Japanese financial system
Encyclopedia
The main elements of Japan's financial system are much the same as those of other major industrialized nations: a commercial bank
ing system, which accepted deposit
s, extended loan
s to business
es, and dealt in foreign exchange
; specialized government-owned financial institutions, which funded various sectors of the domestic economy
; securities
companies, which provided brokerage services, underwrote corporate and government securities, and dealt in securities markets; capital market
s, which offered the means to finance public and private debt and to sell residual corporate ownership; and money markets, which offered banks a source of liquidity and provided the Bank of Japan
with a tool to implement monetary policy
.
banks (seven), trust banks
(seven), mutual loan and savings banks (sixty-nine), and various specialized financial institutions. During the 1980s, a rapidly growing group of nonbank operations—such as consumer loan, credit card
, leasing
, and real estate
organizations—began performing some of the traditional functions of banks, such as the issuing of loans.
In the early postwar financial system, city banks provided short-term loans to major domestic corporations while regional banks took deposits and extended loans to medium-sized and small businesses. Neither engaged much in international business. In the 1950s and 1960s, a specialized bank, the Bank of Tokyo, took care of most of the government's foreign-exchange needs and functioned as the nation's foreign-banking representative. Long-term credit banks were intended to complement rather than to compete with the commercial banks. Authorized to issue debentures rather than take ordinary deposits, they specialized in long-term lending to major kaisha, or corporations. Trust banks were authorized to conduct retail and trust banking and often combined the work of commercial and long-term credit banks. Trust banks not only managed portfolios but also raised funds through the sale of negotiable loan trust certificates. Mutual loan and savings banks, credit associations, credit cooperatives, and labor credit associations collected individual deposits from general depositors. These deposits were then loaned to cooperative
members and to the liquidity-starved city banks via the interbank money markets or were sent to central cooperative banks, which in turn loaned the funds to small businesses and corporations. More than 8,000 agricultural, forestry, and fishery cooperatives performed many of the same functions for the cooperatives. Many of their funds were transmitted to their central bank, the Norinchukin Bank
, which was the world's largest bank in terms of domestic deposits.
In 1990, the five largest banks in the world, measured by total assets, were Japanese banks. These banks opened branches abroad, acquired existing foreign banks, and became engaged in new activities, such as underwriting Euro-yen bond issues. The investment houses also increased overseas activities, especially participating in the United States Treasury bond market (where as much as 25 to 30 % of each new issue was purchased by Japanese investors in the late 1980s).
As of March 1989, the five largest city banks in Japan (in order of total fund volume) were Dai-Ichi Kangyo Bank
, Sumitomo Bank, Fuji Bank
, Mitsubishi Bank, and Sanwa Bank.
(JEXIM), the Japan Development Bank, and a number of finance corporations, such as the Housing Loan Corporation, promoted the growth of specialized sectors of the domestic economy. These institutions derived their funding from deposits collected by the postal savings
system and deposited with the Trust Fund Bureau. The postal savings system, through the 24,000 post offices, accepted funds in various forms, including savings, annuities, and insurance. The post offices offered the highest interest rates for regular savings accounts (8 % for time deposits in 1990) and tax-free savings until 1988, thereby collecting more deposits and accounts than any other institution in the world.
The Japan Bank for International Cooperation
(JBIC) is the only government institution with an international focus. This bank provides financing for trade between Japan and developing countries, performing the function of export-import banks run by governments in other countries (including the United States), although its participation is possibly greater.
, Daiwa
, Nikko
, and Yamaichi
. The Big Four played a key role in international financial transactions and were members of the New York Stock Exchange
. Nomura was the world's largest single securities firm; its net capital, in excess of US$10 billion in 1986, exceeded that of Merrill Lynch
, Salomon Brothers
, and Shearson Lehman combined. In 1986, Nomura became the first Japanese member of the London Stock Exchange
. Nomura and Daiwa were primary dealers in the United States treasury bond market. The second tier of securities firms contained ten medium-sized firms. The third tier consisted of all the smaller securities firms registered in Japan. Many of these smaller firms were affiliates of the Big Four, while some were affiliated with banks. In 1986 eighty-three of the smaller firms were members of the Tokyo Securities and Stock Exchange
. Japan's securities firms derived most of their income from brokerage fees, equity
and bond trading, underwriting
, and dealing. Other services included the administration of trusts. In the late 1980s, a number of foreign securities firms, including Salomon Brothers and Merrill Lynch, became players in Japan's financial world.
