination of these factors led to the Ministry of Finance finally pass judgment 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 pertain rate. Cheap lending rates and greater availability of credit led to many individuals and institutions victorious speculative positions and making much 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 reasonably high value. For this reason, land was often used as collateral on debts and as a seemingly solid investment. Land and equity prices continued to step up 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 massive financial crisis with huge falls in the rail line market and many of the previously entered into debts turning pernicious. Many banks began to flounder and a series of governmental bail-outs and mergers 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 sensation 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 caters 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 set of land encouraged 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 intimately raise funds by issuing convertible bonds to the public. Between the divisions of 1984 and 1989, it was estimat ed that Japanese corporations issued a add up of $720 million in securities, of which it was thought that around 80% were equities5.Japan also had the principle that corporations were not requisite to state how they invested liquid assets. This made it difficult for analysts to achieve sensible judgments in relation to the risks that a authentic go with 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 pecuniary 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 good lower than is con sidered coveted 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 stave function and information system technology, where possible. Although this had a positive 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 hold open 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 fellowship 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 institutio ns (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 mortgages 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 component 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 face the banks, the Japanese government offered a substantial bail-out to several banks, Sakura included, which helped to raise the amount of ca pital 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 difficulties8.The MergerDespite the difficult times, Sakura did have some positive movements during the 1990s. 1 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 inevitable to form a strategic union 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 c ompanies did largely different things Sakura was a commercial bank and Sumitomo was a money center of attention bank. Although Sumitomo was highly regarded amongst its peers, all money centre banks were generally underperforming. Prior to the merger, Sumitomo had established itself ( done a joint 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 late(a)ly 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 comple ting 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 monetary CrisisThe situation facing Japanese banks in the 1990s is not entirely different from that surely facing the US, the UK and much of the rest of the world. The similarities are spartan the US, in particular, has been mounting up bad debts, backed on overpriced property in scarcely 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 Japa n, there have been some differences which may allow the countries stirred by the widespread credit crunch 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 stock 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 the 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 Japane se crisis can truly be put to good use.BibliographyAllen, Roy E., financial Crises and Recession in the international Economy, Edward Elgar, 2000.Amyx, Jennifer Ann, Japans Financial Crisis Institutional rigidity 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 journal of Bank trade, 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.