Feb. 5, 1991 (rev. 3/4/91)
The Cost of Capital in Japan: Update
Jeffrey A. Frankel
Professor of Economics
University of California
Berkeley, CA 94720
The author is also a Research Associate of the National Bureau
of Economin Research and a Visiting Scholar of the Institute of
International Economics.
This article is forthcoming in Business Economics, April 1991.
Many economists were skeptical, ten years ago, when George
Hatsopoulos began arguing that Japanese corporations had an unfair
advantage over their American competitors in the form of a lower
cost of capital.1 In the course of the 1980s, however, the theory
gained credibility. In the view of most mainstream economists, such
as Martin Feldstein, the origin of the record U.S. trade deficits
that emerged after 1982 lay in the fall in national saving. While
this school of thought was not consistent with the viewpoint that
blamed the trade deficit on unfair trade policies, it did fit in
neatly with the argument that U.S. corporations faced a shortage of
capital, as reflected in real interest rates that were higher
domestically than in Japan, and that productivity growth was
suffering as a result.2
A survey of the now-voluminous literature on the cost of
capital in Japan and the United States in the 1980s reveals that
many different factors are potentially involved in evaluating the
possible differential.3 Nevertheless, a robust conclusion emerges.
Throughout the 1980s, up to 1989, the cost of capital was indeed -by a variety of measures -- lower in Japan than in the United
States.
Since 1989, there have been dramatic developments in Japanese
financial markets. A new Bank of Japan governor, less enthusiastic
about buying dollars to support the U.S. currency than some others
in the Japanese government and more intent on fighting inflation,
has tightened Japanese monetary policy, raising real interest rates
steeply in 1989 and 1990. The Japanese stock market fell sharply at
the beginning of 1990, presumably as a result of the increase in
interest rates, and fell again in the Fall, presumably as a result
of the beginning of the Kuwait crisis.
This article reviews findings on the Japanese cost of capital
in the 1980s. These findings include evidence of liberalization and
other structural trends that have been underway in Japanese
financial markets for some years, accelerated to a certain extent by
pressure from the U.S. Treasury.
It then seeks to update the
analysis to reflect the developments of 1990.
The conclusion is
that the increase in real interest rates and the accompanying fall
in the stock market in Japan have been great enough virtually to
eliminate the difference in the cost of capital vis-a-vis the United
States.
This still leaves open the question whether or not this
recent development is "good news," and what American policy should
be in talks with the Japanese government on financial policy.
1. Japan's Weighted-Average Market Cost of Capital in the 1980s
A standard measure of the corporate cost of capital is the
weighted average of the cost of debt and the cost of equity finance.
Many would argue that this standard definition is not relevant for
Japan, because corporations have traditionally obtained little of
their capital by issuing securities on the open market, but rather
have relied on bank loans and retained earnings (e.g., Meerschwam,
1989).
This point is addressed in the fourth section of this
article.
For the moment, the standard measure will serve well to
illustrate three of the arguments most commonly made to show that
Japan had a lower cost of capital in the 1980s. Under the standard
definition, the claim can be broken down into some combination of
1
the following three possibilities: (a) the cost of borrowing was
lower in Japan, (b) the cost of equity was lower in Japan, or (c)
the weight on debt-financing (versus equity-financing) was higher in
Japan. All three statements contain some truth.
Calculations using 10-year government bond yields suggest that
Japanese real interest rates were below U.S. real rates virtually
continuously from 1967 to 1988. The evident reason for low Japanese
real interest rates was a high saving rate.
The real differential
narrowed
after
1984,
presumably
due
to
the
influence
of
increasingly-tightly integrated international financial markets, but
had not disappeared by 1988.
In the past, Japanese corporations have had a much higher ratio
of debt to equity than U.S. corporations, that is, they have been
much more highly leveraged.
In the period 1970-72, for example,
debt/equity ratios in Japan were four times as high as in the United
States.
This commonly-observed characteristic of the Japanese
system is one major reason why calculations often show a lower
overall cost of capital in Japan than in the United States; equityfinancing is known to be more expensive than debt-financing in any
market, presumably because portfolio investors demand a higher
expected return on equity to compensate them for higher risk.
How have Japanese firms been able to rely so heavily on debt?
As a number of authors have pointed out, a particular debt/equity
ratio that would be very risky for a U.S. firm would have been less
risky for a Japanese firm.
There are several reasons for this.
