Japanese Bank Loans for Private Fixed Investment
Author:
Joachim Ahrensdorf
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Publication Date:
01 Jan 1965
eISBN:
9781451956122
Language:
English
Keywords:
SP; CFA country; Euro-dollar market; dollar; loan; term loan; equipment loan; deposit ratio; loan portfolio; cover loan; loans amount; Commercial banks; Loans; Bank credit; Private investment; Open market operations
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There seems to be a general impression that Japanese commercial banks engage in capital financing to a much larger extent than commercial banks in other countries. Furthermore, it is often presumed that commercial bank credit in Japan plays an unusually large role in the financing of private investment in plant and equipment.1 This note attempts to test this presumption by comparing data for Japan and four other industrial countries (United States, Federal Republic of Germany, France, and Italy).

Abstract

There seems to be a general impression that Japanese commercial banks engage in capital financing to a much larger extent than commercial banks in other countries. Furthermore, it is often presumed that commercial bank credit in Japan plays an unusually large role in the financing of private investment in plant and equipment.1 This note attempts to test this presumption by comparing data for Japan and four other industrial countries (United States, Federal Republic of Germany, France, and Italy).

There seems to be a general impression that Japanese commercial banks engage in capital financing to a much larger extent than commercial banks in other countries. Furthermore, it is often presumed that commercial bank credit in Japan plays an unusually large role in the financing of private investment in plant and equipment.1 This note attempts to test this presumption by comparing data for Japan and four other industrial countries (United States, Federal Republic of Germany, France, and Italy).

Some Conceptual Problems

Comparisons of this sort are subject to two important qualifications. One stems from what may be called intrinsic factors and the other from certain differences in classifications in national statistics. In an analysis of the destination of bank credit by sector or purpose, there is the problem of appraising the significance of the results derived from banking statistics. The ultimate use of proceeds of loans cannot always be clearly verified; for example, borrowers generally have choices between different sources of credit for the financing of various undertakings. An increase in bank financing of a certain type of expenditure does not necessarily mean that this type has increased commensurately, or that it has increased at all. It may only reflect a shift in the sources of financing.

A similar problem arises with respect to an appraisal of the maturity pattern of bank lending. Short-term loans may, for example, be defined as having maturities of up to one year, and term loans as having maturities of one year and over. If, however, short-term loan agreements permit borrowers to have the loan renewed for another period after it has matured, or if loans are more or less routinely renewed, such credits in effect become term loans. It follows that any change in the willingness of banks to renew short-term loans will not be reflected in the maturity pattern of their loan portfolios; therefore—on the assumption that term loans are used primarily for fixed capital expenditure and short-term loans for working capital purposes—such a change will distort conclusions as to the relative importance of bank lending for working and fixed capital purposes, respectively.

Conceptual differences in national statistics exist mainly with respect to coverage and maturity (or purpose) classifications. The Japanese data shown in Table 1 cover the loans and discounts of 13 large city banks (excluding trust accounts and overdrafts). Since there are no Japanese data for maturities, equipment loans are considered as term loans and operating loans as short-term. The U.S. data in the table cover commercial and industrial loans of the 10 largest banks in New York City, term loans being defined as having an original maturity of more than one year.2 The data for France cover loans of some 300 commercial banks to private and nationalized enterprises and to individuals—medium-term loans running from three months up to five years and long-term loans for five years and over. The Italian data cover commercial bank loans to the domestic market (excluding the public sector and security issues); term loans have a maturity of more than one year. The German data refer to commercial bank loans (excluding security holdings) to businesses and individuals. Medium-term loans have an original maturity of six months to less than four years, and long-term loans have a maturity of four years and over.

Table 1.

Selected Countries: Commercial Bank Loans and Private Investment in Plant and Equipment, Annually, 1960–63

(Columns 1, 2, and 3 in billions of national currency)

article image

Sources: Bank of Japan, Economic Statistics of Japan, 1962, and Economic Statistics, monthly. Data on loans are loans and discounts (excluding overdrafts and trust accounts)) outstanding at end of year of 13 large city banks. Equipment loans in the Japanese sources are used here to represent term loans.

Sources: Federal Reserve Bank of New York, Monthly Review (for columns 1 and 2) and Federal Reserve Bulletin (for column 3). Data on loans cover loans outstanding on last Wednesday in December of the 10 largest banks in New York City. Term loans are for more than one year.

