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BANKING IN JAPAN.
Term Paper ID:24378
Essay Subject:
Effects of deregulation, organ banks, reform, securities, bubble economy, lending & interest rates, effects of merger between Tokyo & Mitsubishi banks, contingency planning.... More...
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Paper Abstract:
Effects of deregulation, organ banks, reform, securities, bubble economy, lending & interest rates, effects of merger between Tokyo & Mitsubishi banks, contingency planning.
Paper Introduction:
BANK OF TOKYO-MITSUBISHI BANK MERGER
I. INTRODUCTION.
A. Focus event.
B. Research purpose.
II. JAPANESE BANKING.
III. BANKING REFORM IN JAPAN.
A. Regulation.
B. Structure of banking.
C. Organ banks.
D. Deregulation.
IV. EFFECT OF THE “BUBBLE ECONOMY.”
A. Development.
B. Speculation.
C. Effects.
V. BANK LEN
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1-21). (1991). 84). III. Thornton, E., & Schlender, B. One of the first financial reforms was the introduction of secondarymarkets, which resulted in the end of absolute government control ofinterest rates in Japan (Frankel & Morgan, 1992, p. A. 584).Under compensating-balance arrangements, corporate borrowers maintaininterest-free or low-interest deposit accounts, either as a condition ofthe formal loan contract or to maintain a good relationship with theirbanks. Employeeempowerment: Solution to a burgeoning crisis? Centralized purchasing andsales organizations were used to foster markets. B. VI. Deregulation. Interest rates. VII. Morgan, J., & Pain, N. (199 , December). C. The organ banks possess inside information thatresults in the efficient evaluation of risk, and thus the efficientallocation of capital (Imai, 1992, p. Regulation. EFFECT OF THE "BUBBLE ECONOMY." A. For more than 3 years following the end of World War II, the Japanesefinancial system was highly regulated (Frankel & Morgan, 1992, p. Government intervention. Obviously, this is a process whichcould strangle strategy development, if effective use is not made of IStechnology. In 1993, however, further deregulation of Japan's financial systempermitted certain banks to underwrite securities, while securities housesare now allowed to enter the trust banking business, all through theirsubsidiaries (Hirsch, 1993, p. Economist, 32 (7717), 7 -71. The profitability of Japan's leading corporations and banks wasseverely deflated by the collapse of the bubble (Rowley, 1993, pp. NationalInstitute Economic Review, 26-55. 579).Japanese monetary authorities administratively determined all interestrates, including those on bank deposits and loans as well as coupon rateson government bonds and bank debentures. Organ banks. A1). T. In the contingency approach, a variety of possible scenarios aredeveloped, based on forecasted conditions, and contingent strategies aredeveloped for each probable scenario. R. Effects. (1991, 27 July). The entire strategic processwithin an organization is a set of highly interrelated components thatfunction within a dynamic environment. These provisions of the law werethe authorizations (1) for Japanese banks to borrow and lend foreigncurrencies freely (both at home and abroad), subject only to financialprudence guidelines, and (2) for Japanese corporate enterprises to financethemselves abroad through borrowing denominated in foreign currency. Impacts of organizational evolution onleadership roles and behaviors. 25),and the universal approach, which holds that certain laws of cumulativeexperience are almost universally observable. That cost, however, is minimal when compared to the savings thatmay be achieved through effective contingency planning. 39). B. Japanese investors are wary of thesecurities, land markets, and banks. 61). percent 1994 - 2.2 percent 1995 - 1.2 percent 1996 - .5 percent Long-Term Interest Rates: 1992 - 5.1 percent 1993 - 4. 59). Far Eastern Economic Review, 156(4), 42-43. CONTINGENCY PLANNING ASSESSMENT.VIII. Thistarget is far superior to the average 3 percent level attained by theinstitutions in the last year prior to the merger, but it is far lower thanthe 15-to-2 percent return on equity being earned by many large NorthAmerican and European banks (Sender, 1996, p. This research examines the factorsleading up to this event-the merger between the two banks. The clustering of Japanese companies around large banks permits thekeiretsu corporate groups to finance more than two-thirds of theirinvestments from within the keiretsu (Tseo & Ramos, 1995, p. Sender, H. (5th ed).Homewood, IL: Dow Jones-Irwin. The potentiallosses of these companies could generate a systemic failure within thebanking system. Research purpose. More effective contingency planning likely would haveeither forestalled the necessity of the merger or would have indicated thatthe merger should have occurred earlier. 