Line Essays: Finance and Consciousness Reform

November 30, 1997 - From the Line Essays, Basel, Switzerland Report

Essays

To begin with, I would like to clarify that the following essays are my personal observations and do not represent the views of my employer, the Bank for International Settlements.

Everyone would agree that the deterioration of the situation surrounding Japanese financial institutions since November 1997 has been extremely severe.
With the collapse of major banks and securities firms—events that occur perhaps once every 70 to 80 years—many must have felt as though the very foundations of Japan's financial system were shaking.

So, why did this situation come about?
Where do the causes lie? What will happen to Japanese financial institutions from here on out?
It is no wonder that everyone is feeling anxious.

To start with the conclusion, while I must view the future with extreme caution, I am fundamentally optimistic.
Once the dust settles, I do not believe Japan's future is hopeless. Moreover, I hope that is the case.

The direct trigger was likely the aftereffects of the bubble economy of the late 1980s hitting companies and financial institutions head-on in the 1990s, leading to a worsening earnings environment and an accumulation of bad assets.
This happened in many other countries as well, but the reason the situation in Japan became particularly bad is likely due to the complex entanglement of the 'herd mentality' peculiar to Japanese people and corporate employees, ambiguous corporate accounting principles, lack of thorough disclosure, the arbitrariness of regulatory authorities, and an attitude of postponing problems.

'If we all cross at a red light, we have nothing to fear.'
In the late 1980s, many financial institutions likely rushed into rapidly increasing real estate lending, providing benefits to sokaiya (corporate racketeers), and compensating large investors for losses, even while knowing it was somewhat dangerous, simply because others were doing it too.
In Japan, where religion does not act as a restraint, those who went against such trends were likely viewed as unwelcome within their companies.
Those who clearly said 'no' to these trends must have had to give up on their promotions within their companies.

As many acknowledge, the accounting and bookkeeping of Japanese companies and banks remain quite arbitrary.
For example, the classification of a bank's bad assets is not clearly defined in a way that anyone can objectively categorize 99 percent of them; there is a significant portion left to the assessment of banking regulatory authorities.
This has made it difficult to make the management of companies and financial institutions transparent, and has hindered external checks.
Regulatory authorities, out of consideration for fiscal revenue and other factors, have also always avoided facing difficulties by postponing problems.

Has this ambiguity and lack of transparency that has permeated the Japanese economy and society not made solving problems difficult, and encouraged political indecision and the arbitrary postponement of problems by bureaucrats?
When they still had some strength left, there were likely banks and securities firms that would rescue other financial institutions at the urging of regulatory authorities.
Seeing their own ratings being rapidly downgraded due to such rescues, it is natural that they came to think it is only logical to put their own house in order rather than save others.

The concentration of major financial institution failures in the autumn of 1997 was likely because this postponement of problems had reached its limit.
Financial institutions that can no longer raise funds in the market cannot continue their operations.
The market will likely proceed with weeding out the weak.
If left alone from here on, it is clear that this process will continue through market forces until the supply and demand for financial services are balanced.
In other words, the number of financial institutions may decrease until there are too few, to the point where consumers feel inconvenienced.
If that is not to their liking, the public will be forced to choose whether to move the government to inject public funds or take other paths to rescue them.

Even so, for a long time, Japanese financial institutions have been soaking in a lukewarm bath, neglecting to hone their own strengths.
They asked for competition to be restricted, and the government offices protected them with blind obedience.
It is truly an ironic phenomenon that even before the Big Bang began, just the mention of it has led to a succession of financial institution failures.
In Japan, depositors and investors do not think for themselves, instead relying on the assumption that the state will protect their deposits, and financial institutions expect the state to restrict foreign entry into Japan; this is not an environment where robust, muscular management can grow.
If they only think about who to assign as the MOF (Ministry of Finance) liaison, or how to give preferential treatment to sokaiya and large investors, then in the cutthroat, international financial battlefield, the outcome is decided before they even step onto the field.

When I returned to Tokyo this spring, everyone was seriously debating whether the Tokyo financial market should adopt the so-called 'Wimbledon tennis method' (where the local British side rarely wins, and only the Germans and Americans win), or the 'J-League soccer method' (where there are quotas for foreigners), so that foreign financial institutions could operate freely and on equal terms.
I was somewhat astonished to hear this, wondering if this was really a topic for people who advocate for FREE, FAIR, and GLOBAL, but without waiting for the conclusion, the direction was indicated by market forces.
The financial institutions that had been loudly demanding protection are disappearing one by one due to bankruptcy.

I know many Japanese dealers and executives who are active in non-Japanese financial institutions outside of Japan.
I have also seen many Japanese-affiliated financial institutions that are tenaciously generating profits outside of Japan.
Even if the weak Japanese financial institutions are largely weeded out in Japan, it is a fact that these battle-hardened 'black-eyed foreigners,' along with the blue-eyed foreigners, are keeping a close eye on the Japanese market.
They have lived by global standards.
They must be watching with intense interest for the timing when the Tokyo market will accept all foreigners on equal terms.

There is a person named Akio Kuroda, a friend of mine who is a professor at Meiji University.
He once told a story about 'Japanese chickens and Southeast Asian chickens.'
Japanese chickens just walk around on the ground because there is no danger and they are fed, whereas the same chickens in the tropical rainforests of Southeast Asia must always be on guard against wild animals and secure their own food, so they fly high from tree to tree.

Those who have been coddled by protection cannot survive in this harsh international competitive society.
In the automotive and electronics industries, Japanese companies have been exposed to fierce competition for a long time and have survived it.
I hope there are no financial institutions in Japan that have spent money on unnecessary things, sucked up to government offices, and only sought protection.
It should be clear to everyone that such financial institutions will not be able to survive in this era of international upheaval where rough waves are crashing in, and will immediately face difficulties.
This will likely soon be the same for domestic financial management as it is abroad.
I can see some Japanese financial institutions that are robust and preparing to spread their wings toward the blue sky in the future.
The reason I am optimistic about the future is precisely because I have high expectations for these financial institutions.

Reflections of an Elderly Programmer

I remember hearing the term 'Financial Big Bang' frequently at the time.
I recall the posters for Prime Minister Hashimoto's 'Fireball Reform.'
It was a period of drastic change, with banks merging one after another, and some even going bankrupt.
A classmate who joined Taiyo Bank was at Sumitomo Mitsui when he retired.

Being in the IT field, it felt like someone else's problem, something that had nothing to do with me.
At that time, although I had questions about what money was, I didn't know anything more and did nothing.

A few years later, I ended up in charge of electronic money payments, and my interest in 'what is money' deepened; I never imagined I would end up explaining money in front of people.
Now, I understand that the lack of understanding and misunderstandings about money and finance by the policymakers of that time were what caused the subsequent stagnation of Japan, known as the 'Lost 30 Years'.

Supplement

The article above is a reprint of the "Line Essays (Yukio Iura)" from around 1997.
At the time, Mr. Iura posted the posthumous work of the chief priest of my hometown, "Mother's Cooking", on the web, and it is now published by the priest's son.
I remembered the kindness I received back then and decided to reprint it.

One day, the table of contents for "Line Essays" suddenly started appearing in search results.
However, the links to the articles from there are broken.
This might be the reason why it hadn't appeared in searches until now.
Therefore, I will continue the reprinting work as I have been doing.

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