Banking and Finance in Japan (RLE Banking & Finance)

An Introduction to the Tokyo Market

Kazuo Tatewaki

• Publisher: Routledge
• Year: 2012
• ISBN:
  9781136269066
• Edition: 1
• Topic: Economics
• Subtopic: Banks & Banking
• Index: Economics

The Tokyo market has often been a difficult financial environment for the non-Japanese to understand. This volume, written for an international readership provides a study of the financial centre behind one of the world's largest economies.

Part I

Financial structure and deregulation

Chapter one

Historical background

Formation of Japan's modern banking system, 1868-99

Japan's banking system was formed under the strong influence of the United States and Europe rather than on the basis of any tradition from feudal days. The new government of 1868 born out of the Meiji Restoration tried to establish its banking system by imitating the systems of western countries.

The government felt that a modern financial system was a prerequisite to Japan's development and transformation from a feudal state into a modern capitalist economy. The government introduced Japan's new decimal currency, the yen, in 1871. In the following year, the government enacted the National Bank Act which was a copy of the National Currency Act of 1864 in the United States. Private entrepreneurs created the First National Bank (Dai-ichi Kokuritsu Ginko) in 1873, and several other banks followed shortly thereafter. In 1882, the Bank of Japan (BOJ) was founded as Japan's central bank, modelled on the Banque Nationale de Belgique, which was at that time considered the modern version of the Bank of England. Under the Banking Act (Law No. 72 of 1890), the national banks lost their note-issuing function and were transformed into British-style commercial banks.

The government took another step towards founding savings banks by inaugurating the postal savings system in 1874. Private savings banks followed after. By 1880, Japan's financial system came to be organized on European lines with the BOJ at the apex of a financial structure based on the commercial banks and the savings banks. It was, however, difficult for voluntary savings alone to satisfy the enormous demand for capital generated by the desire to develop the economy in a short period of time. Hence the government had to assume the important role of promoting industrial growth. The result was the establishment of a number of government-supported ‘Specialized banks’: Yokohama Specie Bank (1880), Nippon Kangyo Bank (1897), Hokkaido Takushoku Bank (1900), the Bank of Taiwan (1900), the Industrial Bank of Japan (1902), and others.

Commercial banks also found it difficult to follow British practice too faithfully, being compelled to work as investment banks supplying long-term funds to industry. Thus long-term time deposits dominated deposits; in lending, loans were overwhelmingly more important than the discounting of bills. Reflecting the steady growth of the commercial banks, clearing houses were established in Osaka in 1879 and in Tokyo in 1887.

Development of the banking system before the Second World War, 1900-44

The number of commercial banks increased rapidly, reaching a peak of 1,867 banks in 1901. The collapse of small and unsound banks accounted for most of the subsequent decline; merger was a minor phenomenon and did not contribute significantly to the initial growth of Japan's big banks. Merger only became important during and after the depression years following the First World War, and particularly after the financial crisis of 1927. The minimum bank capital requirement of the Banking Law (Law No. 21 of 1927), which took effect in 1928, accelerated the process. The law disqualified more than half of 1,400 then existing banks.

Many banks preferred merger to liquidation, but there were few cases in which big banks participated in such mergers or amalgamations. The usual pattern was one of horizontal merger between regional, small- or middle-scale banks. The cause was the marked difference in the basic character of big urban banks from small rural banks. Even so, local merger improved the quality of banks in rural areas.

In 1942, with the expiry of its founding charter, the BOJ was reorganized along the same lines as the Reichsbank in Germany. Since reorganization took place during the Second World War, the new BOJ was destined to control currency, credit, and finance pursuant to government policy so that the general economic resources of the nation could be utilized adequately.

By 1936, the number of commercial banks had been reduced to 418. Bank mergers during the Second World War reduced the numbers further. By the end of the war, only sixty-four banks remained. The survivors consisted of eight major banks in metropolitan areas and generally one regional bank in each prefecture. The number of savings banks also declined. A legal amendment in 1943 allowing commercial banks to engage in savings banking concurrently proved devastating. As a result of such changes, only four savings banks remained by the end of the war in 1945.

Trust companies were founded one after another at the turn of the century. However, their character was not always distinct in the earlier periods as some of them deviated from genuine trust business. It was only after the promulgation of the Trust Law and the Trust Business Law (Law Nos 62 and 65 of 1922) that genuine trust companies came into existence and started to grow rapidly. The limited private assets and traditional family organization in Japan, however, handicapped their development. The bulk of trust funds were placed in an account called ‘money in trust’ which was virtually identical to bank deposits.

The Nippon Kangyo Bank and the agricultural and industrial banks (noko ginko) were set up to provide agricultural finance. Eventually, the Nippon Kangyo Bank absorbed the others through mergers. In addition, the financial activities of agricultural co-operatives gradually gained importance, being legally endorsed by the Industrial Co-operative Law (Law No. 34 of 1900) in 1900. In 1923, the Central Bank for Industrial Co-operatives (the predecessor of Norinchukin Bank) was established as the central body of the industrial co-operatives.