84). 25). Scale. Half of anylosses on these remaining loans will be paid for from public funds. BANK OF TOKYO-MITSUBISHI BANK MERGER Introduction In mid-1996, the Bank of Tokyo and Mitsubishi Bank merged into asingle financial institution (Sender, 1996, p. The merged institutionis known as Bank of Tokyo-Mitsubishi. Japan's slump.Fortune, 126(14), 72-76. Acrossthe Board, 29(11), 58. There are some internal problems in the merged institution. (1995, September-October). Terazono, E. For large Japanesecorporate enterprises, the proportion of debt represented by financialvehicles (corporate bonds, convertibles, and so forth) floated in thesecurities markets rose to 3 percent by 199 . Airline Business, 56-58. The widespread use ofEnglish at former Bank of Tokyo facilities has become a sore point for thepersonnel of the former Mitsubishi Bank. Speculation. The effects of financial liberalization in Japan, however, have notall been as anticipated (French, 1992, p. Far Eastern EconomicReview, 159(4 ), 6 -61. Challenge, 38, 25-31. Banking deregulation in Japan also reduced the dependence by Japanesecorporate enterprises on trade credit (Frankel & Morgan, 1992, p. 84).Nevertheless, uncertainty lingers with foreign banks and companies doingbusiness with the merged institution. Such a department at an institution the size of the Bankof Tokyo-Mitsubishi may be expected to cost upwards of US$1,5 , annually. A major focus of the deregulation policy has been to improve theefficiency of Japanese corporate finance. The keiretsu also establishedinsurance and trust companies to mobilize financial resources for theirentrepreneurial ventures. Futureprofitability at the merged institution has been questioned because themerged bank's management has been unwilling to cut costs by dischargingemployees. Institutional Investor, 27, 27-28. Lynn, L. The different types of bankingfirms and other financial service firms were legally and administrativelyrestricted to a specified range of activities, and capital markets wererequired to operate under guidelines that included strict collateralrequirements for the issuance of corporate bonds. The new bank is the largest in theworld, with assets of US$726.8 billion. Strategic planning is a process that generates specific actions which arerequired to carry out a particular strategy. Focus event. Thesecompanies initially lent to finance house purchases and subsequentlyexpanded into the commercial real estate market in the 198 s, using fundsraised from loans from other financial institutions rather than fromprivate-sector deposits. The contingencyapproach to management, however, goes beyond the forecasting of conditions. Tokyo woes: Japan's airlines are relyingheavily on cheap preferential funding at home as they race to develop newfinancial sources. (1994, September 1). Structure of banking. (1992). The Ministry of Finance decision toallow the crossover between the two industries is coming under criticism,particularly from the securities sector. B. Failures of intermediate forms:A study of the Suzuki "zaibatsu." Organization Studies, 16, 55-8 . Far Eastern Economic Review,159(18), 84. Developers at bay. Hardy, Q. Major Japanese airlinecompanies, as an example, have been able to persuade the Ministry ofFinance to allow them to form foreign asset companies (referred to asforeign sales companies, or FSCs) that, in turn, are able to qualify forthe preferential rate financing offered by Japan's equivalent to the Export-Import Bank in the United States. McCabe, D. 3. do Rosario, L. Comparative data for the pre-merger banks, together with that for themerged institution, are as follows: Assets: Bank of Tokyo: (24,413 billion Mitsubishi Bank: (5 ,26 billion. Frankel, A. Whether the contingency approach or some other approach to managementis employed, strategy development is heavily dependent on environmentalconditions and on the strategic planning process (Gibbons, 1992, pp. Contingency Planning Assessment The contingency approach to management is designed to deal withuncertainties (McCabe, 199 , pp. The concept of corporate strategy. Simultaneously, JAL's use ofstraight bonds dropped from 25 percent to 15 percent of corporate debt,equity issues increased from 17 percent to 26 percent, and the use ofcommercial bank loans dropped from 54 percent to 33 percent. 