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FIID US Session(July 31 2015) The Impacts of Financialization:Commonalities between US and JapanYongdo Kim

(Hosei University, Japan)

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AgendaBackgroundCommon points between Japan and USConclusion

BackgroundRegarding the argument of “recent Japan=hybrid type of new US model and old Japanese model”.

For example, some scholars consider the change of corporate governance in Japan as a hybrid, which is a comibination of traditional “relation” type and new “market” type (Aoki et al.(2007); Whittaker and Deakin(2009);Olcott(2009))

However, every true economy is always “hybrid”.Organizations strongly affect markets, and vice

versa. Accordingly, in the sense that market and organizational principle are intertwined, every real economy always is the “hybrid”.

Financialization and its impacts are no exception.

Financialization Marketization⇌(Market Principles)

⬇⬆(intertwine)

Organizational Principles

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Considering this intertwining, this presentation focuses on common points between US and Japan. In fact, Japanese business system has shared many common points with US old economy business model until the 1970s.

Common pointsReforms of corporate governance in Japan and its limits

In order to strengthen monitoring and pressure on CEOs and to stimulate incentive for CEO by compensation(Market Principle)Still, boards are currently dominated by CEOs the same as the US(Organizational Principle).

Strengthen market principles in stock trade to converge on the USJapan belatedly established the institution to approve pure holding companies, stock buyback, and stock option to strengthen market principle.

Top management behaviorsChanged: Japanese top management has become more sensitive to ROE and stock price short-term perspective on ➩decision-making as the US(Market Principle).Unchanged: on the other hand, most CEOs are internal-promotion type and their income is weakly related to the companies’ performance(Organizational Principle).

⇒Question raised to the arguments that emphasize institutional complementarity between subsystemse.g. internal-promotion and fixed income of CEO⇌short-term decision-makingor long-term decision-making= the market principles and organizational principles are intertwined in new manner.

Stock buyback in Japan since 1994 to emulate with the US(table1, table 2)Market Principle: i)most stock buyback is practiced by open market repurchases similar to US, ii) decrease in cross-holding of shares between financial institutions and corporations(table 3)

Table1. Dividends and stock buybacks of listed companies on the stock exchange(Millions of Yen) Year dividends buyback of stock

1995 1,940 100

1996 2,050 100

1997 2,090 480

1998 1,920 390

1999 1,920 490 2000 2,190 690

2001 2,060 1,420

2002 2,210 3,180 2003 2,500 2,540 2004 3,030 2,540

2005 3,750 4,340

2006 4,380 3,900

Table2. Stock repurchasing of Japanese comapanies , 2013(billion Yen)

Footnote: From January 1 2013 to September 24 2013

Ranking Name of company Amount

1 NTT 272

2 Japan Tabacco 250

3 Mitsui Sumitomo Trust Holdings 200

4 Risona Holdings 100

5 Chiba Industrial Bank 60

6 Canon 50

7 Kirin Holdings 50

8 Kansai Urban Bank 41

9 Mizuho Financial Group 37

10 Tokyo Gas 36

Table 3. share holding by investor categories and cross-holding in Japan(per cent)

Footnote: Samples are listed non-financial corporations in the First and Second Section of Tokyo Stock Exchange(source: Miyajima(2011).

1986 1991 1997 2002 2006 2008Ratio of institutional

investor to total share holding 6.79 10.03 11.76 14.00 24.57 23.25

(Ratio of foreign investor to total share holding) 5.28 5.21 7.62 7.34 15.01 12.24

Ratio of cross-holding to total share holding 14.27 14.53 13.48 10.81 8.37 8.54

Ratio of mainbank to total share holding 4.37 4.23 4.10 N.A. 3.10 3.10

Has the separation of ownership and control reversed?Increased share holdings by CEOs in the US represents change in separation of ownership and control.Although Japanese executives hold very few shares, there are in Japan many well-performing companies whose control has not separated from ownership.

Along with financialization, there are changes taking place in the industrial structure: rapid growth of IT related industries and service sector to make up for the decline of manufacturing industries like US⇒It has resulted in lowering the rate of labor union participation , an increase in outsourcing⇒increase of dismissal and non-regular workers⇒ increase of unstable and short-term employment like the US⇒ shrinkage and downfall of middle class and expansion of income gap between upper class and lower class

ConclusionBoth US and Japan economy are consistently “hybrid” type.Japan shares effects of financialization with US in many aspects. For example, direction of change in corporate governance and stock trade/ increase of short-term employment/short-term perspective decision making of CEO(more sensitive to ROE and stock price)

It is highly likely that financialization will break institutional complementarity between subsystems in Japanese business system which previous studies emphasize ⇒new manner of intertwining between market principle and organizational principle.It is highly possible that financialization will cause a reversal of separation between ownership and control in both US and Japan.

ReferenceAoki, Jackson, and Miyajima(2007), Corporate Governance in Japan: Institutional Change and Organizational DiversityOlcott,G(2009),Conflict and Change: Foreign Ownership and the Japanese FirmWhittaker and Deakin(2009),Corporate Governance and Managerial Reforms in Japan