Much of the borrowing, particularly for members of a keiretsu, was
from the firm's main bank. A main bank would not cut off lending in
time of financial difficulty; to the contrary it would do all it
could to see the company through.
Another reason is that, until
recently, all loans had to be collateralized.
In any case, it is
important to note that the seemingly robust regularity that
"Japanese firms are highly leveraged" now appears to be a thing of
the past.
The debt/equity ratio declined throughout most of the
1970s and 1980s, and by one measure had by 1986 fallen to the level
in the United States.4
The third of the standard components of the overall cost of
capital, the cost of equity financing, is the most ambiguous of the
components to measure.
One approach has been to use the realized
market rate of return on equity, i.e., the dividend/price ratio plus
the rate of increase of equity prices.
The problem with this
approach is that stockholders' realized rate of return on equity is
a very noisy indicator of ex ante expectations.
In the absence of a speculative bubble, stock prices can be
thought of as the present discounted value of expected future
dividends or free cash flow.
The equity cost of capital is the
implicit discount rate, and thus can potentially be inferred from
the ratio of stock prices to current dividends or earnings -whichever denominator can more reliably be used to estimate future
prospects.
We consider the subject of the price/dividend ratio
first, and then turn to the price/earnings ratio.
There has been no upward trend in Japanese dividends per share
over the last 20 years.
This makes it especially difficult to
explain the high level of Japanese stock prices, if one follows the
2
common approach of choosing the present-discounted-value-of-futuredividends formula and estimating expected dividends from actual
realized dividends.
On the other hand, the observed high level of
prices relative to dividends would be perfectly understandable if
the increase in dividends were thought still to lie in the future.
One possible explanation as to why Japanese dividends have been low
in the past is that Japanese corporations have over the postwar
period had many profitable investment opportunities, but until the
late 1980s have not had sufficiently free access to securities
markets to drive their cost of capital into equality with the rate
of return on these investments.
For this reason, they have used
retained earnings to finance investment.
Such considerations suggest that looking at the past history of
dividends may not be a very useful way to estimate future dividends.
An alternative approach is to look at the amount of earnings the
firm is required to generate per unit of equity, that is, the
inverse of the price/earnings ratio P/E.
The P/E ratio (like the
price/dividend ratio) has been observed to be higher in Japan than
in the United States ever since the early 1970s.
Because this
difference could be explained by a lower discount rate in Japan, it
is often the basis of arguments that the cost of equity capital is
lower in Japan.
2. Price/earnings ratios
Some, such as Ando and Auerbach, have looked at the priceearnings ratio because they are interested in the cost-of-capital
question, and they consider P/E to be inversely related to the
required rate of return re.
Others, such as French and Poterba
(1989) are interested in the price-earnings ratio to evaluate
whether the late-1980s increase in prices was excessive. They note
that, as of the end of 1988, Japan's reported P/E was more than four
times that in the United States.
So big an apparent discrepancy would be difficult to explain.
If earnings (as a commonly-used proxy for free cash flow) were
expected to grow at rate ge, then the earnings/price ratio should
equal re - ge in order for the return to investment to be equalized
to the opportunity cost of funds. The end-1988 differential between
reported earnings/price ratios in the United States and Japan was
.06 [=.078-.018].
A 6-point difference in the required rate of
return on capital re would support the cost-of-capital-advantage
school, but seems too large to be plausible.
French and Poterba (1989), Ando and Auerbach (1988), and others
have emphasized the importance of correcting earnings for a number
of measurement problems.
Ando and Auerbach focussed on three
distortions related to inflation: depreciation accounting, inventory
accounting, and accounting for nominal liabilities.5
French and Poterba pointed out some additional corrections to
make to reported earnings.
First, earnings reported by U.S.
corporations include the profits of subsidiaries, while those
reported by Japanese firms do not (only actual dividends received
from subsidiaries).
Second, reported Japanese earnings deduct
(both on the firms' tax returns and on their financial statements)
generous allowances for special reserves for such possible future
contingencies as product returns, repairs, and retirement benefits.
3
Third, Japanese firms often take greater depreciation allowances.
All three factors work to make reported earnings look smaller in
Japan, and P/E ratios larger.
French and Poterba found that correcting for all three
accounting differences in earnings explained about half of the
difference between Japanese and U.S. ratios, but still left
corrected end-1988 Japanese P/E ratios at about twice U.S. levels.
The difference between the U.S. and Japanese E/P ratios is about 5.4
per centage points after the correction (averaging two methods). A
more rapid expected growth rate ge in Japan could explain only part
of this difference.
