No. 43 — November 12, 1999


Feature Article


Douglas Ostrom


The Big Bang financial market reform program along with almost daily announcements of corporate restructurings suggest that Japan is leaving behind the old system of centralized control and compliant companies that, willingly or not, do their part to maintain the social order. This prospect implies that considerations of rates of return, with their attendant benefits for growth and social welfare, increasingly will dominate the economy.

In many ways, this is how Japan has liberalized its economy and continues to do so. However, in at least one important respect, the financial services industry is an exception to the new pattern despite steady progress under the Big Bang rubric. The nation's lengthy economic downturn and the related crisis in the financial sector have combined to force Tokyo to take a more hands-on approach to the financial system. In fact, the government's direct and indirect roles in providing financing have increased, particularly assuming that its equity stakes in most of Japan's big banks give bureaucrats increased leverage over these institutions.

The government's growing involvement in the financial sector has taken many forms. It goes beyond an ownership position in all the biggest banks to include a more active role for public-sector financial institutions, temporary government control of two giant banks, greatly expanded credit guarantees for private-sector lending and even a Bank of Japan program to purchase commercial paper. These undertakings do not add up to the nationalization of the banking industry, but they do approach that degree of involvement. Not counting two bank-recapitalization schemes, government programs currently are the source of nearly half of all lending in Japan.

Tokyo's already substantial role in the financial system has expanded since Prime Minister Keizo Obuchi took office last year — a development that appears to be consistent with his approach to governance. The description of most of the mentioned changes as emergency measures meant to deal with an admittedly serious economic situation suggests that they will have a short life. Their extension, and perhaps expansion, well into the recovery phase, which now may have begun, would represent a radical departure from the philosophy inherent in the Big Bang and in other reforms initiated by Tokyo. In fact, such an outcome would fly in the face of much of postwar Japanese economic policy, which typically has moved in the direction of giving more leeway to market forces.

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Weekly Review

--- by Jon Choy

Despite broad agreement for some time that the composition and the operation of American financial markets had changed dramatically since the Great Depression, Congress only now has voted to repeal a key legacy of that era — the Banking Act of 1933, more commonly known as the Glass-Steagall Act. Landmark legislation approved November 4 will break down the regulatory barriers that have separated the banking, securities and insurance businesses. The signing into law of the Gramm-Leach-Bliley Act will give the green light to mergers and acquisitions among firms in these three industries as well as allow in-house diversification by existing financial services providers. The result could be the creation of so-called universal banks, which offer every variety of financial product and service under one roof.


--- by Douglas Ostrom

As Tokyo weighs the next move in its effort to ensure Japan's recovery from its worst postwar economic slowdown, policymakers will pay close attention to a frequently overlooked source of demand in the world's second-largest economy — residential construction. Although the industry is small, comprising less than 4.3 percent of the overall economy, its impact during the early stages of postwar rebounds often has been significant.


--- by Barbara Wanner

Barely a year after the unprecedented upper house censure of a Japan Defense Agency chief for his mishandling of a defense equipment overcharging scheme, the organization again is alleged to have engaged in shady procurement practices. A Board of Audit investigation leaked to the press October 27 revealed that JDA had spent some ¥50 billion ($416.7 million at ¥120=$1.00) during FY 1998 on 100-plus repair contracts for Maritime Self-Defense Force vessels. Because the contracts had been awarded without competitive bidding, taxpayers were charged about ¥1.5 billion ($12.5 million) more than was necessary for 50 of the orders, the board claimed.


--- by Marc Castellano

German Chancellor Gerhard Schroeder's October 31-November 2 visit to Tokyo was, according to observers, almost entirely positive and free of dispute. However, his proposal that the People's Republic of China attend the annual summit of the leaders of the Group of Seven industrial nations plus Russia, scheduled for July 2000 on Okinawa, proved somewhat controversial. In a circumspect reaction, Tokyo suggested that the idea be considered carefully since the inclusion of China could complicate policy coordination among the G-8 participants. On other issues, the dialogue was cooperative and yielded few, if any, disagreements. In a meeting with Prime Minister Keizo Obuchi, Mr. Schroeder discussed such topics as United Nations reform, bilateral exchange programs, economic recovery and preparations for the G-8 summit.



To the surprise of no one in the know, certainly not Japanese steel industry executives, another big category of made-in-Japan steel could be shut out of the U.S. market next spring because of stiff antidumping duties. In a preliminary decision released November 2, the Department of Commerce said that Kawasaki Steel Corp., Kobe Steel, Ltd., Nippon Steel Corp. and Nisshin Steel Co., Ltd. had sold carbon cold-rolled steel products to domestic appliance, motor vehicle and other users of this generally commodity input for 53.04 percent less than they charged customers at home. This pricing difference matched exactly the dumping margin contained in the mid-July complaint filed by USX Corp./U.S. Steel Group, Bethlehem Steel Corp. and five other domestic mills along with the United Steelworkers of America and a fellow union (see JEI Report No. 29B, July 30, 1999). That was no coincidence. With major Japanese shippers of cold-rolled sheet concluding that they had nothing to gain from cooperating with Commerce analysts assigned to the case, the department went with the U.S. industry-provided pricing information.

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