Japanese insurance companies became important leaders in international finance in the late 1980s. More than 90% of the population owned life insurance and the amount held per person was at least 50% greater than in the United States. Many Japanese used insurance companies as savings vehicles. Insurance companies' assets grew at a rate of more than 20 % per year in the late 1980s, reaching nearly US$694 billion in 1988. The life insurance companies moved heavily into foreign investments as deregulation allowed them to do so and as their resources increased through the spread of fully funded pension funds. These assets permitted the companies to become major players in international money markets. Nippon Life Insurance Company
, the world's largest insurance firm, was reportedly the biggest single holder of United States Treasury securities in 1989.
Two developments in the late 1980s helped in the rapid expansion of the Tokyo Securities and Stock Exchange. The first was a change in the financing of company operations. Traditionally large firms obtained funding through bank loans rather than capital markets, but in the late 1980s they began to rely more on direct financing. The second development came in 1986 when the Tokyo exchange permitted non-Japanese brokerage firms to become members for the first time. By 1988 the exchange had sixteen foreign members. The Tokyo Securities and Stock Exchange had 124 member companies in 1990. In 1990, five types of securities were traded on the Tokyo exchange: stocks, bonds, investment trusts, rights, and warrants alone.
Japan's stock market dealings exploded in the 1980s, with increased trading volume and rapidly rising stock prices. The trading recorded by the Nikkei 225
stock average, compiled by the Nihon Keizai Shimbun
(Japan Economic Daily), grew from 6,850 in October 1982 to nearly 39,000 in early 1990. During one six-month period in 1986, total trade volume on the Tokyo exchange increased by 250% with wild swings in the Nikkei. After the plunge of the New York Stock Exchange in October 1987, the Tokyo average dropped by 15%, but there was a sharp recovery by early 1988. This was the height of the Japanese asset price bubble
, which collapsed in the year 1990, and was followed by the lost decade
.
Bank
A bank is a financial institution that serves as a financial intermediary. The term "bank" may refer to one of several related types of entities:...
ing system, which accepted deposit
Deposit account
A deposit account is a current account, savings account, or other type of bank account, at a banking institution that allows money to be deposited and withdrawn by the account holder. These transactions are recorded on the bank's books, and the resulting balance is recorded as a liability for the...
s, extended loan
Loan
A loan is a type of debt. Like all debt instruments, a loan entails the redistribution of financial assets over time, between the lender and the borrower....
s to business
Business
A business is an organization engaged in the trade of goods, services, or both to consumers. Businesses are predominant in capitalist economies, where most of them are privately owned and administered to earn profit to increase the wealth of their owners. Businesses may also be not-for-profit...
es, and dealt in foreign exchange
Foreign exchange market
The foreign exchange market is a global, worldwide decentralized financial market for trading currencies. Financial centers around the world function as anchors of trading between a wide range of different types of buyers and sellers around the clock, with the exception of weekends...
; specialized government-owned financial institutions, which funded various sectors of the domestic economy
Economy of Japan
The economy of Japan, a free market economy, is the third largest in the world after the United States and the People's Republic of China, and ahead of Germany at 4th...
; securities
Security (finance)
A security is generally a fungible, negotiable financial instrument representing financial value. Securities are broadly categorized into:* debt securities ,* equity securities, e.g., common stocks; and,...
companies, which provided brokerage services, underwrote corporate and government securities, and dealt in securities markets; capital market
Capital market
A capital market is a market for securities , where business enterprises and governments can raise long-term funds. It is defined as a market in which money is provided for periods longer than a year, as the raising of short-term funds takes place on other markets...
s, which offered the means to finance public and private debt and to sell residual corporate ownership; and money markets, which offered banks a source of liquidity and provided the Bank of Japan
Bank of Japan
is the central bank of Japan. The Bank is often called for short. It has its headquarters in Chuo, Tokyo.-History:Like most modern Japanese institutions, the Bank of Japan was founded after the Meiji Restoration...
with a tool to implement monetary policy
Monetary and fiscal policy of Japan
Monetary policy pertains to the regulatio, availability, and cost of credit, while fiscal policy deals with government expenditures, taxes, and debt...
.
