Shin-ichi Fukuda

What role has the “Main Bank” played in Japan?☆

Abstract This paper investigates whether there has been risk-sharing between banks and borrowing companies through the main bank relationship in Japan. First, we evaluate the importance of risk-sharing by statistically examining the factors behind changes in main bank relationships. If the main bank relationship is based upon a mechanism of risk-sharing, changes in the relationship ought to be systematically related to changes in the risk that borrowing companies face. Second, we evaluate the importance of the main bank relationship as a means of risk-sharing by comparing the correlation between financial expenses and the operating profits of specific companies with the degree of their dependence on main banks. The first investigation indicates that growth by a company, the presence in its financial grouping of a large bank, and a history of past changes in its main bank, to differing extents all exert significant influence on changes in the main bank relationship. The main bank relationship in Japan does indeed have some empirical content. However, neither investigation supports the hypothesis of risk-sharing via the main bank relationship. J. Japan. Int. Econ., June 1988, 2(2), pp. 159180. Faculty of Economics, University of Tokyo, Bunkyo-ku, Tokyo 113,

Why Did ‘Zombie’ Firms Recover in Japan?

The Japanese economy experienced prolonged recessions during the 1990s. Previous studies suggest that evergreen lending to troubled firms known as ‘zombie firms’ distorted market discipline in terms of stabilising the economy and caused significant delays in its recovery. However, the eventual bankruptcy of zombies was rare. The purpose of this study is to investigate why zombie firms recovered in Japan. We first extend the method of Caballero et al. (2008) and identify zombies from among the listed firms. Subsequently, we investigate the nature of corporate restructuring that was effective in reviving zombie firms. Our multinomial logistic regressions suggest that reducing the employee strength of zombie firms and selling its fixed assets were beneficial in facilitating their recovery. However, corporate restructuring without accounting transparency or by discouraging incentives for managers was ineffective. In addition, corporate restructuring lacked effectiveness in the absence of favourable macroeconomic environment as well as substantial external financial support.

The emergence of equilibrium cycles in a monetary economy with a separable utility function

Abstract This paper analyzes the dynamic properties of the monetary economy when money held during the period induces some utility. It is shown that the price level and real money balances may have chaotic dynamic paths even if the utility function is separable in real money balances and consumption. A crucial point is that a constraint on the utility of money yields the wealth effect that inflation will reduce the real value of assets. Hence, as in the overlapping generations model, the conflict between substitution and wealth effects may cause globally stable periodic orbits as well as the complicated dynamics.

International transmission of monetary and fiscal policy: A symmetric N-country analysis with union

This paper analyzes the effects of monetary and fiscal expansion on the multiple economies in a Dornbusch model and a Yaari-Blanchard model. Unlike previous literature, the paper incorporates union and explicitly solves the N-country models. The effects of monetary and fiscal expansion outside the union are quite similar to the previous results based on the two-country models. However, the effects of expansion inside the union induce a different dynamic path after the policy changes. Furthermore, the number of union members changes the fluctuations of various endogenous variables.

Market-specific and currency-specific risk during the global financial crisis: Evidence from the interbank markets in Tokyo and London

This paper explores how international money markets reflected credit and liquidity risks during the global financial crisis. After matching the currency denomination, we investigate how the Tokyo Interbank Offered Rate (TIBOR) was synchronized with the London Interbank Offered Rate (LIBOR) denominated in the US dollar and the Japanese yen. Regardless of the currency denomination, TIBOR was highly synchronized with LIBOR in tranquil periods. However, the interbank rates showed substantial deviations in turbulent periods. We find remarkable asymmetric responses in reflecting market-specific and currency-specific risks during the crisis. The regression results suggest that counter-party credit risk increased the difference across the markets, while liquidity risk caused the difference across the currency denominations. They also support the view that a shortage of US dollar as liquidity distorted the international money markets during the crisis. We find that coordinated central bank liquidity provisions were useful in reducing liquidity risk in the US dollar transactions. But their effectiveness was asymmetric across the markets.

Why Did ?Zombie? Firms Recover in Japan?

The Japanese economy experienced prolonged recessions during the 1990s. Previous studies suggest that evergreen lending to troubled firms known as ‘zombie firms’ distorted market discipline in terms of stabilising the economy and caused significant delays in its recovery. However, the eventual bankruptcy of zombies was rare. The purpose of this study is to investigate why zombie firms recovered in Japan. We first extend the method of Caballero et al. (2008) and identify zombies from among the listed firms. Subsequently, we investigate the nature of corporate restructuring that was effective in reviving zombie firms. Our multinomial logistic regressions suggest that reducing the employee strength of zombie firms and selling its fixed assets were beneficial in facilitating their recovery. However, corporate restructuring without accounting transparency or by discouraging incentives for managers was ineffective. In addition, corporate restructuring lacked effectiveness in the absence of favourable macroeconomic environment as well as substantial external financial support.

