Case study of Japan

Topic by Name: Course: Tutor: University: Date History Japan opened up to the western powers in the year 1959 (Tamaki 1995, p. 5). This was after it had been secluded for 230 years.

The opening up had some implications on the ruling regime, the Tokugawa Shogunate. The shogunates held meetings and agreed to open up their ports in a bid to kick away the slogan “revere the empire, expel the barbarian. ” This would however not go down well with the samurai extremists who were not open to the idea.

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The movement and their slogan lost control when the Satsuma and Choshu Joined in the agreement considering they were the strongest domains. They gathered their well equipped army and attacked Shogunate in 1867. The Samurai and Choshu had to be burdened by their weak forces.

More importantly they were responsible for management of funds in the new Meiji Government and thus they had to heavily rely on old merchant bankers. Even before the arrival of the demanding foreigners, there existed a quasi banking system in place in Japan.

Bakufu government had authorised merchants known as ryogae to trade in Tokyo (Edo) and Osaka. They resisted the influx of foreign traders and settlers at the ports and thus deployed a larger number of ryogae in this regions. Taxes were previously paid in kind, using rice. It was the real currency until 1973.

Edo and Osaka had grown to their big names due to handling rice and thus they had developed the initial banking functions (De Roo 1998, p. 205) In the Edo era, the banking scene was thus dominated by the ryogae who were in fact merchants but offered a variety of banking services to approved clients.

In western terminology, the can be reterred to as merchant bankers. All the ryogae were led by Junin ryogae which consisted of then most wealthy houses. Konoike and Sumitomo were among hem and they have grown to be vital in the banking system.

Another was Mitsui which facilitated the transition. The big houses were commissioned by Bakufu government to sustain the system, for example by loaning the Bakufu and in the exchange of older coins for new ones. Osaka ryogae were better of in the loaning services than in Edo. The mitsui for example believed loans were the reasons many merchants failed.

The domain had the privilege of handling Bakufu’s money in Osaka, Edo and Kyoto. An important factor was that the ryogae had resources from their money and the money people had entrusted in them.

They operated in a lot of caution and circumspection in that they never divulged their financial worth even to family. All decisions regarding capital, loans, borrowing thus lay with the ryogae. It was common for the interest to be paid in deposits. As the Shogunate regime ended, there were two types of accounts, the current and deposit accounts.

Deposit taking led to the establishment of two significant proto banking models: The first was interest and the second was deposit reverse ratio. They developed two documents for these types, the ryogae’s note and the depositors order.

The methods were pplied appropriately to grow the ryogae business into a profitable venture. The roots of the Japanese banking system can thus be traced to ryogae and their ideas. The Dai-Ichi Bank, originally Dai-Ichi Kokuritsu Bank (lit. First National Bank) was literally the first bank and the first Joint stock company ever to be established in Japan.

Established by an industrialist Shibusawa Eiichi in 1873, it was originally empowered to issue banknotes, until the Bank of Japan assumed this function in 1883.

Subsequently, it became a purely commercial bank based in Tokyo. In 1873, the Dai-Ichi bank ltd. as established by industrialist Shibusawa Eiichi and it was basically the first bank in Japan. It was meant to issue banknotes up until the time the BOJ too took over this role. Regulation The regulatory process is carried out by Financial services Agency (FSA).

It serves to controls the insurance, securities and other financing field players.

The central bank and lender to the last resort is The Bank of Japan (BO]). It is not a regulator but carries out inspections on premises to maintain a favourable financial system. Article 44, on site examination of the Bank of Japan act states that the bank can should carry ut on site analysis of the financial firms built on the contract they have to appropriately conduct prudential policy actions for example emergency loaning services. Here, eligible collateral is not required as stated in Article 37 to 39.

Securities institutions in Japan, Japanese firms and also security associates of foreign investment banks hold current accounts with the Bank of Japan.

They also enjoy discount windows and are thus subject to on site examination by BOJ . The ministry of Finance (MOF) has been responsible for regulation until 1998 when FSA took over. In this year and in the middle of an economic crisis, the Shinshei Bank (Formerly Long term Credit bank of Japan) and Aozora Bank had to be de facto nationalised due to their economic importance. The body had found that were too large and thus vital for the economy for them to fail.

The problem at this time was that Japan nad at this time not developed a tramework to handle this.

The legislation body thus had to work promptly on these emergency regulations. By 2000, a clause-systematic risk exception clause-was pass© by adding more explanations to the existing deposits laws. This was the perfect period for a omplete overhaul of the system by strengthening the regulatory body to be able to handle such problems in future. The powers were all placed on the FSA. At present, the Ministry of Finance deals with financial stability issues.

This is done from the fiscal soundness point of view.

Just like in all countries, The Banking Act permits the commissioner of the FSA to claim reports and all necessary material on financial conditions of a bank, to conduct on-site checkups at the premises, penalise misconduct and may sometimes order the bank to maintain a portion of the assets within Japan. In order to deliver the interpretations of laws related to financial organizations and the standards for the application in the business, supervision policies and guidelines have been issued.

