Financial Restructuring in Japan
- a Korean Perspective -
Kun-Young Yun
Yonsei University
May 30, 2003
I. Current Japanese Economy: an Overview
1. Number 2 in the world (2002)
◇ Second largest:
GDP = $3,992 billion
◇ Second richest: Per capita GDP = $31,200
◇ Population:
128 million
2. Current Situation
◇ Not growing fast enough
*Growth rates in the good old days:
1960s: 10%
1970s: 4.4%
1980s: 4.1%
1993-2002: 1.1%
◇ Unemployment rate: 2.2% (1992) Æ 5.4% (2002), and rising.
◇ Deflation in goods and asset prices
☞ The financial system is believed to be at the center of the problem
Figure 1. Economic Growth, Unemployment, and Interest Rate (%)
10.0
8.0
6.0
4.0
2.0
0.0
-2.0
19
83
19
85
19
87
19
89
Real GDP growth rate
19
91
19
93
Unemployment
19
95
19
97
19
99
20
01
Prime Lending Rate(Short Term)
Source: Bank of Japan, "Bank of Japan Statistics and Other Key Statistics," May, 2003
20
03
Figure A1. Velocity of Money: % Change in GDP/(M2+CD)
14.0
12.0
10.0
8.0
6.0
4.0
2.0
0.0
-2.0
-4.0
-6.0
Velocity of Money(% change)
20
03
20
01
19
99
19
97
19
95
19
93
19
91
19
89
19
87
19
85
19
83
-8.0
G DP G rowth Rate(nominal)
Growth Rate of M2+CD
Source: Bank of Japan, "Bank of Japan Statistics and O ther Key Statistics," May, 2003
Figure A2. Propensity to Consume (%)
80.0
79.2
78.0
78.6
77.1
77.4
76.0
76.6
75.8 75.5
75.2
74.8
74.0
74.3
74.0
73.7
72.9 72.7
72.0
72.5
72.3
71.2 71.1
71.7
71.4
70.0
68.0
03
20
01
20
99
19
97
19
95
19
93
19
91
19
89
19
87
19
85
19
19
83
66.0
Source: Bank of Japan, "Bank of Japan Statistics and Other Key Statistics," May, 2003
Figure A3. Exchange Rate (Yen/US dollar)
300.00
250.00
200.00
150.00
100.00
50.00
03
20
01
20
99
19
97
19
95
19
93
19
91
19
89
19
87
19
85
19
19
83
0.00
Source: Bank of Japan, "Bank of Japan Statistics and Other Key Statistics," May, 2003
Figure A4. Balance of Payment and Foreign Exchange Reserves
160,000
600,000
140,000
500,000
400,000
100,000
80,000
300,000
60,000
200,000
40,000
100,000
20,000
0
89
87
85
91
9
9
9
9
1
1
1
1
current account(left)
0
93
9
1
99
03
01
97
95
9
0
0
9
9
2
2
1
1
1
gold and foreign exchange reserves(right)
Source: Bank of Japan, "Bank of Japan Statistics and Other Key
Statistics," May, 2003
milliion dollar
100 million yen
120,000
25.0
40.0
20.0
30.0
15.0
20.0
10.0
10.0
5.0
0.0
0.0
Gov't Bond Issues(left)
Tax revenue(left)
Total expenditure(left)
Bond Dependency(right)
*Note: Bond dependecy = Gov't Bond Issues / Total expenditure
FY 1983-2001: settlement; FY 2002: revised; FY 2003: Budget
Source: Ministry of Finance, "Highlights of the Budget for FY 2003," Dec., 2002.
percent
50.0
20
03
30.0
20
01
60.0
19
99
35.0
19
97
70.0
19
95
40.0
19
93
80.0
19
91
45.0
19
89
90.0
19
87
50.0
19
85
100.0
19
83
trillion yen
Figure A5. Balance of Government Budget
Figure A6. General Government Debt / GDP (%)
160.0
140.0
120.0
100.0
80.0
60.0
40.0
20.0
0.0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Japan
US
UK
Germany
France
Italy
Canada
Source: Ministry of Finance, "Highlights of the Budget for FY 2003," Dec., 2002.