In the area of the financing of small businesses and petty loans to the public, Japan had for a long time had organizations for mutual financing called mujin or tanomoshiko. In 1915 the tanomoshiko were incorporated into the mujin companies. In addition, co-operative financing was no longer confined to agriculture alone, as urban credit cooperatives came to be established after 1917. In 1936, the Central Bank for Commercial and Industrial Co-operatives (Shokochukin Bank) was formed as an institution to finance the co-operatives of small enterprises.

The securities markets contributed little to development for many years since actual transactions were highly speculative. One major obstacle to the development of the securities markets was the fact that enterprises tended to belong to a group of companies or zaibatsu. The zaibatsu dominated the nation's economy and could rely on capital supply from within the group. Despite such hindrances, development of heavy industries and the growth of large enterprises during the First World War led to a slow expansion of securities markets.

Restructuring of the banking system after the Second World War, 1945-54

Drastic changes in the banking system

After the Second World War the Supreme Commander of the Allied Powers’ (SCAP) directives and instructions brought drastic changes to most Japanese institutional arrangements. Shortly after the end of the war, all the wartime financial institutions and colonial banks such as the Bank of Taiwan were closed. In 1950 all the specialized banks were converted into commercial banks. However, no revision was made to the Banking Law (Law No. 21 of 1927) and no drastic reforms touched banking itself. The role of commercial banks increased rather than declined because their credit creation was vital to business enterprises.

Probably the most important post-war reform affecting commercial banks was the revised Securities and Exchange Law (Law No. 25 of 1948). The law was modelled after the Glass-Steagall Act in the United States and prohibited commercial banks from underwriting securities except for public bonds. Thus underwriting business, which commercial banks had dominated before the war, was taken over by securities firms, boosting their importance in subsequent years.

In 1949, the BOJ was reorganized and the Policy Board was established, modelled on the Board of Governors of the Federal Reserve System in the United States. The Policy Board, comprising representatives of various sectors of the nation's economy, took over the responsibility for major decisions on monetary policy, including changes in discount rates. The reorganization strengthened the BOJ's powers.

The accelerated inflation after the war had a great impact on banking. Spiralling inflation strangled financial institutions engaged mainly in mobilizing long-term savings. The four remaining savings banks were converted to or merged with commercial banks. Trust companies were transformed into commercial banks concurrently engaging in trust business and renamed ‘trust banks’. The specialized banks established before the war were unable to maintain their status. Their conversion to commercial banks, therefore, was inevitable even without the 1950 reform.

The post-war inflation turned various other financial institutions as well into de facto banks relying on deposits. A reform of the financial institutions for small businesses followed in 1951. Small businesses were faced with depression and financial crisis resulting from the severe anti-inflationary measures of 1949-50. The 1951 reform made mujin companies convert into mutual banks (sogo ginko) and urban credit cooperatives into credit associations (shinyo kinko). These new institutions were allowed to offer current accounts and subsequently grew tremendously. Their total deposits grew faster than those of commercial banks.

The stabilization of the economy in 1949-50 enabled the trust banks, the insurance companies, and other organizations for long-term finance to recover. Two new financial instruments were introduced by the government to spur the growth of trust banks. These were the securities investment trust (1951) and the loan trust (1952). Loan trusts facilitated lending to important industries. When these new instruments proved to be a great success, the government decided as a matter of policy to guide trust banks towards greater emphasis on trust business and towards a reduced emphasis on banking activities.

The Long-term Credit Bank Law (Law No. 187 of 1952) was promulgated in 1952. The legislation was a response to the lack of an active market for long-term capital after the war. The long-term credit banks (LTCBs) were authorized to raise funds for long-term lending by issuing bonds. The Industrial Bank of Japan, a specialized bank in the pre-war days, was converted into a LTCB. The Long-term Credit Bank of Japan and the Nippon Fudosan Bank (currently the Nippon Credit Bank) were also founded under the law.

The Foreign Exchange Bank Law (Law No. 67 of 1954) established the Bank of Tokyo, successor to the Yokohama Specie Bank, as the specialized foreign exchange bank. However, the bank lost many of the privileges which its predecessor had enjoyed. In fact, today most major banks engage in foreign exchange business on an almost equal footing.

Government financial institutions

The Reconstruction Finance Bank (established 1947) engaged in construction finance after the Second World War by relying heavily on borrowings from the BOJ and contributed significantly to the post-war accelerating inflation. The institution ceased its operations in 1949. A number of the government financial institutions were established in subsequent years to ensure the supply of funds to sectors of the economy which private financial instit...

Table of contents

• Front Cover
• Half Title
• Title Page
• Copyright
• Title Page
• Copyright
• Dedication
• Contents
• List of tables and figures
• Preface
• Publisher’s acknowledgement
• Introduction
• Part I Financial structure and deregulation
• Part II Financial markets
• Part III Financial institutions
• Part IV Monetary authorities and monetary policy
• Future outlook
• Appendix 1 Chronology of financial deregulation
• Appendix 2 List of laws and decrees related to banking and finance
• Bibliography
• Index