Banks
Japan's traditional banking system was segmented into clearly defined components in the late 1980s: commercial banks (thirteen major and sixty-four smaller regional banks), long-term creditCredit (finance)
Credit is the trust which allows one party to provide resources to another party where that second party does not reimburse the first party immediately , but instead arranges either to repay or return those resources at a later date. The resources provided may be financial Credit is the trust...
banks (seven), trust banks
Trust company
A trust company is a corporation, especially a commercial bank, organized to perform the fiduciary of trusts and agencies. It is normally owned by one of three types of structures: an independent partnership, a bank, or a law firm, each of which specializes in being a trustee of various kinds of...
(seven), mutual loan and savings banks (sixty-nine), and various specialized financial institutions. During the 1980s, a rapidly growing group of nonbank operations—such as consumer loan, credit card
Credit card
A credit card is a small plastic card issued to users as a system of payment. It allows its holder to buy goods and services based on the holder's promise to pay for these goods and services...
, leasing
Leasing
Leasing is a process by which a firm can obtain the use of a certain fixed assets for which it must pay a series of contractual, periodic, tax deductible payments....
, and real estate
Real estate
In general use, esp. North American, 'real estate' is taken to mean "Property consisting of land and the buildings on it, along with its natural resources such as crops, minerals, or water; immovable property of this nature; an interest vested in this; an item of real property; buildings or...
organizations—began performing some of the traditional functions of banks, such as the issuing of loans.
In the early postwar financial system, city banks provided short-term loans to major domestic corporations while regional banks took deposits and extended loans to medium-sized and small businesses. Neither engaged much in international business. In the 1950s and 1960s, a specialized bank, the Bank of Tokyo, took care of most of the government's foreign-exchange needs and functioned as the nation's foreign-banking representative. Long-term credit banks were intended to complement rather than to compete with the commercial banks. Authorized to issue debentures rather than take ordinary deposits, they specialized in long-term lending to major kaisha, or corporations. Trust banks were authorized to conduct retail and trust banking and often combined the work of commercial and long-term credit banks. Trust banks not only managed portfolios but also raised funds through the sale of negotiable loan trust certificates. Mutual loan and savings banks, credit associations, credit cooperatives, and labor credit associations collected individual deposits from general depositors. These deposits were then loaned to cooperative
Cooperative
A cooperative is a business organization owned and operated by a group of individuals for their mutual benefit...
members and to the liquidity-starved city banks via the interbank money markets or were sent to central cooperative banks, which in turn loaned the funds to small businesses and corporations. More than 8,000 agricultural, forestry, and fishery cooperatives performed many of the same functions for the cooperatives. Many of their funds were transmitted to their central bank, the Norinchukin Bank
Norinchukin Bank
The Norinchukin Bank is a Japanese cooperative bank serving over 5612 agricultural, fishing and forestry cooperatives from its headquarters in Tokyo. Its members include cooperative federations such as the Japan Agricultural Cooperatives and the Japan Fishery Cooperatives...
, which was the world's largest bank in terms of domestic deposits.
In 1990, the five largest banks in the world, measured by total assets, were Japanese banks. These banks opened branches abroad, acquired existing foreign banks, and became engaged in new activities, such as underwriting Euro-yen bond issues. The investment houses also increased overseas activities, especially participating in the United States Treasury bond market (where as much as 25 to 30 % of each new issue was purchased by Japanese investors in the late 1980s).
As of March 1989, the five largest city banks in Japan (in order of total fund volume) were Dai-Ichi Kangyo Bank
Dai-Ichi Kangyo Bank
The , abbreviated as , was one of the largest banks in the world during the latter half of the 20th century. It combined with Fuji Bank and the Industrial Bank of Japan in 2000 to form Mizuho Financial Group....
, Sumitomo Bank, Fuji Bank
Fuji Bank
The was one of Japan's major banks during the post-World War II era. It combined with Dai-Ichi Kangyo Bank and the Industrial Bank of Japan in 2000 to form Mizuho Financial Group, and changed its name to Mizuho Corporate Bank in 2002 after transferring its retail banking operations to Mizuho...
, Mitsubishi Bank, and Sanwa Bank.
Government institutions
A group of government financial institutions paralleled the private banking sector. The Japan Export-Import BankJapan Bank for International Cooperation
The , also known by its acronym, JBIC, is a Japanese public financial institution and export credit agency, and was created on October 1, 1999, through the merging of the Japan Export-Import Bank and the Overseas Economic Cooperation Fund ....