II. Current Issues on the Japanese
Financial System
1. Bubbles in the Asset Markets
30.0
20.0
10.0
0.0
-10.0
-20.0
-30.0
-40.0
2001
2002
2003
1999
2000
1996
1997
1998
1994
1995
1991
1992
1993
-50.0
1989
1990
◇ Δ in GDP Deflator
1993-2002: -0.7%
less than 0 in 8 out of the last
10 years
40.0
1986
1987
1988
◇ Land in 6 large urban areas
1.00 (1982)
Æ 3.47 (1990)
Æ 1.02 (2001)
50.0
35.0
30.0
25.0
20.0
15.0
10.0
5.0
0.0
-5.0
-10.0
-15.0
-20.0
-25.0
-30.0
-35.0
1984
1985
◇ Nikkei 225
9,894 (1983)
Æ 38,916 (1989)
Æ 7,831 (April 2003)
Figure 2. Deflation in Japan (%)
GDP deflator(left)
Urban Land Price Index(left)
Urban Land Price(6 Large Areas)(left)
NIKKEI 225 Stock Average(growth rate)(right)
Source: Bank of Japan, "Bank of Japan Statistics and Other Key Statistics," May, 2003
2. Impacts of the Collapse on the Financial System
Table 1. Non Performing Loans of Japanese Deposit-taking Financial Institutions (End of March)
(trillion yen)
1998
1999
2000
2001
2002
Sept, 2002
Total Loans (A)
553.1
506.6
496.2
494.1
473.2
453.6
NPLs (B)
19.5
29.6
30.4
32.5
42
39.2
-
33.9
31.8
33.6
43.2
40.1
Losses from Disposal of NPLs (C)
13.3
13.6
6.9
6.1
9.7
-
Cumulative Losses since 19922)
45.1
58.8
65.7
71.8
81.5
83.4
B/A (%)
3.5
5.8
6.1
6.6
8.9
8.6
C/A (%)
2.4
2.7
1.4
1.2
2.0
-
Total Loans (D)
688.5
642.2
629.2
626.4
606.4
-
NPLs (E)
25.0
38.7
41.4
43.4
53.0
-
-
42.6
40.9
43.0
52.4
-
3.6
6.0
6.6
6.9
8.7
-
1. Banks
NPLs-FRL
1)
2. Banks + Cooperative Type Financial Institutions
NPLs-FRL
E/D (%)
Note: 1) NPL-FRL: Non-performing loans based on Financial econstruction Law.
2) Cumulative losses from disposal of NPLs.
Source: Financial Services Agency, Japan.
☞ Banks are burdened by NPLs and pressured to meet capital adequacy requirements.
Æ Bank lending and business Investment are shrinking.
3. Government Policy for Economic Revival
Emergency Countermeasures to Deflation, Feb 27, 2002.
Comprehensive Measures to Accelerate Reform, Oct 30, 2002, and
Program for Financial Revival, Oct 30, 2002
☞ Why is the problem so persistent?
The answer may be: Systemic nature of the problem requires
a comprehensive, decisive, and bold policy.
☞ Any lessons to be drawn from the Korean experience?
III. Financial Restructuring in Korea
1. The Korean Economic Crisis: 1997-1998
◇ GDP growth rate in 1998: -6.7% (the lowest in post-Korean war period)
◇ Unemployment rate surged to 8.8% in Feb 1999.
2. Resolution of Bad Institutions and Bad Loans
Table 2. Financial Restructuring in Korea
Restructuring Status
Number of
Companies
(year-end
1997) (A)
License
Revocation
Banks
33
Merchant Banks
Merger
Liquidation,
Transfer to
Bridge Bank,
Suspension of
Operations
Total
(B)
Change
(B/A)
5
9
0
14
30
18
6
4
Securities
Companies
36
5
1
Insurance
Companies
50
7
Investment Trust
Companies
30
Mutual Savings
Banks
Newly
Opened
Current
Total
42.4
1
20
28
93.3
1
3
1
7
19.4
16
45
6
2
15
30.0
9
44
6
1
0
7
23.3
6
29
231
71
26
25
122
52.8
12
121
Credit Unions
1666
2
102
303
407
24.4
9
1268
Lease Companies
25
9
1
0
10
40.0
3
18
Total
2101
123
152
335
610
29.0
57
1548
Sourse: Annual Report-2001, Korean Deposit Insurance Corporation, 2002, Table 1-3.