The real growth rate of the Japanese economy
had averaged 1.6 per cent faster than the U.S. economy over 1980-88.
There was no particular reason to expect the real growth rate of
the economy to increase in the future, or to expect the growth rate
of earnings or cash flow to be higher than the growth rate of GNP.
It seems that a cost of equity capital re which was lower in Japan
than in the United States is needed to explain the rest of the
difference.
This leaves the question of why the cost of equity capital was
lower. We already observed that the real interest rate was lower in
Japan in the 1980s.
In addition, it is possible that the equity
premium, the compensation for holding risky stocks beyond the return
on holding bonds, was also lower in Japan, though several studies on
the subject have failed to find evidence of the lower level of
riskiness in the Japanese market that would merit a lower risk
premium.
It has also been suggested that the lower cost of equity
capital in Japan is due to more favorable tax treatment of
investment. It would presumably be more convenient for any American
businessman who wished to claim that Japanese industry had an
"unfair advantage" in the form of a low cost of capital, if the
source of the advantage were more favorable tax treatment by the
Japanese government.
Ando and Auerbach (1988), Shoven (1989), and
many others have looked at the corporate tax question, from a number
of different angles. As many studies have found that the tax system
in the 1980s was less favorable to investment in Japan as the other
way around. The overall finding seems to be that differences in tax
treatment tend to be dwarfed by other factors like differences in
real interest rates.
Furthermore, tax reforms that took effect in
Japan in April of 1988 and April of 1989 have now narrowed some of
the existing differences.
The lower cost of both debt and equity
finance in Japan appears to stem primarily from a higher private
saving rate, and not from tax differences.
Some observers have explained the tremendous run-up in stock
prices in the late 1980s by the appreciation in the land held by
corporations.
This hypothesis, even if accurate, only pushes the
question back one stage. If rents are expected to grow at rate gr,
then the price/rental ratio should be given by 1/(r - gr). Thus the
same possible explanations arise for high land prices as arise for
high equity prices: a low discount rate r or a high growth rate gr.6
It appears likely that each of these factors explains part of the
gap between land price/rental ratios in Japan and the United States
as of the end of the 1980s.
4
But there remains a puzzle as to why land price/rental ratios
in Japan increased so much in the 1980s. Real interest rates were
even lower and growth rates even higher in earlier decades. Why did
price/rental ratios not reach their high levels until the late
1980s?
The same question applies to the price/dividend and
price/earnings ratios in the stock market: if the lofty levels of
the end of the 1980s were due to a low real interest rate and high
growth rate, then why were these ratios lower, rather than higher,
in earlier decades? Were the late-1980s run-ups in land and equity
markets due to speculative bubbles?
3. Update for the Events of 1990
We have seen that the required rate of return appeared to be
lower in Japan in the 1980s than in the United States. Although a
lower real interest rate probably could not in itself explain the
sky-high P/E ratios in the Japanese stock market at the end of the
decade, it is possible that a combination of the low discount rate,
the high expected growth rate, and the need to correct accounting
differences in the measurement of earnings, could together explain
the end-1988 P/E level.
But we have not yet addressed the
possibility of a speculative bubble.
In 1990, the Japanese stock market lost almost half its value.
At first glance, this plunge could be interpreted as clear evidence
that the run-up of prices in the late 1980s was indeed a speculative
bubble. Unfortunately for this view, the macroeconomic fundamentals
changed dramatically at the same time. The Bank of Japan began to
tighten Japanese monetary policy in 1989, raising real interest
rates steeply in 1990.
In this section we try some simple calculations to see if the
changes in macroeconomic fundamentals can explain the decline of the
Japanese stock market between late 1989 and the end of 1990.
The
calculations use monthly survey data collected from a sample of
banks, multinational corporations and other forecasters by Alan
Teck's Currency Forecasters' Digest of White Plains, New York.
Table 1 estimates the Japanese 10-year real interest rate to
have been 2.61 per cent in September 1989, and the 10-year expected
rate of economic growth to have been 3.75 per cent. One is tempted
to take the difference r - g as an estimate of re - ge and see if it
equals the ratio of earnings to prices. But the difference, -1.14,
is less than zero, and would thus apparently be capable of
explaining any P/E ratio, no matter how high.
