Japan Project Meets

June 29-30, 2012
Jennifer Corbett, Australia-Japan Research Centre; Charles Horioka, Osaka University; Anil Kashyap, University of Chicago; Kazuo Ueda, University of Tokyo; and David Weinstein, Columbia University, Organizers

Takeo Hoshi, University of California at San Diego and NBER, and Takatoshi Ito, University of Tokyo and NBER

Defying Gravity: How Long Will Japanese Government Bond Prices Remain High?

Recent academic papers have shown that the Japanese sovereign debt situation is not sustainable. The puzzle is that the bond rate has remained low and stable. Some suggest that the low yield can be explained by domestic residents' willingness to hold Japanese government bonds (JGBs) despite its low return, and that as long as domestic residents remain home-biased, the JGBs are sustainable. About 95 percent of JGBs are owned by domestic residents. Hoshi and Ito argue that even with such dominance of domestic investors, a crisis would happen if the amount of government debt breaches the ceiling imposed by the domestic private sector financial assets. Their simulation is conducted on future paths of household saving and fiscal situations, and shows that the ceiling would be breached in the next ten years or so without a drastic fiscal consolidation. They also show that the government debt can be kept under the ceiling with sufficiently large tax increases. A crisis would happen even before the ceiling is hit if the expectation of such drastic fiscal consolidation disappears. The authors suggest several possible triggers for such a change in expectations. However, downgrading of JGBs by credit rating agencies is not likely to be a trigger, because the past downgrades have not produced any change in the JGB yield. If and when the crisis happens, the Japanese financial institutions that hold large amount of government bonds will sustain losses and the economy will suffer from fiscal austerity, financial instability, and inflation.

Makoto Hazama and Iichiro Uesugi, Hitotsubashi University; Kaoru Hosono, Gakushuin University; Daisuke Miyakawa, Development Bank of Japan; Hirofumi Uchida, Kobe University; Arito Ono, Mizuho Research Institute; and Taisuke Uchino, Daito Bunka University

Natural Disasters, Bank Lending, and Firm Investment

Natural disasters damage the lending capacity of banks, providing natural experiments for examining whether such damage tightens the financial constraint on borrowing firms. Hazama, Hosono, Miyakawa, Uchida, Uchino, Uesegi, and Ono study the impact of the financial constraint created by the Great Hanshin-Awaji earthquake, which occurred in Japan in 1995, on firm investment through the channel of firm-bank relationships. By using unique firm-level data combined with the information on physical damage caused by the earthquake, they find that the investment ratio of firms located outside the earthquake - hit area but transacting with a main bank located inside the area is lower than for those transacting with a main bank located outside the area. This implies that the exogenous shock to bank lending capacity has a significant negative impact on firm investment. The authors also find that this outcome is robust to two alternative measures of bank damage, that is the damage to the headquarters and the damage to the branch network. However, the impact of the former measure emerges immediately after the earthquake, while that of the latter emerges with a one-year lag. This difference in the timing of the effects implies that there are two different channels of bank damage to client firms: one through the banks' impaired managerial capacity to originate loans, and the other through their deteriorated risk-taking capacity.

David B. Cashin, University of Michigan, and Takashi Unayama, Kobe University

Measuring Intertemporal Substitution: Evidence from a Consumption Tax Rate Increase in Japan

Cashin and Unayama estimate the intertemporal elasticity of substitution (IES) using the 1997 Consumption Tax rate increase in Japan, which represented an exogenous change in the real interest rate. Because the Japanese Consumption Tax is highly comprehensive, and the tax rate increase was announced prior to implementation, it is an ideal natural experiment for estimating the IES. The authors exploit a Japanese monthly household survey to categorize “non-durables” and to address intra-temporal substitution bias. They find that the IES is 0.21 and not significantly different from zero, but it is significantly less than one. These results suggest that the impact of policies that affect the real interest rate will be small.

Yasushi Hamao, University of Southern California; Kenji Kutsuna, Kobe University; and Joe Peek, Federal Reserve Bank of Boston

Nice to be on the A-List

Hamao, Kutsona, and Peek address an important shortcoming of most of the existing literature on credit availability by including a set of unlisted firms (the firms most likely to be bank dependent) in their analysis, and by investigating differences between the treatment of listed and unlisted firms by lenders. The researchers find evidence consistent with "evergreening behavior" by banks toward listed firms, consistent with prior studies. However, the more striking result is that banks appear to treat the smaller, unlisted firms differently, being much less willing to engage in evergreening behavior for those borrowers. The difference in treatment of unlisted firms relative to listed firms does not appear to be related to systematic differences in size between the two groups of firms. Thus, it appears that the distinguishing characteristic that determines whether a bank might evergreen loans to a firm is whether or not the firm is listed. Furthermore, this effect appears to be stronger for those firms listed on the more prestigious Tokyo Stock Exchange as compared to firms listed on other exchanges; that is, being on the list (being listed) matters, and being on the A-list matters even more. Moreover, among listed firms, for which data on ownership by banks are available, a higher concentration of ownership of the firm by either the main bank or the firm’s top three lenders increases the likelihood of the firm obtaining increased loans, suggesting that bank ownership of the firm stimulates evergreening behavior to a greater degree.

