| Provisional Translation |
A report by "The Study Groupon Structural Changes in Flows of Funds in the21st Century" (June 2000)
Issuesin the financial sector for Japan's sustainedeconomic growth in the 21st century
- Analysis and study on the current situation ofcorporate finance -
< OUTLINE>
1.Introduction
(1) Basic issues
In order to achieve Japan'ssustained economic growth in the 21st century,Japanese firms are expected to vitalize theirbusiness activities and to improve theirprofitability according to their stage of growth,responding to the structural changes of theeconomic environment enhanced by the ITrevolution.
For this aim, it is necessary toutilize financial assets so as to provide a smooth"flow of funds" responding to thefinancial needs and risks of firms which differsdepending on the stage of growth and the contentof business.
The analysis of the "flow offunds" focusing on corporate finance is givenbelow.
(2) General composition(Currentsituational analysis and identification and studyof issues)
| Current situational analysis of the "Provider of funds"(households) and the "Recipient of funds"(firms) |
- Identification of issuesaccording to the stage of growth and the financialneeds of the firms
||
\/
| Examination of the issues for corporate finance by classifying firms into 4 typical types (Hearings from firms and market practitioners) |
- Private companies with lowexpected growth
- Private companies with high expected growth
- Public companies in the growth stage
- Firms in the maturity stage
2.Analysis of the portfolio selections of householdsand current situational analysis of corporatefinance
(1) Analysis of the portfolioselections of households
In order to realize a steady"flow of funds" responding to thevarious needs of firms, utilization of a broadrange of routes to supply funds is required.
Although some view that"aversion of risks is a nationalcharacteristic of the Japanese and therebyrestricts the expansion of the fund supply channelto firms through the capital market", thismay not actually be the case.
| - The prewar stock holding ratio of the private sector |
--> Environmental changes suchas improvements in the legislation on investmenttrusts and reforms in the wage and pension systemsmay ease the factors which restrain households topossess securities.
--> Environmental improvements to enableprivate investors to invest with an accurateunderstanding of the risks.
--> Improvement in the firm's investment valueand corporate governance is required as essentialfor corporate finance.
(2) Analysis on the currentsituations of firms
Current and future situations areanalyzed from the viewpoint of how listedcompanies and OTC companies view the current andfuture situation of corporate finance and whethermanagement reforms such as "emphasis on sharevalue and diversification of financing" arebroadly recognized.
(a) Listed companies, etc.
| The results of the questionnaire show that though being aware of the necessity of broad management reforms, many firms have not yet developed concrete measures (diversification of financing, etc.). |
--> Doesn't the infrastructureof the capital market impede the diversificationof financing methods? (= typical issue for"Public companies in the growth stage").
--> Doesn't the basic law of Japan restrain thepromotion of management reforms to emphasize sharevalue? (= typical issue for "Firms in thematurity stage").
(b) OTC companies, etc.
| The results of the questionnaire show that firms are aggressive in financing through the capital market. On the other hand, the issues on investor protection for investments for venture businesses and lending functions of the existing financial institutions are recognized. |
--> Are the middle-risk lendingfunctions of financial institutionswell-developed? Are the firms preparing for theappropriate accounting and disclosure? (= typicalissues for "Private companies with lowexpected growth").
--> Is the governance system of Japan fit forfirms to go public through the contribution ofventure capital while protecting the investors? (=typical issues for "Private companies withhigh expected growth").
3. Issuesconcerning smooth financing in accordance with thestage of growth and the needs for funds of thefirm
= Examine the issues for each of the 4classifications of firms =
| (1) Private companies with low expected growth |
From the viewpoint ofstrengthening the financial positions of firms,though borrowing from financial institutions willcontinue to be the mainstream of financing, boththe lender and the borrower must act in a mannerthat corresponds to the future cash flow.
--> For private financialinstitutions, it is necessary to develop thecorresponding relations between risk and returnfor the sake of their own governance and forimposing financial discipline on the borrowingfirm (development of the examination function formiddle risk).
--> The development of intermediary agents forthe expansion of small and medium-sized firmsfinancing from the capital market
| The lack of financial information (privately-placed bonds, etc.) on local firms became apparent from the hearing of the small and medium-sized firms. |
=> Tackling the medium andlong-term issues such as the improvement in thegovernance of firms, the strengthening of theirfinancial base, and strengthening the financialaudit which supports this.
| (2) Private companies with high expected growth |
Financing from a capital market,especially from venture capitals, where manypeople examine and bear risks plays a veryimportant role.
(A virtuous circle is expected in which companiesthat venture capitals invest in go public, and theventure capitals use the capital gain forinvesting into new firms together with humanresources and expertise.)
| Not only the development of a market offering a place for the firm to go public, but also the following environmental developments were pointed out as necessary in the hearing of the market practitioners. |
--> Provision of a adequate andclear information for investors (disclosure, etc.)
--> Development of human capital for venturecapitals, and efforts by firms, etc.
--> Development of securities companies whichunderwrites private stocks, and development of aninfrastructure for the private stock market
=> An order-made relationship between theventure capital and the founder is required togive an "incentive" to the founder thatafter making use of contributions and know-howfrom venture capitals the founder will regainownership when going public in the future. Thedevelopment of an investment method and the reviewof the corporate law (corporate governance) may benecessary.
| (3) Public companies in the growth stage |
The development of aninfrastructure, where firms can raise funds mosteffectively not only from the financialinstitutions but also from the capital market, isnecessary.
| Some concerns for the liquidity of the capital market and the funding costs was shown from the result of the questionnaire. |
--> A balanced development ofthe standards for public offering and improvementof the trading systems is required to shorten theterm necessary for financing and securingliquidity.
--> The development of a payment system for abroad capital market.
| (4) Firms in the maturity stage (utilization of new financial methods) |
For firms in the maturity stage,restructuring of the managerial resources such asthrough combination of M&A methods isincreasing. The issues for the utilization of newfinancial methods are analyzed according to thefirms' view on the current conditions.
| The following analysis is based on the hearing of the listed companies, etc. |
--> It is necessary to examinethe issues of governance as well as enhancement oflabor mobility and strengthening of intermediaryagents, in order for the firms to restructuretheir managerial resources through M&As. Forexample, how the general meeting of shareholdersnecessary for M&A should be held.
=> How should governance be when foreigninstitutional investors are increasing amongshareholders ? (The issue of how convenient thesystem prescribed by the Japanese corporate law isby international standards, as seen by the issueof general meeting of shareholders)
4.Conclusion
(a) The necessity to review"corporate finance" and "corporategovernance" together was identified as acommon approach to deal with the issues extractedfrom each of the four classifications of thefirms.
(The review of the issues ofcorporate finance leads to the question of how toseek a combination of "claims for the cashflow" and "the right to participate inthe activities of the recipient, which existbetween provider and recipient of thefunds".) (ex. Order-made investment contractsfor venture capitals)
(b) The current issues can beregarded as asking a fundamental question ofwhether our basic infrastructure is convenient touse for the firms to reform their managementunder their domestic and foreign shareholders.
(c) Regarding the basicinfrastructure of Japan, market practitioners havebegun to show their intention to seek for aself-sustained change instead of copying a foreignsystem. A comprehensive review of finance andcorporate governance together is required for theentire infrastructure including the financialcapital market and the basic laws (the role ofthe public sector)