Japanese Banks Research Articles

Outlook for Interest Rates and Japanese Banks’ Risk Exposures under Abenomics

This paper examines how Japan’s long-term interest rates and Japanese banks’ interest rate risk exposures may evolve under Abenomics. Results from a panel regression analysis for major advanced economies shows that long-term government bond yields in Japan are determined to a large extent by growth and inflation outlook, fiscal conditions, demography, and the investor base of government securities. A further deterioration of fiscal conditions would push up long-term rates by about 2 percentage points over the medium term, but the rise is partly offset by higher demand for safe assets amid population aging and increased purchases by the Bank of Japan. At the same time, illustrative scenarios suggest the interest rate risk exposure of Japanese banks could decline substantially over the next two years. However, if structural and fiscal reforms are incomplete, both long-tem yields and interest-risk exposures of Japanese banks could increase over the medium term.

Outlook for Interest Rates and Japanese Banks’ Risk Exposures Under Abenomics

This paper examines how Japan’s long-term interest rates and Japanese banks’ interest rate risk exposures may evolve under Abenomics. Results from a panel regression analysis for major advanced economies shows that long-term government bond yields in Japan are determined to a large extent by growth and inflation outlook, fiscal conditions, demography, and the investor base of government securities. A further deterioration of fiscal conditions would push up long-term rates by about 2 percentage points over the medium term, but the rise is partly offset by higher demand for safe assets amid population aging and increased purchases by the Bank of Japan. At the same time, illustrative scenarios suggest the interest rate risk exposure of Japanese banks could decline substantially over the next two years. However, if structural and fiscal reforms are incomplete, both long-tem yields and interest-risk exposures of Japanese banks could increase over the medium term.

Market Discipline of Subordinated Debt: Empirical Evidence from Japanese Commercial Banks

We investigate if Subordinated Note and Debenture (SND) holders make banks to take less risk by analyzing balance sheet data of Japanese commercial banks. The cross-section regression shows that banks take less risk as the amount of SNDs increase. Specifically, it is shown that the loan risk measure (the ratio of impaired loans to the total loans) and the stock investment risk measure (the invested stocks over bank capital) have decreased with the increase of SND amounts. These results provide evidence that SNDs are effective instrument for the market discipline.

Cross-Border Activity of Japanese Banks

This paper explores the determinants of Japanese banks’ overseas expansion and assesses whether the growing cross-border activity will continue under the new macroeconomic policies referred as “Abenomics”. The analysis finds that Japanese banks are well positioned to scale up foreign exposures, thanks to their relative resilient balance sheets and continued growth in the region. Stronger domestic growth in Japan could mitigate the pace, but is unlikely to reverse the expansion as global and regional pull-factors play a more prominent role in the growth of cross-border claims. Increasing cross-border activity could pose funding risks and supervisory challenges and require continued close monitoring.

Cross-border Activity of Japanese Banks

This paper explores the determinants of Japanese banks’ overseas expansion and assesses whether the growing cross-border activity will continue under the new macroeconomic policies referred as “Abenomics”. The analysis finds that Japanese banks are well positioned to scale up foreign exposures, thanks to their relative resilient balance sheets and continued growth in the region. Stronger domestic growth in Japan could mitigate the pace, but is unlikely to reverse the expansion as global and regional pull-factors play a more prominent role in the growth of cross-border claims. Increasing cross-border activity could pose funding risks and supervisory challenges and require continued close monitoring.

Does statutory auditors matter in bank-dominated corporate governance? Evidence from Japan

This paper presents examination of the relation between the role of statutory auditors and corporate governance mechanisms in Japan in the early 1990s. Under Japanese commercial law before 2003, the establishment of an audit committee was required, but not appointment of outside auditors. Consequently, firms came to coexist with and without outside auditors. The empirical question arises of whether outside auditors in Japan are effective monitors or not. We find the following three points in this paper. First, managerial entrenchment effects exist for the appointment of outside auditors. Second, we can find a negative relation between Japanese bank ownership and firms with outside auditors. Finally, financial keiretsu memberships are not significantly effective for the appointment of outside auditors

Lending Behavior of Japanese Banks in China

Lending Behavior of Japanese Banks in China

An Assessment of Systemic Risk in the Japanese Banking Sector

An Assessment of Systemic Risk in the Japanese Banking Sector

Global Strategies of the Japanese Mega Bank BTMU toward Asian Countries

In Japan, with declining birth rate and aging population, the domestic market has been shrinking in recent years. As a result, Japanese companies are increasing their operations in foreign countries, and the banks have started to support these Japanese companies aggressively. Especially, Mitsubishi UFJ Financial Group (MUFG) has actively provided various supports to Japanese companies expanding their businesses into foreign countries. China and India have been experiencing higher economic growth in Asia. After recent financial crises precipitated by the Lehman Brothers bankruptcy in 2008, more and more Japanese companies tend to consider setting up their businesses in India than it used to be. This study aims to discuss how the Bank of Tokyo-Mitsubishi UFJ, Ltd (BTMU) and its group subsidiaries provide sophisticated information and financial services for Japanese customers who want to expand their businesses in Asian countries, especially in India.