Clearly the real
interest rate underestimates the required rate of return on capital
-- presumably due to a risk premium of the sort discussed above in
the section on price/earnings ratios -- or else the GNP growth rate
overestimates the rate of growth of earnings.7
French and Poterba's figures, after adjustment of earnings,
show that the U.S. E/P ratio exceeded the Japanese E/P ratio by
about 5.4 per cent in late 1988. P/E ratios were almost the same at
the end of 1989 as they were at the end of 1988. Table 1 shows an
apparent "overvaluation" of the Japanese stock and land markets at
the end of the 1980s, beyond what could be attributed to real
interest rates or expected growth rates in Japan and the United
States.
This overvaluation could be attributed either to (1) a
speculative bubble, or (2) a higher equity risk premium for the
5
United States than for Japan, or some other source of bias in r - g
(as an estimate of the difference between the relevant discount and
growth rates) that is greater for the United States than for Japan.
Let us consider the second hypothesis, and assume that the
difference in risk premiums (or other source of bias) between the
two countries remained the same at the end of 1990 as in late 1989:
about 3 per cent if unadjusted earnings figures are used.
Is the
1990 increase in Japanese real interest rates capable of explaining
the collapse of the Japanese market?
As of December 1990, the real
interest rate in Japan was up by 1.29 points.
As a result the
difference between the U.S. and Japanese estimates of r - g was down
by 0.57 points from September 1989.
Over the same period, the
difference in (unadjusted) E/P ratios fell by 0.61 points. Thus the
increase in real interest rates in Japan can explain most of the
decline in the stock market in 1990 vis-a-vis the United States, and
there is no obvious need for recourse to the hypothesis of a burst
speculative bubble.
What are the implications of the 1990 developments for the cost
of capital question? The difference in real interest rates between
the United States and Japan has disappeared completely.
There is
probably now little left also of the difference in P/E ratios once
the accounting adjustments are made to Japanese earnings.8
In short, though by most measures the cost of finance in the
1980s was cheaper in Japan than in the United States, this appears
no longer to be the case. Whether this is cause for rejoicing among
American businessmen is another question. Given the high degree of
international integration that has taken place over the last ten
years, fluctuations in saving are reflected in capital flows between
Japan and the rest of the world as easily as in domestic investment.
In other words, corporate borrowers in Japan are not the only ones
to feel the effect of a decreased availability of Japanese savings;
borrowers in the United States and elsewhere in the 1990s will feel
it as well.
4. The Increasing Relevance of "The Market" in the Japanese
Financial System
It is true that in the past, the standardly-computed weightedaverage cost of issuing securities in the market has not been
entirely relevant in Japan. The fourth respect in which the cost of
capital can be said to have been lower in Japan in the past involves
the benefits of internal and main-bank financing.
These benefits
have been persuasively described as mechanisms for avoiding problems
of imperfect information or incentives, where such problems can
complicate
the
financing
of
investment
projects
by
issuing
securities on the market.9
Such benefits are less easily
quantifiable than the first three factors (real interest rate, cost
of equity finance, and debt/equity ratio), but the direction has
been clear: for any given level of the measured cost of capital,
many Japanese corporations, certainly the members of keiretsu, have
faced a lower "effective" cost of capital, implying they have been
more inclined to undertake an investment with given prospects, than
an American firm would be in the same situation.
The market is becoming more and more relevant in Japan.
Established banking relationships began to break down in the 1980s
6
and the market began to take their place, as corporations began to
use banks less and bond markets more.
This process accelerated as
the result of international liberalization as well as domestic
deregulation.
This increasing market-orientation provides the explanation for
one of the greatest puzzles to emerge from the literature on
Japanese finance: the increase in stock and land prices in the
1980s. As mentioned above, if some combination of low real interest
rate and a high expected growth rate explains the high levels of
Japanese stock and land prices in the late 1980s, these prices
should have been even higher in the 1970s, when real interest rates
were even lower and expected growth rates even higher.
The answer
is that the arbitrage between the interest rate and real assets that
we take for granted in a market-oriented system was not entirely
relevant in the earlier period.
In the 1980s the increased
availability of funds that could be used for asset-market arbitrage
allowed the great run-up in equity prices and land prices.
But we are left with another, even greater puzzle: if "main
bank" relationships were indeed so advantageous to Japanese
corporations, why have they now been abandoning these relationships
in favor of the market?
It is possible that "insiders," those
corporations with access to preferentially priced funds, had an
advantage over "outsiders," and that this advantage was lost
recently when the latter gained access to the escape route of
borrowing abroad. If the outsiders had previously been subsidizing
the insiders, their escape from the closed system may have driven up
the cost of capital for the former.
It may not be possible for
trust and long-term relationships to survive in an environment where
new-comers deal only in explicit contracts.