The FSA has encouraged the ingenuity of better regulation since 2007. It is base on the view that improving the attractiveness, competitiveness and general service provision of Japans financial firms are actually the major challenge for this countrys economy. The FSA backs the concept of the “optimal combination of principles-based and rules-based supervisory approaches,” as one of the core steps in achieving the goals that have been published in “The Principles in the Financial Services Industry’ in 2008.

Performance The banks continue to suffer from previous errors albeit with measures being taken to ensure the crisis does not emerge. The system has been in the process of structural reform since 2001. A majority of non-preforming state owned banks have been privatised to increase investment. Bad loans have been eliminated with some banks being completely closed. The accounting necessity for evaluating delayed tax assets has been revised and tightened to ensure banks do not list them as equity capital (Loukoianova et.

A1 2008, p. 3) The government has ordered that all banks enefitting from the public be profitable. Commercial banking is not fully private as the government often funds the falling establishments to bring them to a profitable level. There is a new policy that will allow any financial institution in Japan to request for the provision of public funding. A particular trend since 2007 has been the widening of the fee-based business.

It is not meant to respond to a variety of needs but in essence to be a new profit opportunity for the banks.

In recent times, between 2001 and 2005, the net fees plus commissions totaled to approximately 2. 14 trillion yen. Such a type of profit as opposed to older lending has a direct influence on the profitability and variability. The reference point in use is the Return on Assets (ROA).

It is a measure of how well exploited assets are. This is done in terms of net profit. It is a tool that has previously ben used to get rid of bad loans. In the 1990s, data shows that there was a positive relation between profitability and the fee based system, leading to a rise in their ROA variability.

Stability of management also remained the same. In contrast, for the period 2001 to 2005, the relation changed and there was no ncrease in ROA variability.

The management stability increased. Most recently, a study has shown that as soon as a correlation is drawn between the two income types, the ROA variability will grow upwards (Tsutsui 2010, p. 89) Some of the banks operating currently are Ashikaga Bank, Citibank, Hokkaido Bank ot Tokyo and Shinsnei bank . A major commercial bank is Bank ot Tokyo which is the second largest in the world in terms of assets.

Services in Japan banks are also very unique. The banks operate between 9 am and 3 pm on weekdays.

Their ATMs also operate within a given time usually up to 5 pm. An exception is those which close at 8 pm if they are in stores. However, the compensation is that large amounts of withdrawals are allowed. One can also buy air tickets on the ATM. The banks majorly work with cash and thus cashing out checks is complicated thus featuring a fee for deposits and over 3 days for processing. Problems Japan’s banking system is one of the largest globally.

It is thus a major player in the Southeast Asia financial system. However, in recent years, the system has proved to be one of the least profitable. There are several problems with Japan’s financial nstitutions: their cost-effectiveness is low and they are burdened with non- performing loans. There are too many unmaintainable financial organizations and this blocks profitability. Another is that lending is in these institutions is also not risk- averse (Kanaya ; Woo 2000, p. 26) There has been a continued outcry for reforms and more attention to be given to the falling system.

The top 19 Japan based banks continue to struggle to find ways they can get out of massive 600billion distressed loans they carry. This can be attributed to several and new bank failures in addition to the poor economic performance across the board. From as far as the 1990s, the country has been a subject of economic stagnation coupled with the extremely strained banking sector. Problems for this economy began when there was an error in the assessment of the credit risk to the many borrowers. It was even more worsened by the poor managerial planning and decisions by the management at that time.

At that time, the downfall of the pricing bubble to comprise the housing market coupled with the management’s poor ability to foresee present and potential dangers at that time are the core causes of the 1990s crisis.

A majority of the banks held loans at zero percent mark not allowing for lot of profit, if any especially due to the increase in the credit cost. In addition to this, capital shortage seemed to plague the big and top banks in Japan. The cream was falling riskily low at this time.

Some of them were Just on the 8 percent mark or below of the unsettled loans secured. Operating below this threshold meant that the banks could not be able to operate internationally. All these factors brought together necessitated a transformation plan.

The era was known as the big bang and it ran from 1998 to 2001 (Hughes & MacDonald 2002, p. 42). The phase was basically a practical start to the goal of deregulation in the conomy of Japan. The plan was intended to loosen the banking system, stock markets and insurance so as to help them to contest in the international market.

The big bang removed rules that barred companies from selling, buying or trading their investments in foreign currency while establishing a better structure for disclosure.

A good example of such deregulation steps enabled large bank customers the freedom and luxury of moving to and from regular bank financing and capital financing. A disadvantage is that it became less satisfactory to savers as they continued to deposit unds into banks that offered low or no security while paying unfavourable interest in the return.

In addition, the Japanese banks were prohibited to pursue any new areas of business. This meant that their loans only focused on small businesses leading to the banks expanding real estate lending to unparalleled levels which turtner strained their finances (Fare & Grosskopf 2005, p. 139) Currently, the system is undergoing a major restructuring and reorganization phase.

There are plans to establish more improved methods of classification for better assessment of risk. The private capitalization of major banks in the country is being done through domestic and also foreign means.