Beneath the Finance–Growth Nexus: The Case of Japan’s Post-World War II Commercial Banking

ABSTRACT

For most of the post-World War II period, Japan’s finance–growth nexus did not benefit greatly from the information-producing and monitoring activities of commercial banks. This contradicts the famous Main Bank thesis. Regulations on direct finance and competitive restrictions on banking effectively liberated the banks from having to develop their informational activities. These institutional factors also enabled the banks to extract regulatory and informational rents from client companies. Bank regulators were motivated to stick to the status quo without reforming such commercial banks. On an aggregate basis over the period 1965–96, corporate profitability negatively correlated with bank loan dependency, and liquidity constraints impacted on corporate finance.

KEYWORDS:

• Finance–growth nexus
• bank-based financial system
• information production and monitoring
• rent extraction
• Japanese Main Banks

Acknowledgements

The author is grateful for comments made by an anonymous referee of this journal. The opinions expressed in this article are those of the author alone and do not reflect those of the Bank of Japan, the Organisation of Economic Co-operation and Development, or its member countries. All remaining errors are attributable to the author. Lastly, the author dedicates this article to his wife, Akiko.

The author declares that he discharges his ethical responsibilities applicable to the Journal of Comparative Asian Development. The author also declares that he has no conflict of interest.

Notes

¹La Porta, Lopez-de-Silanes, Shleifer, and Vishny (1998) argue that laws and enforcement mechanisms are a more effective way to distinguish financial systems than the dichotomy of markets and banks. Additionally, Levine (2002) stresses that the level and quality of financial services do matter for economic growth, and that the dichotomy of markets and banks is less relevant to financial development because the two can be complementary in their services. Tadesse (2002) and Deidda and Fattouh (2008) show contrary evidence for this financial services view.

²Not all economists have surrendered in the face of those difficulties. Hassan, Sanchez, and Yu (2011) cope with the second difficulty using a panel data analysis for 168 low- and middle-income countries over the period 1980–2007. Love and Zicchino (2006) cope with the second and last difficulties using a panel-data vector autoregression analysis of 36 countries with over 7000 firms over the period 1988–98.

³Slight changes were due to either mergers of existing banks, separations of existing banks, or conversions of existing banks to another type. One exception was the Nippon Credit Bank, established as a new long-term credit bank in 1957.

⁴For instance, the percentage share of loans to the mining and coal industries in the Reconstruction Finance Bank's loans was 74.6 percent in fiscal year 1948 (Okazaki & Ueda, 1995).

⁵This bank was reorganized as a long-term credit bank in 1952.

⁶Commissions paid by corporate bond issuers to their trustee banks in 1965, 1970, and 1975 were 8.6 billion yen, 14.4 billion yen, and 28.1 billion yen, respectively. By summing up the three numbers and dividing the sum by three, this article obtains the average of the commissions in the period from 1966 to 1977: that is, 17.0 billion yen. Then, by multiplying this with 12, we have the 204.4 billion yen mentioned in the main text.

⁷The number of branches and small business offices of the City Banks was 1821, 1791, 2409, 2724, and 3474 in 1955, 1960, 1970, 1980, and 1990, respectively. For the first-tier Regional Banks the figures were 3702, 3822, 4335, 5675, and 7548 in the same years, respectively. For long-term credit banks they were 15, 22, 34, 54, and 74, respectively , and for trust banks 118, 166, 262, 316, and 389, respectively. All of these figures are taken from Ito (1995, Table 6.2).

⁸The criteria are the ratio of current costs to current revenues, the ratio of the real and moveable property to the capital account, the ratio of loans to deposits, the ratio of capital and allowance accounts to deposits, the ratio of current assets to deposits, and the ratio of loans to a single borrower to capital and allowance accounts.

⁹When the firms were keiretsu firms, a rational action by their MBs would be to encourage the keiretsu firms to finance more risky projects by issuing new stocks in order to share risks with new shareholders, and such an overinvestment problem might have been aggravated as loanable funds accumulated and reduced the MB cutoff level for acceptable projects (Wu & Yao, 2012).

¹⁰To be specific, borrowing accounted for 43 percent of listed firms’ fund raising on an average over the period 1971–75, and this percentage share decreased to 21 percent, 12 percent, and 3 percent over the periods 1976–80, 1981–85, and 1986–90, respectively. Behind this trend, the percentage share of internal funds increased from 34 percent over the period 1971–75 to 61 percent over the period 1981–85, and the percentage share of direct finance, or corporate bonds and equity, increased from 11 percent over the period 1971–75, to 22 percent over the period 1981–85, and to 35 percent over the period 1986–90.

¹¹The number of companies eligible to issue unsecured convertible bonds increased from 2 to 25 in January, to 97 in April 1983, and reached 175 by the end of 1985. These figures are taken from Matsuo (1999, p. 75). The two companies originally eligible were Matsushita Electric Industrial (now Panasonic Corporation) and Toyota Motor Corporation, both of which are currently global companies that did not originate from zaibatsu. The former issued unsecured convertible bonds of 20 billion yen for the first time after World War II.

¹²The number of companies eligible to issue unsecured straight bonds increased from 2 to 16 in April 1983 and reached 57 by the end of 1985. These figures are taken from Matsuo (1999, p. 75). The two companies originally eligible were those mentioned above.

¹³For manageability, the current author employs this simplified computation method, following Yazdanfar (2013).

¹⁴There are three clear differences amongst the LEs, the MEs, and the SEs. One is that the LEs' ROA was considerably larger than other groups' ROAs in the 1980s. The second difference is that the LEs' CASH increased rapidly in the late 1980s. The third difference is that BFR was on a mild downward trend for the LEs whilst it was on a clear upward trend for the MEs and the SEs. The last difference is that COA had been on a rapid upward trend for the LEs from the mid-1970s whilst it had been on a mild upward trend for the MEs and the SEs.

¹⁵The order of lags is one. This is chosen by AIC.

¹⁶The order of lags is one. This is chosen by AIC.

¹⁷Appendix 3 calculates VIFs for three groups of firms and shows that all VIFs are too small to cause multicollinearity.

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Kei-Ichiro Inaba

Kei-Ichiro Inaba is a senior economist at the Bank of Japan, currently on loan to Organisation for Economic Co-operation and Development. He obtained his PhD in economics from the University of London and the Bachelor of Economics from the University of Tokyo. His research interests include banking and finance, monetary policy, and Japanese financial system.