5. Conclusions for Policy
To summarize, all four respects in which Japan could be said to
have a lower cost of capital ten years ago have recently either
diminished or vanished altogether.
Real interest rates have risen
to U.S. levels, partly as a result of the removal of Japanese
barriers to capital outflow. The required rate of return to equity
capital has risen in tandem.
The ability of Japanese corporations
to lever themselves highly has diminished, as the Japanese system
gradually moves from one of stable long-term relationships to one
that is more market-oriented.
Finally, this same trend of
increasing market-orientation has undermined the previous ability of
keiretsu-affiliated corporations to obtain loans from their main
banks on terms that were more favorable than can be obtained in
American-style securities markets.
The
structural
trends
of
international
and
domestic
liberalization in Japanese markets have, to a significant extent,
been accelerated over the past ten years by pressure from the U. S.
Government.
The
usual
skeptical
American
view
underlying
negotiations with Japan, that significant demands will either not be
agreed to speedily or not be implemented faithfully, does not fit
the events well in the case of financial matters. The U.S. Treasury
during the first Reagan Administration asked Japan's Ministry of
Finance to remove its remaining controls on international capital
flows and otherwise to liberalize its financial markets. The talks
7
culminated in the Yen/Dollar Agreement of May 1984 in which the
Ministry of Finance acceded to the U.S. demands.10
Notwithstanding
the rapid pace of Japanese liberalization, American pressure has
continued.
One of the U.S. requests in the Structural Impediments
Initiative, which produced an agreement in June 1990, was a
loosening of the keiretsu relationships.
But the logic underlying U.S. demands on Japan is confused.
Three rationales have been explictly offered by the U.S.Treasury.
One rationale has been to increase the flow of capital from Japan to
the United States, to give American corporations access to the same
cheap capital as their Japanese rivals, thereby allowing them to
increase investment and long-term productivity growth.
Another
rationale was to appreciate the yen against the dollar and reduce
the U.S. trade deficit.
(This original motivation was explicit on
the part of Treasury Secretary Don Regan, though it contradicts the
first because the trade balance and the capital flow are one-andthe-same.)
A third rationale on the part of the Treasury has been
to promote the efficiency of the Japanese economy.
But American
businessmen and Congressmen, whose concerns with the bilateral trade
imbalance
constituted
the
political
impetus
behind
the
Administration campaigns, wish to improve the competitiveness of the
American economy, not of the Japanese.
Perhaps cozy Japanese banking relationships have been an
effective way of avoiding information and incentive problems, in
which case the rationale for recent U.S. action would seem clear: to
drag Japanese efficiency down to the level of the United States.
Or, on the other hand, perhaps the Japanese financial system will
benefit from its increasing market-orientation.
Either way, valid
American concerns that U.S. productivity growth has been hampered by
inadequate investment in plant and equipment, R and D, and
education, should be addressed by looking to our own economy, rather
than making demands on Japan that are conflicting, changeable, and
poorly thought out.
*
*
*
*
8
References
Ando, Albert, and Alan Auerbach, 1988, "The Cost of Capital in
the U.S. and Japan: A Comparison," NBER Working Paper no.
2286.
Journal
of
the
Japanese
and
International
Economies, vol.2, pp. 134-158.
Frankel,
Jeffrey,
1984,
"The
Yen/Dollar
Agreement:
Liberalizing Japanese Capital Markets," Policy Analyses in
International Economics no. 9, Washington, D.C.:
Institute
for International Economics.
Frankel, Jeffrey, 1991, "The Japanese Cost of Finance: A
Survey,"
Forthcoming
in
Financial
Management,
Spring.
[Parts of this paper draw on National Bureau of Economic
Research Working
Paper No. 3156.]
French, Kenneth and James Poterba, 1989, "Are Japanese Stock
Prices Too High?" revised, National Bureau of Economic
Research, Aug.
Hale, David, 1990, "Economic Consequences of the Tokyo Stock
Market
Crash,"
U.S.-Japan
Consultative
Group
on
International
Monetary Affairs, Washington, D.C., July 23.
Hatsopoulos, George, 1983, "High Cost of Capital: Handicap of
American Industry," Study sponsored by the American Business
Conference and Thermo Electron Corp., April.
Hatsopoulos, George, and Stephen Brooks, 1986, "The Gap in the
Cost of Capital: Causes, Effects, and Remedies," in Ralph
Landau and Dale Jorgenson, eds., Technology and Economic
Policy, Cambridge, MA: Ballinger 221-280.