Deteriorating Bank Health and Lending in Japan: Evidence from Unlisted Companies under Financial Distress

Abstract When a borrower faces a hold-up problem, deteriorating bank health might reduce a borrowers credit availability. However, a bank with an impaired balance-sheet might attempt to ‘gamble for resurrection’ and hence might increase risky lending to zombie firms. The purpose of this paper is to investigate what impacts weakened financial conditions of banks had on loans outstanding to medium size firms in Japan. Estimating lending functions, we examine the determinants of lending to unlisted Japanese companies in the late 1990s and the early 2000s. We find that two alternative measures of the bank health, regulatory capital adequacy ratios and ratios of non-performing loans (NPLs), had opposite impacts on lending. In the case of regulatory capital adequacy ratios, its deterioration had a perverse impact on the banks lending. The deteriorating NPL ratios, however, increased lending to troubled firms to keep otherwise economically bankrupt firms alive.

Macroeconomic impacts of foreign exchange reserve accumulation: Theory and international evidence

Recently, a dramatic accumulation in foreign exchange reserves has been widely observed in developing countries. This paper explores the possible long-run impacts of this trend on macroeconomic variables in developing countries. We analyze a simple open economy model where increased foreign exchange reserves reduce the costs of liquidity risk. Given the amount of foreign exchange reserves, utility-maximizing representative agents decide consumption, capital stock, and labor input, as well as the amounts of liquid and illiquid external debt. The equilibrium values of these variables depend on the amount of foreign exchange reserves. A rise in foreign exchange reserves increases both liquid and total debt, while shortening debt maturity. To the extent that interest rates of foreign exchange reserves are low, an increase in foreign reserves also leads to a permanent decline in consumption. However, when the tradable sector is capital intensive, the increase may enhance investment and economic growth. We provide empirical support for our theoretical analysis using panel data from the Penn World Table. The cross-country evidence shows that an increase in foreign exchange reserves raises external debt outstanding and shortens debt maturity. The results also imply that increased foreign exchange reserves may lead to a decline in consumption, but can also enhance investment and economic growth. The positive impact on economic growth, however, disappears when we control the impact through investment.

Some international evidence on inventory fluctuations

Abstract This paper shows some international evidence that production is more variable than sales in most developed countries but the reverse is true in most developing countries. From international perspectives, cost shocks do not appear to be the predominant source of fluctuations in inventories, contrary to the widely accepted evidence in the postwar United States Demand shocks and serial correlations in demand, on the other hand, appear to be of roughly equal importance for inventory fluctuations.

Nontraditional Financial Policies

This study examines how nontraditional financial policies were implemented in Japan from the late 1990s to the early 2000s by looking at the differences between the zero interest rate policy and quantitative easing policy. During this time, the Bank of Japan adopted an unprecedented ultra-low interest rate policy. Orthodox financial policies had become ineffective because of the liquidity trap. However, under increasing instability in the financial markets, this radical financial policy proved to be somewhat effective as a credit-easing measure. In this analysis, I focus on the fact that a difference between the high and low daytime call rates (the spread) emerges as a reflection of the risk premium, and I examine how that spread differed during the zero interest rate period and the quantitative easing period. Not only did the ultra-low interest rate policy cause the short-term interest target rate to approach 0 percent, but it was also somewhat effective at reducing the size of the spread in the call market. However, the quantitative easing policy caused further significant reductions in the call rate spread, virtually removing the risk premium from call market transactions. Thus, it is very possible that Japans radical financial policies, including its quantitative easing measures, reduced liquidity risk and credit risk in the market, and ultimately contributed to the performance of the overall economy by easing access to credit. At the same time, however, radical financial policies create a moral hazard for financial institutions, which are supposed to be weeded out through market mechanisms. During the period of quantitative easing, the institutions that added the most to their excess reserves as a ratio of their total funds were foreign banks, as they were able to procure yen funds under the highly advantageous condition of negative interest. In reality, financial institutions on the verge of bankruptcy also increased their liquidity. On the other hand, the Lombard-style lending that was implemented in the early years of the 2000s generally fell out of use once the quantitative easing policy was strengthened. These super-loose monetary policies, in spite of their side effects, seem to have played an important role as macroprudential policies.