3. Public Funds and Public Burdens
Table 3. Sources and Uses of Financial Restructuring Funds(Nov, 1997-March, 2003)
(trillion won)
Contributions
Deposit
Insurance
Claim
Asset
Purchases
Purchases
of NPLs
Total
42.2
15.2
20.0
4.2
20.5
102.1
Recycled Funds
3.9
1.6
6.2
4.4
17.0
33.1
Public Funds1)
14.1
-
-
6.3
0.5
20.9
Others2)
-
0.1
2.9
0.1
1.1
4.2
Total
60.2
16.9
29.1
15.0
39.1
160.3
Equity
Participation
Bond Issues
1) Include government budget, government fund, and foreign loans.
2) Include loans from financial institutions, KAMCO's and KDIC's own funds.
Source: Public Fund Oversight Committee, 2003
Table 4. Uses of Financial Restructuring Funds(Nov, 1997-March, 2003)
(trillion won)
Equity
Participation
Contributions
Deposit
Insurance
Claim
Asset
Purchases
Purchases
of NPLs
Total
Banks
33.9
13.7
-
14.0
24.6
86.2
Merchant Banks
2.7
0.2
17.2
-
1.6
21.7
Securities Companies and
Investment Trust
Companies
7.7
-
0.01
-
8.5
16.2
Insurance Companies
15.9
2.9
-
0.4
1.8
21.0
Credit Unions
-
-
4.6
-
-
4.6
Mutual Savings Banks
-
0.1
7.3
0.6
0.2
8.2
Overseas Financial Companies
-
-
-
-
2.4
2.4
Total
60.2
16.9
29.1
15.0
39.1
160.3
Source: Public Fund Oversight Committee, 2003
4. Fixing the Stable after the Cow Is Stolen
☞ Financial Supervisory Commission (FSC) investigated 464 institutions:
◇ 4,879 people involved in inappropriate activities.
◇ 2,404 people contributed to the losses of financial institutions
Æ 1,377 people were reported to the prosecutors’ office.
☞ Korea Deposit Insurance Corporation (KDIC) investigated 418
institutions:
◇ 4,716 people have contributed to the losses of financial institutions.
Æ Sued 5,166 people for 1,534 billion won and confiscated 1,373
billion won.
IV. Restructuring Japan’s Financial
System: a Korean Perspective
1. Comprehensive Measures and Financial Revival
◇ Four strategic areas of structural reform:
- Financial system
- tax policy
- regulation, and
- government expenditures.
◇ Financial Restructuring:
- Accelerate disposal of NPLs => resolution of the NPLs problem by 2004
(reduction of NPLs/Loans ratio of major banks by half)
◇ Improve Financial Administration:
- tightening asset assessment
- enhancing capital adequacy, and
- strengthening governance of major banks
◇ And revive corporate borrowers
+ ensure smooth flow of loans to SMEs.
☞ Lessons from Korea
- A well functioning financial system is essential for stability and growth.
- Stem the deterioration of financial system at the earliest possible date.
2. Would it work this time? Some Remarks.
◇ If the excessive NPLs in the financial institutions are the prime cause of deflation and economic slowdown,
the cost of NPLs disposal and bank recapitalization is a small price to pay.
- Since the government purchases (through RCC) NPLs and new claims on the banks at market value, the
expected net burden to taxpayers is zero.
- Injection of public funds for disposal of NPLs and bank recapitalization causes temporary, not permanent,
increase in government debt.
- Disposal of NPLs, per se, does not “create” losses. Financial institutions merely realize the capital losses
that accrued in the past.
◇ Temporary reduction of NPLs may not be sufficient to restore stability to the financial system.
- The large flow of loans that are downgraded from performing to non-performing must be dealt with.
◇ Improve profitability of the borrower corporations!
- Financial restructuring itself helps move resources from inefficient to efficient firms.
- Other factors affecting profitability of firms include tax policy, regulation, competition in the markets, R&D,
education, etc.
◇ Provide adequate safety nets for the unemployed, and ensure stable flow of funds to SMEs !
◇ Act decisively, boldly, and quickly to clean-up NPLs and recapitalize the weakened banks.
V. Concluding Remark
◇ Overhauling the financial system may be the most urgent problem to be resolved.
- Must treat the fundamental sources of the problem.
- No More Stop-gap!!
- No More Piecemeal Approach !!
- Decisive and bold approach is recommended.
- Commit sufficient public funds for quick resolution of NPLs and recapitalization of the
financial institutions.
- Otherwise, the economy may have to continue on the suboptimal path for a long time, and
the restructuring process may be overtaken by other events demanding urgent government
attention.