Japan Project Meeting

NBER Reporter: Summer 2000

Japan Project Meeting

Members and guests of the NBER's Japan Project met in Cambridge on May 12 and 13. Fumio Hayashi, NBER and University of Tokyo, and Anil K Kashyap, NBER and University of Chicago, organized the meeting. The formal program for the second day was:

lijah Brewer III, Hesna Genay, and William Curt Hunter, Federal Reserve Bank of Chicago; and George G. Kaufman, Loyola University, "Does the Japanese Stock Market Price Bank Risk? Evidence from Financial Firm Failures"

Discussant: Eric S. Rosengren, Federal Reserve Bank of Boston

Ben S. Bernanke, NBER and Princeton University, "Japanese Monetary Policy: A Case of Self-Induced Paralysis?"

Discussant: Koichi Hamada, Yale University

Takao Kato, Colgate University, "The Recent Transformation of Participatory Employment Practices in Japan"

Discussant: Lisa M. Lynch, NBER and Tufts University

Yasushi Hamao, University of Southern California, and Takeo Hoshi, NBER and University of California, San Diego, "Bank Underwriting of Corporate Bonds: Evidence from Post-1994 Japan"

Discussant: Yishay Yafeh, Hebrew University

Fumio Hayashi, "Is There a Liquidity Effect in the Japanese Interbank Market?"

Discussant: Craig Furfine, Bank of International Settlement

Brewer, Genay, Hunter, and Kaufman examine the response in the stock market returns of Japanese commercial banks to the failure of four commercial banks and two securities firms between 1995 and 1998. They find that the stock market in general did respond to new information about the failures, and it did so rationally. Financially weaker banks were more adversely affected than healthier banks by the failure of other banks and financial institutions. This suggests that the Japanese stock market is more efficient, even for banks, than often perceived.

Bernanke argues that excessively tight monetary policy is an important factor inhibiting the recovery of the Japanese economy. Although it is true that additional open-market purchases would be of little help in the current zero interest-rate environment, there are several nonstandard approaches for "reflating" the economy that might be worth trying. These include large-scale acquisition of foreign reserves to depreciate the yen.

Using both quantitative data from national surveys and qualitative data from field research, Kato provides evidence on how Japanese firms used participatory employment practices during the economic slowdown of the 1990s and the recent financial crisis. Overall, he finds such practices to be enduring (except for small- to medium-size firms with no union where management seemed to try to weaken the role of employee participation). However, even for large, unionized firms, Kato sees a few early signs of trouble, which might eventually result in the breakdown of the participatory system if left untreated. For example, although the number of full-time union officials has been falling as a result of the continued downsizing of the labor force, the amount of time and effort that union officials need to put into participatory employment practices has not been falling. This uncompensated increase in workload for union officials could lead labor representatives on joint labor management committees to become less prepared and less committed to the interest of the rank and file. Second, top management sometimes finds the participatory system to be detrimental to timely and efficient management and thus tries to streamline it. Overloaded union officials may offer less resistance to this type of management initiative. Finally, the current system tends to produce a gap between top union officials and their general membership in the quantity and quality of information acquired from management. It is conceivable that such a gap could result in the breakdown of the participatory system.

In 1993, the corporate bond market in Japan underwent a major change: the Financial System Reform Act allowed banks to enter the underwriting business by setting up securities subsidiaries. Hamao and Hoshi analyze yield differentials between issues underwritten by bank subsidiaries and those underwritten by securities houses. They show that investors discount corporate bonds underwritten by bank-owned subsidiaries because they suspect conflict of interest. Bank-owned subsidiaries, on the other hand, try to avoid this conflict by underwriting bonds intended for institutional investors and bonds issued by firms with weak main-bank ties. While investors' suspicions of conflict of interest may put bank-owned subsidiaries at a disadvantage with respect to incumbent security houses, this study suggests that an aggressive entry strategy on the part of bank-owned subsidiaries has offset the disadvantage so far. In light of the recent repeal of the Glass-Steagall Act, these findings will be of particular interest to observers of the changing nature of the securities business in the United States.

Hayashi asks whether there is a liquidity effect in the Japanese interbank market for overnight loans. If the reserve requirement is the only reason for banks to hold reserves, then the demand for reserves should be infinitely elastic at the overnight rate that is expected to prevail for the rest of the reserve maintenance period. If, however, reserves are also useful for facilitating transactions between banks, then the demand curve will be downward-sloping as a function of the overnight rate. If the demand curve is downward-sloping, not horizontal, at the observed level of reserves, then there is a liquidity effect. Hayashi's results indicate that the large injection of reserves by the Bank of Japan after the Yamaichi debacle was not enough to eliminate the liquidity effect. The evidence in this paper is consistent with the view that the Bank's desk behaved optimally before and after the Yamaichi debacle.


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