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Lecture Note A1: Hot News on Jpns Financial Institutions

1. IMPORTANT: See Table: Highlights of yen_dollar exchange rate and Jpn economy; Credit expansion and crunch (1970q1 - present).
2. <<10/18/98>> In USA: Hedge funds borrowed a huge amount of funds from banks (to invest in risky assets)
   A decline in the US stock prices
   => Astronomical loss from holding risky assets
   => Bad loans in US banks
   => Credit crunch: Worst (in US) in the post-war period
   => less new investment by mfg firms
3. <<10/18/98>> In USA:
   Zero new stock issuing for about a month since late August; the same abnormality occurred 28 years ago.
4. <<1998>> Banks' High Reluctance to Lend ("credit crunch" or, in Jpns, "Kashi-shiburi"): Banks are highly reluctant to lend to firms today.
   1. <<9/21/98>> Jpns firms in Asia are also faced with the same problem: Not only Jpns banks but local banks (in Asia) are reluctant to lend.
   2. "Kashi-shiburi" most likely necessitates unintended changes in the corporate strategy, including terminating entirely a particular project or business in a particular nation (either Jpn or a foreign nation).
   3. Why are the Jpns banks so reluctant to lend? See next.
   4. Major Jpns banks hold a large number of the so-called cross-held shares.
      [For "intragroup cross-shareholding," see Mgmt Style by Function: Finance and Accounting/Auditing.]
      • The recent fall in the stock prices did, thus, bring about the fall in the latent profit or paper profit ("fukumi eki" in Jpns) from holding such stocks for some banks and the rise in the latent loss or paper loss ("fukumi son" in Jpns) for other banks.
        [For "latent profit" or "latent loss," their plots (for banks) and "latent profit-based management", see Mgmt Style by Function: Finance and Accounting/Auditing.]
      • <<10/17/98>> The weight of the stocks in the assets held is 0.8% for CityBank in the U.S. and as large as about 7% for some Jpns big bank. Thus the following vicious cycle most likely occurs:
        *To make up for the "extraordinary" loss from holding stocks, the Jpns banks continued to SELL the stocks
        => a further decline in the Jpns stock prices
        =>(i) the banks' smaller "Fukumi (latent) profit" from holding stocks, and (ii) credit crunch
        =>*
5. <<8/31/98>> Major Jpns bank stock prices, such as Sakura Bank shares, fell sharply on 8/28/98.
6. New stock issuing by banks:
   1. See financial statements for "equity capital" as against "debt capital."
      • The new stock issuing leads to the higher ratio of the stockholders' equity to total capital, which is desirable for the better corporate capital structure.
        • In the balance sheet, Debit (left side) = Credit (right side): Total Asset = Total Capital [= Debt capital (borrowing and bond) + Stockholders' Equity　Capital]
   2. <<8/31, 9/9/98>> On 8/31/98 Sakura Bank announced the new stock issuing of about 300 billion yen to raise funds (from the Mitui Keiretu member firms).
      • Like most other banks in Jpn, Sakura Bank is suffering from the heavy burnden of "bad loans," which necessitates a financial support from outside the bank.
      • Being a "main" bank for the Mitui Keiretu, Sakura Bank asked the Mitui Keiretu member firms for help purchasing the new stock issues. [For the Mitui Keiretu and the Mitui Keiretu member firms, see Six Horizontal Keiretsu; The Heart of the Horizontal Keiretsu (Bankers and Traders) and Member firms of Six Horizontal Keiretsu .]
      • << 9/9/98>> Toyota, a member of the Mitui Keiretu, announces its plan to purchase new stocks of about 150 billion yen. Toyota may become a largest stockholder ("hittou kabunushi" in Jpns) of Sakura Bank.
   3. <<9/11/98>> On 9/11/98 Fuji Bank announced its plan to issue the new stock of about 200 billion yen to raise funds (from the Fuyo Keiretu member firms), and to reduce the number of overseas operations by half in the next three years. [For the Fuyo Keiretu and the Fuyo Keiretu member firms, see Six Horizontal Keiretsu; The Heart of the Horizontal Keiretsu (Bankers and Traders) and Member firms of Six Horizontal Keiretsu .]
7. Business link-up among Jpns banks and securities companies, which is to show the stock market that they are serious in attempting to improve their business performance:
   1. See international financial link-up diagram as of 10/2/98. [Source: Asahi N.P., morning edition, 9/29/98, 10/3/98]
      • 1980s-1990s: large banks merged; the resultant conglomerates are Sakuran Bank, Asahi Bank, and Tokyo-Mitubishi Bank.
      • They, however, found out later that the cost of merging was much higher than they had thought. This has led today to link-up (instead of merging), which is less costly and may be more effective and efficient to improve their business performance in a short period of time.
   2. Further reasons for business lin-up:
      • Banks without sufficient managerial control and power are now faced with the risk of being disregarded by the stock market. The shares of the banks are today sold sufficiently that their prices are falling rapidly. This is indeed a sign that the traditional system of mutual aid through cross-holding shares among the Keiretu member firms is about to collapse.
      • Banks cannot any longer anticipate a public help from the government.
   3. Note that, while relying on one another for help like this, Jpns financial institutions are responsible for disclosing the stock market the exact amount of bad loans and their proposals for solution. Have they done this yet?? ---NO!
   4. <<5/1998>> Nomura Securities and Industrial Bank of Japan started their business link-up.
   5. <<9/11/98>> On 9/11/98 Tokyo-Mitubishi Bank, Mitubishi Trust Bank, Tokyo Marine and Fire Insurance, and Meiji Life Insurance, announced the business link-up in the securities and the investment trust business in order to reinforce their business strategy for investment trust in particular.
      • These are four major firms in the Mitubishi Keiretu. [For the Mitubishi Keiretu and the Mitubishi Keiretu member firms, see Six Horizontal Keiretsu; The Heart of the Horizontal Keiretsu (Bankers and Traders) and Member firms of Six Horizontal Keiretsu .]
   6. <<9/28/98>> On 9/28/98 Tokai Bank and Asahi Bank, neither of which belongs to any particular Keiretu, announced the comprehensive business link-up.
   7. <<9/30/98>> On 9/30/98 Dai-Ichi Kangyo Bank and JP Morgan announced the comprehensive business link-up focusing on the mutual fund.
   8. <<10/2/98>> On 10/2/98 Industrial Bank of Japan and Dai-Ichi Life Insurance, neither of which belongs to any particular Keiretu, announced the strategic business link-up with respect to every businesses area.
   9. Suggested strategies for recovery from the post-bubble managerial hardships: Successful strategies implemented by US banks.

