Sapienza Università di Roma

1. Sapienza Università di Roma International Banking Lecture Twelve Banking in Japan Prof. G. Vento

2. Agenda • Introduction to Banking in the United States • Structure of the Banking and Financial System in the US • Key issues of US Banking Industry • Banking Regulation in the US Internaional Banking - Prof. G. Vento

3. Introduction to Banking in Japan • Japan has a bank-based financial system • Banking system has traditionally played a more important role than the stock market • Wide array of different types of banks • The largest public bank is the Postal Savings Bank • Major financial crisis in 1997-98 • Wide range of reforms during the 90s. Internaional Banking - Prof. G. Vento

4. Structure of Japanese Banking System • The Japanese banking system has experienced difficult times in recent years as a consequence of the downturn in the domestic economy. • Property prices / bad debts generated the crisis in 1997 – 98. • Both public and private financial institutions Internaional Banking - Prof. G. Vento

5. Bank Structure in Japan • Keiretsu system • A Keiretsu is a group of companies with cross-shareholdings and shared directorships which normally include a bank, trust company, insurance firm and a major industrial concern (i.e. cars, steel) • The bank supplies services to the other keiretsu members, including loans • The Ministry of Finance (MoF) was the key regulator through three bureaux: Banking, Securities and International Finance Internaional Banking - Prof. G. Vento

6. Bank Regulation in Japan • MoF’s responsibilities included all aspects of financial institution supervision: examination of financial firms, control of interest rates and products, supervision of the deposit protection scheme, setting the rules on activities to be undertaken by financial firms • Bank of Japan was responsible for the implementation of monetary policy, but under the influence of MoF • High protected market • Japanese companies largely dependant on banks’ loans Internaional Banking - Prof. G. Vento

7. Japan’s Big Bang (1996) • 1989: crash of Japan stock market • Big Bang based on: - end of functional segmentation; integration of banking, insurance & securities; liberalisation of financial products and prices; no restriction to short/long-term operations; commission liberalised; disclosure - restoring financial stability through Financial Supervisory Agency and Financial Reconstruction Commission, merged in 2001 in the Financial Services Agency - more transparent rules Internaional Banking - Prof. G. Vento

8. Private deposit-taking institutions • City banks. The city banks are the largest banks in the Japanese banking system and account for over 50% of total banking sector assets. • They are commercial banks that offer a full range of banking services. • Regional banks. Focused on retail financial services and SMEs. • The majority of regional banks are publicly quoted Internaional Banking - Prof. G. Vento

9. Private deposit-taking institutions • Trust banks and long-term credit banks. • Trust banks perform commercial banking activity but their main function is asset management for retail and other customers. Japanese households place funds to these banks, which they invest on clients’ behalf. • Long-term credit banks provide medium- and long- term finance to the corporate sector. • Cooperative banks. They play a major role in the Japanese banking system. Internaional Banking - Prof. G. Vento

10. Private non-deposit-taking institutions and public financial institutions • Private non-deposit-taking institutions. They include a wide variety of securities, insurance and other firms. • public financial institutions. They perform a significant role in financial system. • Post Office has over 24,000 branches. Japan’s postal saving system is the world’s largest financial institutions in terms of deposits. • Development banks. They direct lend to certain sectors. Internaional Banking - Prof. G. Vento

11. Balance sheet features and performance • Between 1996 and 2005 bank lending portfolios have declined by around 30% reflecting the lack of demand and the increasing number of bad loans that had to be written off. • The decline in lending and the increase in liquid assets is an indication of the weak state of the domestic economy. • Also deposit decreased. • ROE values are very low by international standards, mostly because bad loans Internaional Banking - Prof. G. Vento

12. Banking crisis in the 90s in Japan • Excessive lending (portfolio concentration). • Negative impact of asset price deflation • Policy failure to contain problem

13. Banking industry in Japan: Recent trends • According to the latest estimates, Japan recorded a sharp expansion in GDP in the fourth quarter (3.8 per cent on an annual basis, against a contraction of 0.6 per cent in the third quarter), thanks mainly to the robust increase of 22 per cent in exports. • Private consumption performed well again, growing by 2.8 per cent thanks partly to a series of incentives for purchases of durable goods. Non-residential private investment returned to growth after a year and a half, expanding by 3.8 per cent, while residential investment declined sharply again, contracting by 12.5 per cent. • The latest cyclical indicators offer contradictory signals regarding the strength of the current recovery. Internaional Banking - Prof. G. Vento

14. Banking industry in Japan: Recent trends • The deflationary trend shows no sign of receding. The rate of decline in consumer prices moderated from 1.7 per cent in December to 1.1 per cent in February, but excluding food and energy prices it remained basically unchanged at 1.1 per cent. • According to the forecasts of the private analysts surveyed by Consensus Economics, deflation will continue in 2010 at an average annual rate of 1.1 per cent. The Bank of Japan has held its monetary policy reference rate unchanged at 0.1 per cent. • In order to foster a fall in long-term interest rates, in mid-March it decided to double to ¥20 trillion (about 4 per cent of GDP) the amount of liquidity that will be provided to the market by means of three-month guaranteed loans under the facility introduced in December. Internaional Banking - Prof. G. Vento

15. Next Lecture: BANKING IN UK Internaional Banking - Prof. G. Vento