Julian Franks, London Business School; Colin Mayer, University of Oxford; and Hideaki Miyajima, Waseda University

The Ownership of Japanese Corporations in the 20th Century

Twentieth century Japan provides a remarkable laboratory for examining how an externally imposed institutional and regulatory intervention affects the ownership of corporations. Franks, Mayer, and Miyajima note that in the first half of the century, Japan had weak legal protection but strong institutional arrangements. The institutions were dismantled by the occupational forces after the war and replaced by a strong form of legal protection. This inversion of institutions and legal protection resulted in a switch from Japan in the first half of the century being a country in which equity markets flourished and ownership was dispersed to one in the second half of the century where banks and companies dominated with interlocking shareholdings. Business coordinators and zaibatsu sustained outside ownership in the first half of the century whereas in the second half of the century the dominant institution, banks, did not. Informal institutional arrangements therefore provide a better explanation than formal investor protection for the evolution of ownership in twentieth century Japan and hold important lessons for both Japan and other Asian countries in the twenty-first century.

Douglas Skinner and Meng Li, University of Chicago, and Kazuo Kato, Osaka University

Is Japan Really a "Buy"? The Corporate Governance, Cash Holdings, and Economic Performance of Japanese Companies

Over the past ten years there has been much discussion about whether corporate governance in Japan has improved and, if so, whether this results in improved corporate performance. Skinner, Li, and Kato investigate whether observed changes in Japanese firms' cash holdings and payout policy are consistent with improved governance. To do this, they benchmark Japanese firms against U.S. firms. They find mixed evidence on whether Japanese governance has improved overall, in that conditional on firm characteristics, the cash holdings of Japanese firms are still systematically higher than those of U.S. firms. There is evidence, however, of a strong increase in total payouts (dividends and repurchases) for Japanese firms, especially those that make repurchases. The authors also find that there is an inverse relation between changes in (excess) cash holdings and changes in performance for Japanese firms, consistent with improvements in governance being associated with improved performance. Further, they find that the market valuation of cash holdings was lower for Japanese firms than U.S. firms in the 1990s, which is indicative of poorer governance, but that this difference largely reverses in the 2000s. Overall, the evidence suggests that governance practices in Japan have improved for some firms, and that when governance does improve it is associated with improvements in performance and valuation.

Daiji Kawaguchi, Hitotsubashi University, and Soohyung Lee, University of Maryland

Brides for Sale: Cross-Border Marriages and Female Immigration

Every year, a large number of women immigrate as brides from developing countries to developed countries in East Asia. This phenomenon did not really exist in the early 1990s, but foreign brides currently comprise between 4 and 35 percent of newlyweds in these developed Asian countries. Kawaguchi and Lee argue that two factors account for this rapid increase in "bride importation": the growth of women's educational attainment, and a cultural norm that leads to a low net surplus of marriage for educated women. The authors provide empirical evidence supporting their theoretical model and its implications, using datasets from Japan, Korea, Singapore, and Taiwan.

Ryo Kambayashi, Hitotsubashi University, and Takao Kato, Colgate University

Trends in Long-term Employment and Job Security in Japan and the United States: the Last Twenty-Five Years

Taking advantage of a recent relaxation of the Japanese government's data release policy, Kambayashi and Kato conduct a cross-national analysis of micro data from Japan's Employment Status Survey and its U.S. counterpart, Current Population Survey. They focus on documenting and contrasting changes in long-term employment and job security over the last 25 years between the two largest advanced economies. They find that in spite of the prolonged economic stagnation, the ten-year job retention rates of core employees (employees of prime age of 30-44 who have already accumulated at least five years of tenure) in Japan were remarkably stable at around 70 percent over the last 25 years. There is little evidence that Japan's Great Recession of the 1990s had a deleterious effect on the job stability of such employees. In contrast, notwithstanding its longest economic expansion in history, the comparable job retention rates for core employees in the United States actually fell from over 50 percent to below 40 percent over the same time period. The probit estimates of job loss models in the two nations also point to the resilience of job security of core employees in Japan, whereas they show a significant loss of job security for similar employees in the United States. Core employees in Japan turned out to have weathered their Great Recession well, but mid-career hires and young new job market entrants were less fortunate, with their employment stability deteriorating significantly.

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