581). Bank ofTokyo was a cosmopolitan institution, whereas the Mitsubishi Bank was amore formal institution (Sender, 1996, p. The morning after: Japanese firms countcost of investment binge. Both short-term and long-term interest rates have declined in Japan asfinancial deregulation has proceeded (Morgan & Pain, 1996, p. Thepotential cost of this commitment is estimated to be an additional (6 billion. At sea, Japan starts bailing. Operational integration. Thus, an orderly liquidation of the firms has been viewedas a prerequisite to restoring stability within the financial sector as awhole. (1992, November). Cultural andsocial dynamics. A. This approach was influenced by concerns about the adverseconsequences of bank entry on the competitive positions of the smallersecurities firms in Japan. Federal Reserve Bulletin, 78, 579-593. Eventually, the "bubble" burst in1991 following a four-year spiraling increase in asset prices. BANK OF TOKYO-MITSUBISHI BANK MERGER I. 73). (1996, May 2). B. Goldstein, K. D. Last, an assessment of thecontingency planning at the Bank of Tokyo is presented. (1993). The contingency approach is amiddle ground between the situation-specific approach to management, whichsees each strategic decision situation as unique (Andrews, 1991, p. The game changes. E. Operational data. Gibbons, P. The policy developments stemmedlargely from pressures external to the Japanese domestic banking sectoritself, such as the substantial increase in government debt as a result ofchanges in the flow of funds in Japan after the OPEC (Organization ofPetroleum Exporting Countries) oil shocks, increased competition ininternational financial markets, and a new emphasis on bank capitalmanagement. When necessary, bank managersare expected to discipline inefficient group-member firms by holding outthe threat of calling in the loans or even taking control of the troubledsub-unit. The bubble economy. V. Unfortunately, the managers of the major financial institutionsallowed themselves to be caught up in and to become a part of thespeculative boom in the Japanese economy in the late-198 s. References Andrews, K. Japanese banksand securities firms were given formal authority for a market-rate fundingmechanism for their bond purchases through the use of short-term repurchaseagreements. 585).The proportion of debt represented by trade credit dropped from 18 percentin 198 to 5 percent in 199 for Japanese firms. Asian Wall StreetJournal Weekly, 16(14), 24. INTRODUCTION. (1996, October 3). 58). A separate contingency planning department at the merged institutionshould be formed. Effects on banks. (1992, August). Bank Lending Activity in Japan Traditionally, Japanese banks have been able to raise effective loanyields above posted lending rates through a requirement for borrowers tomaintain compensating deposit balances (Frankel & Morgan, 1992, p. (1993, 17 June). As an example, thefinancial reform policies introduced by the Japanese government in 1992 didnot provide for the provision of stock brokerage services by Japanesebanks. Yen master. Tseo, G. In early-1993, as anexample the securities house Nomura managed a (1 billion bond issue forToshiba Corp. The Japan Fair Trade Commission reported that reliance oncompensating balance accounts for loans to small businesses declinedsteadily throughout the 198 s (subsequent to the initiation of bankingreform in Japan), from 45 percent of bank loan contracts in 198 to 26percent of bank loan contracts in 199 . 27). Strategic forecasting is the cornerstone in acontingency approach. 