Financial Big Bang will take place soon

On April 1, the revised Foreign Exchange Control Laws will take effect, and the drastic financial liberalization will take place. However, Japan is still in the midst of the handling of unfair practices which have been taken by the Ministry of Finance (MOF) and the financial sector, in particular, securities firms.

Since elite officials who had supervised the financial industry at the front line were arrested, all the other MOF officials are now worried about who would be the next to be arrested.

Japanese private financial institutions have already different level of competitiveness although the Financial Big Bang has not taken place yet.

For example, major banks such as Tokyo Mitsubishi Bank, Sakura Bank, Fuji Bank and Sanwa Bank have already created their strategies for survival after the Financial Big Bang and they are just waiting for the implementation of strategies. These banks are doing research on electric commerce which would be implemented after the Financial Big Bang.

However, other financial institutions such as small and medium-sized institutions or institutions with weak global competitiveness are left behind the trend of the financial liberalization.

On the other hand, politicians in Nagatacho are having a hard time troubled by such issues as the stabilization of the financial system, economic recovery, expansion of domestic market which is requested by the United States.

Japanese Business System; The Reality of the "Corporate Japan" relying on banks

In order to understand changes which will occur after the Financial Big Bang in Japan, we have to take a strucutual approach. Let us explain the central roles played by banks in the Japanese business system.

The Japanese government decided to inject about 30 trillion yen in order to stabilize financial system. The reason why the government, which is shocked by bankruptcies of financial institutions, made the policy judgement to support financial institutions which are troubled by non-performing loans in order to prevent further bankruptcies can not be simply explained by the government's paternalism or consideration toward financial institutions.

We have to understand the unique and indispensable relationship between companies and banks in Japan.

We have to also understand that there are structural reasons for the excessive dependency on MOF regarding the financial administration regardless of overseas criticism for Goso-sendan Ho-shiki, a system under which the MOF protects financial institutions in Japan.

First of all, unlike foreign companies, Japanese companies have low net worth and high borrowed capital. In other words, Japanese banks have a lot of borrowings from banks and financial institutions, thereby creating the system where the intervention and control of financial institutions are strong. Further, the Bank of Japan, a central bank of Japan, and the MOF, by controlling public funds, assume influential role over financial institutions.

Therefore, there is a hierarchy where the MOF and the Bank of Japan stand on the top, and below them banks and financial institutions stand, and companies stand at the bottom. In this system, public funds play a central role, and who invests on whom is clearly structured.

To put this simply, in the Japanese business system, banks are in a position to indirectly control companies. In this system, it is natural that authorities of banks become strong over companies.

Then, what would happen if financial institutions were stagnated? By chain reactions, companies which have a business relationship with a troubled financial institution, are cornered.

Even if the Hashimoto government does not manage macro economics, they are aware of this unique Japanese system. Therefore, they injected public funds in order to maintain this system at their all efforts even in sacrifice of the financial revenue restructure.

The Range of Policy Options

Then, what kind of macro economic policies will the government present?
Where shall we pay our attention in order to observe the Japanese policies?

First, we should understand the government budget. The fund to be applied for the redemption of deficit covering bonds was increased by 18% due to the large scale issuance of deficit covering bonds. Therefore, the fund available for policy implementations were now limited and there are not enough fund to be used freely.

In addition, due to the appreciation of the yen, Japanese exports have increased, creating large trade surplus against the United States. For this reasons, the United States are pushing Japan to expand its domestic market and the Japanese government is forced to take such measures which both expand a domestic market and boost economy.

In addition, since most of the Japanese companies' fiscal years end on March 31, the government needs to boost the economy in order to prevent bankruptcies of small and medium-sized companies.

Altogether, the government, the ruling party are in a difficult situation.

Currently, even among the government, some people is opposing to ineffective public investments focusing on public works as a means to budget expenditures.

Hiromu Nonaka, Deputy Secretary General, Taku Yamazaki, Chairman of Policy Affairs Research Council of LDP have announced the injection of public funds in the amount of 10 trillion yen to social infrastructure plans focusing on information and environment.

However, it would be difficult for them to put major construction companies into an even more difficult position because these companies are the major supporters of the ruling LDP. Therefore, they have no option but to make public investment on major construction companies as they have done up until today.