Financial crises and the balance of power in international finance, 1890–2010

Has the centre of gravity of international finance irreversibly started to shift from the Atlantic to the Pacific since the financial debacle of 2007-2008? This article discusses this highly topical question in a historical perspective, by considering previous changes in the balance of power in international finance and the role played by global financial in these changes. Particular attention is paid to the Baring Crisis of 1890, the American Panic of 1907, the financial crisis of July -August 1914, the banking crises of the Great Depression of the 1930s, the financial instability of the early 1970s and the ensuing banking failures, the International Debt Crisis of 1982, and the Japanese Banking Crisis of 1997-8. The article concludes that financial crisis, perhaps surprisingly, did not lead to clear changes in the balance of power in international finance; and that the financial debacle of 2007-8 is unlikely, in the medium-term, to fundamentally alter the current order.

Learning from Japan (European) Central Banking in Crisis

What shapes central banks’ learning from the policy experiments of their peers? Both economic ideas and organizational interests play important roles. Thus, New Keynesian ideas led central banks to interpret Japan’s experience with quantitative easing through the impact on risk spreads, although the Japanese central bank never intended such effects. In turn, scholars and policy-makers alike ignored one critical lesson: successful policy innovations depend on banks’ funding models. I argue that this was a crucial omission because the shift to market-based funding impairs the effectiveness of the traditional crisis toolkit. Central banks must intervene directly in asset markets of systemic importance for funding conditions, as the Bank of Japan did by buying government bonds. Hence, market-based finance engenders a trade-off between financial stability and institutional stability defined through central bank independence. During critical periods, central banks cannot preserve both. The ECB illustrates this trade-off well. Early in the crisis, it outsourced financial stability to a (largely) market-dependent banking system to protect its independence. With the introduction of Outright Monetary Transactions in September 2012, the Bank recognized that the market-based nature of European banking required outright purchases of sovereign bonds. This new instrument gave the ECB additional powers to shape national fiscal decisions in the name of an independence that no longer has theoretical justifications.

Analysis of the adequate size of a cord blood bank and comparison of HLA haplotype distributions between four populations

The number of units and especially the number of different HLA haplotypes present in a cord blood (CB) bank is a crucial determinant of its usefulness. We generated data relevant to the development of our national CB in Finland. The HLA haplotype distribution was examined between specific populations. We developed graphical ways of data presentation that enable easy visualization of differences. First, we estimated the optimal size of a CB bank for Finland and found that approximately 1700 units are needed to provide a 5/6 HLA-matched donor for 80% of Finnish patients. Secondly, we evaluated HLA haplotype distributions between four locations, Finland, Japan, Sweden and Belgium. Our results showed that the Japanese Tokyo Cord Blood Bank differs in both the frequency and distribution of haplotypes from the European banks. The European banks (Finnish Cord Blood Registry, The Swedish National Cord Blood Bank, and Marrow Donor Program-Belgium) have similar frequencies of common haplotypes, but 26% of the haplotypes in the Finnish CB bank are unique, which justifies the existence of a national bank. The tendency to a homogenous HLA haplotype distribution in banks underlines the need for targeting recruitment at the poorly represented minority populations.

Between Copper, Silver and Gold: Japanese Banks of Issue in Taiwan, Northeast China and Korea, 1879–1937

This article provides the first comparative overview in English of Japanese colonial banks before World War II with an emphasis on their roles as banks of issue in Taiwan, Korea and Northeast China. It discusses at length similarities and differences in these banks’ note circulation patterns, in their note-reserve requirements and their actual application, and in their geographical spread and respective colonial mandates. There was some variation in Japanese bank note issuance in the colonial setting of Korea and Taiwan, in ‘Manchukuo’ and in those parts of China that remained nominally sovereign. But all Japanese colonial banks seem, in one way or another, to have astutely adjusted the spread of their note issue in order to control for flagging demand due to nationalist boycotts, or to conversely cash in on demand spurts for notes resulting from crises in the indigenous financial sector. The banks of issue under review here were theoretically subject to a 100 per cent reserve requirement, but the make-up of their metallic bullion reserve and the degree of their notes’ convertibility were very dissimilar, reflecting varying local conditions. Both in terms of reserve ratios, and note denominations—the banks prudently followed charter obligations that were devised by the Japanese Treasury but, at the same time, were reminiscent of the obligations that British overseas banks also had to abide by. Thus, the findings discussed here shed light on the inception and adaptability of Japanese colonial policy in the lead-up to the Pacific War.