29). (1994, April 4). Chandler, C. R. Small business were defined asthose firms with less than (1 million in capital, which account for 7 percent of total lending by the larger Japanese banks designated as "citybanks." During this same period, the share of city bank loans made tolarge Japanese corporate enterprises-those with more than (1 million incapital-declined 5 percent of the total lending by these banks to 3 percent. Because of the hangover from the bursting of the bubble, Japan'seconomy and Japan's banks face a major battle to emerge from the slump(Thornton & Schlender, 1992, pp. D. 84). D. As a consequence, a "bubble"developed in relation to asset prices-land, securities, and practicallyeverything else (Terazono, 1994, p. Financial liberalization policies in Japan have been balanced in anattempt to minimize the costs for any one sector of the financial system.These loss-sharing arrangements tend to preserve a segmented system byrequiring a gradual approach to deregulation in which adequate time isprovided to assess accurately the effect of each liberalization policybefore another step toward reform is implemented. Few capital generationalternatives to bank financing existed for corporate enterprises in Japanduring this period. Sender, H. The Effect of the "Bubble Economy" The so-called "Bubble Economy" of Japan developed in the decade of the198 s and expired in the early-199 s (Wood, 1992, pp. C. Human Relations,43(12), 12 3-1216. II. 38). Designing complex organizations (5th ed.).Reading, MA: Addison-Wesley. Financial Times,(3246 ), 38. 28). The Ministry of Finance proposals involve an immediate cashinjection of (685 billion to cover part of the irrecoverable loans, withthe remaining portfolio being transferred to a new body. BANKING REFORM IN JAPAN. 211). 29-3 ): Short-Term Interest Rates: 1992 - 4.5 percent 1993 - 3. Japan's financial scandals. 24). Far Eastern Economic Review, 156(24),6 -61. Hirsch, M. Corporate profits in Japan may beexpected to continue to suffer. (1992). L. Internal problems. Effects of the Merger The merger between the Bank of Tokyo and the Mitsubishi Bank combinedthe overseas expertise of the Bank of Tokyo with the strong corporatelending base of the Mitsubishi Bank (Sender, 1996, p. Thispractice frees Japanese firms from the short-term obligations of stocks.As a consequence, both products and markets may be permitted to developslowly over years, as opposed to the short-term payoffs demanded by NorthAmerican corporate managers. In the mid-198 s, reforms were introduced that gave Japanese banksincreased access to international markets (Frankel & Morgan, 1992, p. Leading brokers contend that thenew rules heavily favor the banking industry. Two provisions of the Foreign Exchange Law of 198 were important tothe integrating of Japanese domestic money markets with internationalmarkets (Frankel & Morgan, 1992, p. (1992, June). Neither personnel layoffs or branch closures will occur,according to the management of the Bank of Tokyo-Mitsubishi. These firms have total assets of (13.5 trillion-the equivalent of 2.5 per cent of Japan's gross domestic product (GDP).One-half of these debts are thought to be irrecoverable. The contingency approach to management is designed to dealwith uncertainties. Imai, K'i. This researchalso examines the effects of the merger on the surviving institution,together with the outlook for the company. The securitiesmarkets in Japan collapsed in the wake of the deflation of the bubble(Rowley, 1992, p. Aside from lacking thebanks' enormous capital resources and long-established relationships withcorporations, securities firms contend that they are handicapped by theirinability to deal in foreign exchange. Deregulation andcompetition in Japanese banking. 1-18). (1992, December 28). The bubble was finally punctured when the FinanceMinistry of the Japanese central government and Bank of Japan GovernorYasushi Mieno refused to prop up the over-inflated asset prices any longer(Chandler, 1993, p. The world economy. In-house "organ banks" enabled the keiretsu to overcome the weaknessof the Japanese stock exchanges and to channel resources to entrepreneurialventures (Lynn & Rao, 1995, p. B. IV. BANK LENDING ACTIVITY IN JAPAN. Thus, in 1995, Japan's major banks found their creditworthinessthreatened by bad debt left over from the speculative boom, known as the"Bubble Economy" (Hardy, 1994, p. Brave new bank. 56). The assessment of perceivedenvironmental uncertainty and economic performance. (Hirsch, 1993, p. In return, however, the commercialbanks were required to adhere to domestic lending policies prescribed bythe Bank of Japan. C. A1. Mitsubishi Bank: 15,522. (1993, January 28). Wall Street Journal, p. Bank of Tokyo-Mitsubishi: (2,773. Bank of Tokyo-Mitsubishi: 23,5 . Human Relations, 45(1), 1-18. 12 3-1216). 6 -61). Prior to this liberalization, the Bank of Japan provided all fundsrequired by Japanese commercial banks. 