(JEXIM), the Japan Development Bank, and a number of finance corporations, such as the Housing Loan Corporation, promoted the growth of specialized sectors of the domestic economy. These institutions derived their funding from deposits collected by the postal savings
Japan Post
was a government-owned corporation in Japan, that existed from 2003–2007, offering postal and package delivery services, banking services, and life insurance. It had over 400,000 employees and ran 24,700 post offices throughout Japan and was the nation's largest employer. One third of all Japanese...
system and deposited with the Trust Fund Bureau. The postal savings system, through the 24,000 post offices, accepted funds in various forms, including savings, annuities, and insurance. The post offices offered the highest interest rates for regular savings accounts (8 % for time deposits in 1990) and tax-free savings until 1988, thereby collecting more deposits and accounts than any other institution in the world.
The Japan Bank for International Cooperation
Japan Bank for International Cooperation
The , also known by its acronym, JBIC, is a Japanese public financial institution and export credit agency, and was created on October 1, 1999, through the merging of the Japan Export-Import Bank and the Overseas Economic Cooperation Fund ....
(JBIC) is the only government institution with an international focus. This bank provides financing for trade between Japan and developing countries, performing the function of export-import banks run by governments in other countries (including the United States), although its participation is possibly greater.
Securities
Japan's securities markets increased their volume of dealings rapidly during the late 1980s, led by Japan's rapidly expanding securities firms. There were three categories of securities companies in Japan, the first consisting of the "Big Four" securities houses (among the six largest such firms in the world): NomuraNomura Securities Co.
is a wholly owned subsidiary of Nomura Holdings, Inc. , which forms part of the Nomura Group. It plays a central role in the securities business, the Group's core business. Nomura is a financial services group and global investment bank. Based in Tokyo and with regional headquarters in Hong Kong,...
, Daiwa
Daiwa Securities Group
is Japan's second largest securities brokerage after Nomura Securities Co..Major group members include Daiwa Securities Co.Ltd., which offers retail services such as online trading to individual investors and Daiwa Securities Capital Markets Co.Ltd...
, Nikko
Nikko Cordial
was a third largest Japanese brokerage firm and the holding company for Nikko Cordial Securities and subsidiaries. In 2008, Nikko Cordial Corporation became a wholly owned subsidiary of Citigroup Inc., upon completion of share exchange and it merged with Citigroup Japan Holdings Ltd. to form Nikko...
, and Yamaichi
Yamaichi Securities
was a Japanese securities trading firm. The company announced it would cease operations on November 24, 1997 and was declared bankrupt by the Tokyo District Court on June 2, 1999.- History :...
. The Big Four played a key role in international financial transactions and were members of the New York Stock Exchange
New York Stock Exchange
The New York Stock Exchange is a stock exchange located at 11 Wall Street in Lower Manhattan, New York City, USA. It is by far the world's largest stock exchange by market capitalization of its listed companies at 13.39 trillion as of Dec 2010...
. Nomura was the world's largest single securities firm; its net capital, in excess of US$10 billion in 1986, exceeded that of Merrill Lynch
Merrill Lynch
Merrill Lynch is the wealth management division of Bank of America. With over 15,000 financial advisors and $2.2 trillion in client assets it is the world's largest brokerage. Formerly known as Merrill Lynch & Co., Inc., prior to 2009 the firm was publicly owned and traded on the New York...
, Salomon Brothers
Salomon Brothers
Salomon Brothers was a bulge bracket, Wall Street investment bank. Founded in 1910 by three brothers along with a clerk named Ben Levy, it remained a partnership until the early 1980s, when it was acquired by the commodity trading firm Phibro Corporation and then became Salomon Inc. Eventually...
, and Shearson Lehman combined. In 1986, Nomura became the first Japanese member of the London Stock Exchange
London Stock Exchange
The London Stock Exchange is a stock exchange located in the City of London within the United Kingdom. , the Exchange had a market capitalisation of US$3.7495 trillion, making it the fourth-largest stock exchange in the world by this measurement...
. Nomura and Daiwa were primary dealers in the United States treasury bond market. The second tier of securities firms contained ten medium-sized firms. The third tier consisted of all the smaller securities firms registered in Japan. Many of these smaller firms were affiliates of the Big Four, while some were affiliated with banks. In 1986 eighty-three of the smaller firms were members of the Tokyo Securities and Stock Exchange
Tokyo Stock Exchange
The , called or TSE for short, is located in Tokyo, Japan and is the third largest stock exchange in the world by aggregate market capitalization of its listed companies...
