Amakudari as a signal: possible malfunctioning of the amakudari practice under the limited deposit insurance system

Abstract

We analyse the amakudari practice in Japan focussing on the banking industry where officials from the regulatory authority obtain post-retirement jobs in private banks. A theoretical model is developed to investigate a new role that amakudari might play following the introduction of limited deposit insurance in 2005. It is generally expected that changing deposit insurance from full to limited will discipline Japanese banks' risk-taking behaviour because depositors will start monitoring their banks. However, our game-theoretic analysis suggests the possibility that this disciplinary effect could be reversed by the new role that amakudari may play. We assume that depositors are unsure about banks' riskiness and infer their riskiness from observing whether or not they hire amakudari officials, i.e. these amakudari officials play a crucial role as a signal to depositors. This signal, however, might malfunction. We show that, in order to create more post-retirement employment opportunities for their officials, the regulatory authority may weaken prudential regulation. Ironically and unexpectedly, the introduction of limited deposit insurance may make the whole banking industry riskier.

Keywords:

• amakudari
• signalling
• Japanese banking system

Akihito Asano received his PhD in economics from the Australian National University with his thesis ‘Inequality and economic growth’. He is currently Lecturer in the School of Economics at the Australian National University and teaches microeconomic theory for graduate students and introductory mathematical economics for first-year undergraduate students. He may be contacted at [email protected].

Takaharu Eto received his PhD in economics from the Australian National University with his thesis ‘The Ministry of Finance and the financial crisis in Japan’. He taught microeconomics for graduate students in the University of Auckland and is currently Research Associate in the Australia-Japan Research Centre at the Australian National University. He may be contacted at [email protected]

Notes

1. The term amakudari corresponds approximately to the term ‘revolving door’ in the United States.

2. By the time this article is published, the change will have occurred, but it is unlikely that the full effect of it, as discussed in this paper, will be apparent.

3. See Mukaidani et al. (1994).

4. See Horiuchi and Shimizu (2001).

5. See Schaede (1995) and van Rixtel (2002) for the details.

6. We will come back to this point in the final section of the article.

7. Shinkin banks are credit associations organised in a membership structure.

8. Jūsen is a class of financial institutions, originally specialising in housing loans, which was set up by city banks in the early 1970s. Faced by a slowdown in lending to blue chip firms in the 1980s, city banks themselves started providing housing loans at lower mortgage rates than jūsen companies. Consequently, jūsen companies gradually shifted their business to supply funds for risky investments such as in real estate. The bad loans in jūsen companies reached unmanageable amounts in the years following the asset price bubble burst at the beginning of 1990. The MOF desperately attempted to rescue the jūsen companies. At first, the MOF secretly sought a solution to the problem with the assistance of city banks, but eventually had to inject taxpayers' money into the rescue plan. The following embarrassing facts emerged during the discussion over the rescue plan in the Diet. With only one exception, the presidents of the jūsen companies were all retired MOF bureaucrats. In addition, amakudari officials from the MOF occupied a considerable number of managerial positions.

9. Nakaso (2001) contains the details of the evolution of the Japanese banking system.

10. For the general reader in the social sciences, we use a simple example to illustrate the main point. A rigorous theoretical analysis of a more formal economic model is available from the authors upon request.

11. In economics, we say that banks have ‘private’ information. In such a case, depositors and banks are said to have ‘asymmetric’ information.

12. Again we have used this specific case in order to highlight the main point. However, as we discussed previously, there is no consensus as to the productivity of amakudari officials, and we are aware that it is important to check all the other possible cases. The results for the remaining cases are available in a more technical paper by the authors, which is available upon request.

13. The jūsen problem illustrates this point.