58 ). Contingency relationships have fourmajor links: the influence of the external environment on strategy, theinfluence of organizational variables on strategy, the influence ofperformance variables on strategy, and the influence of strategy onorganizational structure, systems, and style. B., & Morgan, P. The Mitsubishi personnel contendthat they cannot understand the Japanese of the Bank of Tokyo personnelbecause so many English words are used. Shareholders' Equity: Bank of Tokyo: (985 billion Mitsubishi Bank: (1,778 billion. Y., & Ramos, E. 1-18). In the late-198 s, speculation became the byword for investmentactivity in Japan (Goldstein, 1992, p. 72-76). A. Japanese Banking Japan's major banks are among the world's largest (Woods, 1992, p.21). (1996, February). A. The "BubbleEconomy" in Japan was essentially a wildly speculative boom that eventuallycollapsed, as all such speculative booms eventually do. Rowley, A. 58). 579). 7 -71). Contingency theoryrecognizes that usually no one way is the only way of doing something andthat any one way of doing something will not be equally effective in allsituations (Galbraith, 1993, p. New York: AtlanticMonthly Press. Burden of bad debt. K. B. percent 1994 - 4.3 percent 1995 - 3.1 percent 1996 - 3.3 percent As a result of pressures on the Japanese banking system, the Ministryof Finance announced measures to underwrite some of the irrecoverable debtsof the seven housing loan corporations (Morgan & Pain, 1996, p. Structure. Stanford, CA: Stanford University Press, 198-23 . Banking Reform in Japan Deregulation in the Japanese financial system was initiated in thelate-197 s (Frankel & Morgan, 1992, p. Banking reform in Japan has not ended the structure of separationbetween banking and credit intermediaries (Frankel & Morgan, 1992, p. 589). The contingency approach to management is a means of developingorganizational strategy. Japan'sinterest rate experience over the past five years is as follows (Morgan &Pain, 1996, pp. L. Development. Focus. It's bankers versus brokers as Japan's Glass-Steagall starts to break down. The process of financialliberalization in Japan has been slow and deliberate over the past 18years. Organ banks are also sources of coordination within the keiretsu (Lynn& Rao, 1995, p. (1993, June 15). When thespeculations began to boomerang, some of Japan's greatest banks opted forcorrupt practices in an effort to avert disaster ("Japan's", 1991, pp. Further, contingency planningcould have led to the implementation of employee education programs at thepre-merged institutions that could have avoided some of the post-mergerdisharmony. In Kumon, S., &Rosovsky, H. French, T. (1995, Winter). Galbraith, J. REFERENCES. Employees: Bank of Tokyo: 8,358. Bank of Tokyo-Mitsubishi: (74,673. Former Mitsubishi personnel believe that the Bank of Tokyo hasobtained too much power in the merged institution in view of the fact thatMitsubishi was the stronger bank just before the merger (Sender, 1996, p.84). 58 ). Contingency planning at the Bank of Tokyo and the Mitsubishi Bankprior to the decision to merge the two institutions appears to have beennone too effective. Strategic planning and the contingency approach to strategicmanagement are closely associated with an organization's externalenvironment (Gibbons, 1992, pp. 96). Japan's corporate networks. C. Retained profits were allocated to new venturesthrough internal finance and budgeting systems. (1992, January). The Bank of Tokyo-Mitsubishi,however, expected to earn a return on equity of 8 percent by 2 . Thus, JAL's use of preferential fundingincreased from 4 percent to 26 percent. H., & Rao, H. Forecasting of conditions must be made, with respectto environmental conditions, organizational characteristics, resourceavailability, market dynamics, and product life cycle. Thus, the strategic contingencyplanner must know of what the external environment of an organizationconsists and must understand how an organization's external environmentaffects the strategic planning process. 42-43).These organizations suffered losses because of participation in arbitrageand high-risk investments (do Rosario, 1993, pp. Wood, C. (Eds.), The political economy of Japan: Vol. (1993, April). EFFECTS OF MERGER. JAPANESE BANKING. Operational activities, such as computer systems, were quickly andefficiently integrated in the merged institution (Sender, 1996, p.
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