. Japan's securities firms derived most of their income from brokerage fees, equity
Stock
The capital stock of a business entity represents the original capital paid into or invested in the business by its founders. It serves as a security for the creditors of a business since it cannot be withdrawn to the detriment of the creditors...
and bond trading, underwriting
Underwriting
Underwriting refers to the process that a large financial service provider uses to assess the eligibility of a customer to receive their products . The name derives from the Lloyd's of London insurance market...
, and dealing. Other services included the administration of trusts. In the late 1980s, a number of foreign securities firms, including Salomon Brothers and Merrill Lynch, became players in Japan's financial world.
Japanese insurance companies became important leaders in international finance in the late 1980s. More than 90% of the population owned life insurance and the amount held per person was at least 50% greater than in the United States. Many Japanese used insurance companies as savings vehicles. Insurance companies' assets grew at a rate of more than 20 % per year in the late 1980s, reaching nearly US$694 billion in 1988. The life insurance companies moved heavily into foreign investments as deregulation allowed them to do so and as their resources increased through the spread of fully funded pension funds. These assets permitted the companies to become major players in international money markets. Nippon Life Insurance Company
Nippon Life Insurance Company
, also known as or is the second largest Japanese life insurance company behind Japan Post Insurance Co., Ltd. The company was founded in 1889 as the Nippon Life Assurance Co., Inc. In structure it is a mutual company...
, the world's largest insurance firm, was reportedly the biggest single holder of United States Treasury securities in 1989.
Stock Exchange
The Tokyo Securities and Stock Exchange became the largest in the world in 1988, in terms of the combined market value of outstanding shares and capitalization, while the Osaka Stock Exchange ranked third after those of Tokyo and New York. Although there are eight stock exchanges in Japan, the Tokyo Securities and Stock Exchange represented 83 % of the nation's total equity in 1988. Of the 1,848 publicly traded domestic companies in Japan at the end of 1986, about 80 % were listed on the Tokyo Securities and Stock Exchange.Two developments in the late 1980s helped in the rapid expansion of the Tokyo Securities and Stock Exchange. The first was a change in the financing of company operations. Traditionally large firms obtained funding through bank loans rather than capital markets, but in the late 1980s they began to rely more on direct financing. The second development came in 1986 when the Tokyo exchange permitted non-Japanese brokerage firms to become members for the first time. By 1988 the exchange had sixteen foreign members. The Tokyo Securities and Stock Exchange had 124 member companies in 1990. In 1990, five types of securities were traded on the Tokyo exchange: stocks, bonds, investment trusts, rights, and warrants alone.
Japan's stock market dealings exploded in the 1980s, with increased trading volume and rapidly rising stock prices. The trading recorded by the Nikkei 225
Nikkei 225
The , more commonly called the Nikkei, the Nikkei index, or the Nikkei Stock Average , is a stock market index for the Tokyo Stock Exchange . It has been calculated daily by the Nihon Keizai Shimbun newspaper since 1950. It is a price-weighted average , and the components are reviewed once a year...
stock average, compiled by the Nihon Keizai Shimbun
Nihon Keizai Shimbun
is one of the largest media corporations in Japan. Nikkei specializes in publishing financial, business and industry news. Its main news publications include:* Nihon Keizai Shimbun , a leading economic newspaper....
(Japan Economic Daily), grew from 6,850 in October 1982 to nearly 39,000 in early 1990. During one six-month period in 1986, total trade volume on the Tokyo exchange increased by 250% with wild swings in the Nikkei. After the plunge of the New York Stock Exchange in October 1987, the Tokyo average dropped by 15%, but there was a sharp recovery by early 1988. This was the height of the Japanese asset price bubble
Japanese asset price bubble
The was an economic bubble in Japan from 1986 to 1991, in which real estate and stock prices were greatly inflated. The bubble's collapse lasted for more than a decade with stock prices initially bottoming in 2003, although they would descend even further amidst the global crisis in 2008. The...
, which collapsed in the year 1990, and was followed by the lost decade
Lost Decade (Japan)
The is the time after the Japanese asset price bubble's collapse within the Japanese economy, which occurred gradually rather than catastrophically...
.