Hatsopoulos, George, Paul Krugman, and Larry Summers, 1988,
"U.S.
Competitiveness:
Beyond
the
Trade
Deficit,"
Science, July 15, 299-307.
Hoshi, Takeo, Anil Kashyap, and David Sharfstein, 1990,
"Corporate Structure, Liquidity, and Investment: Evidence
from
Japanese
Panel
Data,"
Quarterly Journal of
Economics, forthcoming.
Meerschwam, David, 1989, "The Japanese Financial System and
the
Cost of Capital," NBER conference on The US and Japan:
Trade and
Investment,
Paul
Krugman,
ed.,
forthcoming,
University of
Chicago Press, Chicago.
Shoven, John, 1989, "The Japanese Tax Reform and the Effective
Rate of Tax on Japanese Corporate Investments," NBER
Working Paper no. 2791; in L.Summers, Tax Policy and the
Economy, M.I.T. Press: Cambridge, MA.
9
Table 1
Can macroeconomic fundamentals explain the 1990 P/E decline?
(figures in per cent)
Sept. 1989
Dec. 1990
Japan1
interest rate (10-year)
expected inflation rate
(CPI, 1989-1998)
real interest rate r
____
2.61
____
3.90
expected real growth rate
(1989-1998)
g
3.75
4.05
-1.14
-0.15
4.86
2.25
r - g
6.60
2.70
United States2
interest rate (10-year)
expected inflation rate
(CPI, 1989-1998)
real interest rate r
____
3.40
____
3.57
expected real growth rate
(1989-1998)
g
2.70
2.45
0.70
1.12
8.15
4.75
r - g
7.97
4.40
change
Differential (r-g)US - (r-g)J
0.57
1.84
1.27
Japan E/P (unadjusted)3
+0.87
U.S. E/P (unadjusted)4
+0.26
1.60
2.47
6.47
6.73
-
Differential (E/P)US - (E/P)J
4.87
4.26
0.61
.. Hatsopoulos (1983) and Hatsopoulos and Brooks (1986).
.. In 1988, the different strands -- the businessman's concerns
1
2
3
4
From Currency Forecasters' Digest.
From Currency Forecasters' Digest.
From Nikkei data bank.
From Economic Indicators, Council of Economic Advisers.
10
about American competitiveness and the macroeconomist's concerns
about national saving and (as well as possible inefficiencies in
American financial markets) -- were elegantly fused together in an
article co-authored by Hatsopoulos, Krugman and Summers.
.. Frankel (1991).
.. French and Poterba (1989).
.. Most importantly, Japanese firms have relied more on debt than equity (see
above), so the fact that inflation reduces the real value of outstanding
liabilities has been more important for them.
.. Inferring the discount rate from observed price/rental ratios for land has
an advantage over looking at price/earnings ratios for equities: in the case of
land each period's rent is a conceptually correct measure of the return on
holding land, whereas in the case of equities only that portion of the earnings
that is not reinvested is a conceptually correct measure of the return. In the
case of Japan, the true discount rate should be even lower than that inferred
from the P/E ratio, because a higher proportion of earnings are reinvested than
in the United States.
.. As noted earlier, the capitalization formula does not strictly apply to P/E
ratios, because the portion of earnings that are reinvested are not available as
returns to the stockholder. (This just makes the gap between the discount rate
growth rate differential and the E/P ratio that much harder to explain.)
One
would be on firmer theoretical foundations to match up the calculations reported
in this section to observations on the price/dividend ratio, for the case of
stocks, or the price/rental ratio, for the case of land. Unfortunately, reliable
recent data for land are not available.
.. Some may continue to believe that the standard weighted average of debt and
equity is not relevant for Japan because many corpora-tions still get much of
their financing from main banks.
Even in the case of bank borrowing, however,
there is reason to think that the era of cheap finance is over. Japanese banking
was itself the industry hardest-hit in the 1990 stock market collapse, and is now
under pressure to restrict lending in order to meet stringent new international
standards for capital adequacy. Hale (1990).
.. Hoshi, Kashyap and Sharfstein (1990) study the investment patterns of a
sample of Japanese firms, segregated into those that have affiliations with a
large bank through their keiretsu and those that do not belong to such a group;
one possible conclusion is that "the institutional arrangements in Japan may
offer Japanese firms an important competitive advantage (p.24)." See Part IV of
Frankel (1991) for a review of the literature.
... Frankel (1984).
11