The Change of Funds Flow and the Fiscal Rules for Fiscal Stabilization

(Abstract)

Here we explain the features of Japan’s funds flow across time by using the flow-of-funds table. We prove that the volume of funds flow decreased in various sectors compared with the boom 1980s. Especially in recent years, the increased volume of corporate savings thanks to the increase in the overseas income has been deposited as liquid savings and used to purchase government bonds through financial institutions. On the other hand, the volume of funds flow from financial institutions to corporate investments has been dramatically reduced recently.

We then move on to focus on the difference between the Greek and Japanese government bond markets. Although Japan’s government debt ratio to GDP is bigger than that of Greece, the Japanese government bond market has remained stable. We take note of the demand side of government debt, and explain the difference between the Japanese government bond market, which enjoys a big demand from the domestic financial institutions and investors, and the Greek one, which relies heavily upon foreign investors for the demand. We also explain the difference in the stabilizing measures of government bond markets between the two countries by introducing demand-side analysis into the theoretical model.

We point out that Domar’s condition, which has so far led the discussions about the stabilization of government bond markets, was derived only from the supply-side analysis of government bonds, thus not always proving to be valid. Instead, we derive the stabilizing conditions for government bond markets by the model which considers government bond demand. We also present some rules for fiscal stabilization and explain the fiscal rules corresponding to Taylor’s rule for monetary policy. Finally, we conclude that the issuance of a large volume of debt-covering government bonds should be restrained, and that Japan’s funds should be guided to contribute to the accumulation of private capital stock for the recovery of the growth of the Japanese economy, and we conduct the model analysis regarding its appropriate levels.

Key words: government bond markets, fiscal rules, conditions for fiscal stabilization

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The Great East Japan Earthquake and Investor Behavior in Japan’s Equity Markets

(Abstract)

The Japanese stock prices, which had been on the uptrend before the outbreak of the Great East Japan Earthquake, dramatically plummeted after the disaster, but showed some resilience within a few weeks. In recent years a large share of transactions in Japan’s equity markets has been executed by foreign investors, who conducted more active transactions than usual after the disaster.

It was only those foreign investors that purchased Japanese listed equities around the time of the outbreak of the disaster. The aggregate trading data of listed equities by main investor groups in Japan shows that the Japanese equities were being propped up by the foreign investors from the beginning of the year 2011.

Several preceding literatures on investor groups in Japan show that securities firms often took identical positions with the foreign investors, which means, when there was an increase in the net purchase by the foreign investors, the net purchase by the domestic securities firms also often increased. But our research shows that around the time of the disaster, the domestic securities firms and other financial institutions kept on selling equities, although the foreign investors were net purchasing.

According to our VAR (Vector Autoregression) analysis, a certain pattern of transactions was observed among the domestic investors such as financial institutions and security firms. We also conducted some analysis on the impact of the nuclear reactors’ accidents by including the stock returns of TEPCO, Tokyo Electric Power Co., Inc., in our VAR analysis. However, there was no special causal relationship observed between the stock returns of TEPCO and the transactions by the foreign investors, who must have been particularly sensitive to the changing situations of the accidents during the period subject to our analysis.

Key words: the Great East Japan Earthquake, Japan’s equity markets, investor behavior

JEL classification codes: G11， G14

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The Decision-making Mechanism of Regional Financial Institutions and the Utilization of Soft Information

(Abstract)

In this paper, we document the practice in the processes of loan screenings and condition settings by regional financial institutions and the extent of the use of qualitative information in these processes based upon the data collected by our uniquely-designed questionnaire survey on financial institutions. With this dataset, we also conduct a statistical examination of the hypothesis presented by the existing theory, which predicts the positive correlation between the extent of the delegation of loan decision-making authorities to branches and the extent of the use of soft information. The results show that there is a positive correlation mildly supporting the hypothesis although the statistical significance is not so high. There is also a positive and statistically significant correlation between the asset size of financial institutions and the extent of the use of qualitative information. Our research shows that the results of the preceding empirical studies, which were designed upon the intuitive assumption that financial institutions with larger total assets have a more centralized decision-making system and their extent of the use of soft information is lower, should be interpreted with caution.

Key words: soft information, small and medium-sized enterprise finance, decision-making mechanism

JEL classification codes: G21, L14, L23, D82

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The Risk Premiums in the International Inter-bank Markets under the Financial Crisis

(Abstract)

In this paper, we analyze how the risk premiums in the world’s two major international inter-bank markets of Tokyo and London went through change under the financial crisis. First, we briefly look back upon the financial situations of the two markets at the end of the 1990s, when Japan’s financial crisis became serious. We then compare and examine what happened to the risk premiums in the two markets under the global financial crisis that occurred from the summer of 2007 to 2009.

We use the interest rates of TIBOR and LIBOR for our analysis. In normal times since the two markets are almost completely integrated, the TIBOR is almost interlocked with the LIBOR regardless of their currency denomination. On the contrary, there was a significant gap observed between them in the time of the financial crisis. But the type of gaps that occurred depended largely upon the type of crisis.

First we confirm that at the end of the 1990s, the TIBOR surpassed the LIBOR regardless of their currency denomination. On the other hand, under the global financial crisis at the end of the 2000s, the TIBOR fell below the LIBOR in the yen denomination, but the former still overran the latter in the dollar denomination. The reversal of the magnitude relationship between the TIBOR and the LIBOR depending upon their currency denomination is not explained away only by the difference in relative credit risks among financial institutions in the two markets. In the paper, we make it clear that the concept of liquidity risks in addition to credit risks is useful in explaining this apparently paradoxical phenomenon.

Key words: liquidity risks, short-term financial markets, risk premiums, world financial crisis

JEL classification codes: G15; G12; F36

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The Mergers of Major Banks from the viewpoint of EVA

(Abstract)

Here we check the performance of Japan’s domestic major banks for the past two decades (1989-2008) by focusing on management indicator EVA (Economic Value Added), and examine the effects of bank mergers.

Our research shows that the EVA of the entire financial sector was almost negative except for the period between 2005 and 2007, which means that the banking sector failed so far to gain as much benefits as their shareholders had expected. Although many major banks engaged in merger activities in the period centering on the year of 2000, not every merger has succeeded as of now in light of the improvement of EVA.

Based upon the results of several empirical analyses, one of the main factors enabling banks to enjoy the positive effects of mergers is the expansion of lending shares and it is proved that the more lending shares banks have expanded, the more their EVA has improved.

Key words: EVA, banks, mergers

JEL classification codes: G21, G34

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