      US banks: successful examples

      Jpns banks

      CityCorp; Chasemanhattan. 1990: US banks were faced with the same problem that Jpns banks are today. Early enough disposal of bad loans (unlikely to be repaid) Cutting down the scale of manpower Complete disposal of affiliates and subsidiaries not profitable enough in and out US Focusing on the business with respect to which the bank has held a comparative advantage over other banks Disclosing the stockholders the two-year plan for regaining their profitability Equity capital being increased through new stock issuing (that is effected by the short-term plan disclosed) [See financial statements for "equity capital" as against "debt capital."]

      "Intragroup cross-shareholding": Holding today shares of banks not serious enough and too slow to dispose bad loans most likely degrade the quality or ranking of other firms (even like Toyota, NTT, Panasonic, Sharp, etc) holding these shares,. [For "intragroup cross-shareholding," see Mgmt Style by Function: Finance and Accounting/Auditing.] => Bank shares sold => Bank share prices fell => Stock prices in Tokyo Stock Exchange fell. The Jpns banks take their time to dispose bad loans. Manpower has been cut down to a mimimum possible extent. Disposal of affiliates and subsidiaries in and out Jpn was not aggressive enough and only incomplete. Recent counter-case: <<10/1/98>> Fuji Bank announced its plan to shut down half of its 62 major business offices abroad during FY1999 (4/1999-3/2000). Jpns banks have failed to focus on the business where they have been comparatively advantageous. Recent counter-case: <<10/18/98>> Sumitomo Bank announced its plan in which its local branches will specialize in individuals, not dealing with corporate entities. This is a three-year plan starting next April. New stock was issued only to a limited extent (for disposing bad loans): Exceptions may be only Sakura and Fuji banks; the link-up between Industrial Bank of Jpn and Dai-Ichi Life Insurance effects new stock issuing much smaller in size. In order to increase equity capital, Jpns banks should seek for investors in and out Jpn, like City Corp did so in Saudi Arabia.