Capital injection, restructuring targets and personnel management: The case of Japanese regional banks

A case study of the Japanese bank recapitalization by Hoshi and Kashyap (2005) identified a bank that overstated the progress of required personnel downsizing by shifting employees to subsidiaries. This paper asks if the recapitalization program had a design flaw. We focus on regional banks with a unique panel dataset of 81 banking groups that allows us to observe the employment levels of subsidiaries, in addition to those of parent banks, over fiscal 1994–2006. We estimate a labor-demand equation with sluggish adjustment to compare the employment patterns of public capital recipients and other banks. The result indicates that the shuffling of personnel to subsidiaries was a common response among banks that received large capital injections. Our finding highlights a tension between a reconstruction program and labor law when a country has a tight law on dismissal.

The Impact of IRB Approach on the Credit Risk Exposure Under Basel II

This paper empirically investigates the impact of internal ratings-based (IRB) approach on the risk weight under Basel II. Assuming increasing cost of raising new capital when the requirement constraint is violated, this paper estimates the difference of unknown risk weight parameters between IRB and standardised approach, analyzes how Japanese banks adjusted the amount of risk-weighted assets, and calculates the saved amount of regulatory capital. Furthermore, this paper examines the competitive effect of optional IRB regime and calibrates the model to simulate the impact of more stringent capital requirement under Basel III.

Measuring the effect of postal saving privatization on the Japanese banking industry: Evidence from the 2005 general election

In this study, we empirically investigate the effect of the privatization of Japan's postal savings system, the world largest's financial institution, on the country's banking industry, focusing on the general election of the House of Representatives on September 11, 2005. Econometric results show that the privatization of the postal savings system significantly raises the wealth of mega banks but not that of regional banks. Furthermore, this privatization increases the risk to all categories of banks, and the banks that are dependent on personal loans increase their risk in response to the privatization of the postal savings system. These results suggest that incumbent private banks might seek new business or give loans to riskier customers that they had not served before the privatization to gear up for the entry of the Japan Post Bank (JPB) into the market for personal loans. Hence, privatization of the postal savings system boosts competition in the Japanese banking sector.

Cooperative bank efficiency in Japan: a parametric distance function analysis

This study examines the relative performance of Japanese cooperative banks between 1998 and 2009, explicitly modelling non-performing loans as an undesirable output. Three key findings emerge. First, the sector is characterized by increasing returns to scale which supports the ongoing amalgamation process within the sector. Second, although restricted in product offerings, markets and their membership base, Japanese cooperatives secured both technical progress (a positive shift in the frontier) and a decrease in technical inefficiency (distance from the frontier). Third, the analysis highlighted that regulatory pressure to reduce non-performing loans will have an adverse impact on both output and performance.

Efficiency improvement from multiple perspectives: An application to Japanese banking industry

The current study focuses on efficiency improvement for banking systems from multiple perspectives, which have different definitions of input/output about various attributes of a banking system. In this research we utilize data envelopment analysis (DEA) and Nash bargaining game (NBG) theory to improve inefficient banks in order to: (1) Make the inefficient bank be the state of Pareto Optimality for multiple perspectives, which can avoid discontentment of some perspectives. (2) Improve a bank by changing its attributes and provide various improving schemes for decision makers. A numerical case study of Japanese banks is also given to show the results of equilibrium solution from multiple perspectives.

Negative Impacts of Capital Injection Policies on the Capital Crunch: Evidence from Japan

This paper empirically investigates the effects of capital injections into Japanese banks, which were based on the Financial Function Stabilization Law and the Early Strengthening Law, on the capital crunch. Using financial panel data for all of the Japanese commercial banks, we estimate dynamic panel models which investigate the effects of capital injections on banks’ lending behaviour. We find a negative impact of capital injections on their lending behaviour. This finding is different from that of previous studies, which concluded that capital injections had positive effects. Though the capital injections were expected to free banks from capital regulatory constraint, Japanese banks that had received capital injections became more sensitive about their capital adequacy ratios, and reduced their loans; the exception was the domestic banks that received capital injection based on the Early Strengthening Law. The difference between success and failure has a lot to do with the frameworks of capital injection policies, suggesting that the manner of conducting capital injection policies and banking supervision is a very crucial matter.

Management Insights

Management Insights