Sources: Conseil National du Crédit, Annexes au Dix-Septième Rapport Annuel, 1962 (for columns 1 and 2) and Ministère des Finances, Statistiques & Etudes Financières, Supplément: Huitième rapport du conseil de direction du fonds de développement économique et social, June 1963 (for column 3). Data on loans cover loans outstanding at end of year of about 300 commercial banks to private and nationalized enterprises and to individuals. Term loans cover medium-term and long-term loans; medium-term run for three months up to five years, and long-term for five years or longer. The 1963 data on loans are provisional.

Sources: Banca d’ltalia, Annual Report, 1962 and 1963 (for columns 1 and 2) and Ministero del Tesoro, Relazione Generale sulla Situazione Economica del Paese, 1961, 1962, and 1963 (for column 3). Data for loans cover loans and mortgages outstanding at end of year of commercial banks to the domestic market (excluding loans to the public sector and security issues). Term loans are for one year or longer.

Sources: Deutsche Bundesbank, Monthly Report (for columns 1, 2a, and 2b) and Statis-tisches Bundesamt, Wirtschaft und Statistik (for column 3). Data for loans are loans outstanding (excluding security holdings) at end of year of commercial banks to businesses and individuals. Medium-term loans run for six months up to four years; long-term loans run for four years or longer.

It might be argued that conclusions derived from such comparisons as those shown in the table fail to take into account not only these differences in statistical classification but also differences in banking practices. For example, commercial banks in some countries may traditionally be more accustomed to renew short-term loans than are banks in other countries. While such factors may of course play a role, they are unlikely to be sufficiently important to explain large differences between countries. With respect to Japan, reference is frequently made to the close relationship between certain large banks and certain large enterprises. Similar observations have, however, been made regarding New York City banks.3 Official surveys in the United States suggest that bank loans to some 300 large corporations include a larger proportion of term loans and a smaller proportion of short-term loans than do bank loans to manufacturing corporations in general.4 In Germany, close relations between large banks and large enterprises are suggested by evidence that nearly 60 per cent of total time deposits in excess of DM 50,000 in commercial banks are held by 3 large commercial banks.5

When these various qualifications are borne in mind, the data in the tables nonetheless suggest orders of magnitude in regard to commercial bank lending for fixed capital investment and the significance of such lending as a source of finance for private investment in plant and equipment.

Term Loans in Relation to Total Loans

The most striking aspects of the data shown in the table are the relatively low ratio of term (equipment) loans to total loans for Japan (8–9 per cent) and the relatively high ratio for the United States (55–58 per cent). Even if it is assumed that the data for Japan’s term loans are understated to a larger extent than are the data for the other countries studied here—Japanese sources estimate an effective ratio of 15 per cent6—the ratio would still be much lower than that for either the United States or Germany. Indeed, it would still be only about half the ratio (some 30 per cent) estimated for U.S. member banks other than the New York City banks.7 Moreover, a survey in the fourth Federal Reserve District (Cleveland) in 1955 indicated that nearly two thirds of total commercial and industrial loans, by amount, were to borrowers who had been continuously in debt to the same bank for longer than one year, although only about one third of all the loans had a nominal maturity of more than one year.8

Even if the ratio for Japan were taken at 15 per cent, it would still be below that for Germany, which is about 20 per cent for loans with maturities of four years and over. For France and Italy, the corresponding ratios (7–18 per cent and 9–10 per cent, respectively) appear to be roughly comparable to the Japanese ratio. However, in France “medium-term” begins at three months; moreover, the largest part of medium-term and long-term loans represents medium-term assets eligible for rediscounting with the Bank of France.9

Term Loans in Relation to Private Investment in Plant and Equipment

In the use of term loans as a source for capital funds for industry, Japan is again at the lower end of the scale. The ratio of equipment loans to private investment in plant and equipment, ranging between 12 and 17 per cent, is only slightly higher than the comparable ratio for the United States and for Germany—the ratio for the latter country being in terms of long-term loans (four years and over).

This comparison may be qualified further. In Japan, the total loans and discounts of the 13 city banks with some 1,800 branches are about twice as large as the loans of 65 local banks with about 3,700 branches. In the United States, the commercial and industrial loans of the 10 largest New York City banks amount to somewhat more than one fourth of the total of such loans by all member banks. When the term loans of the New York City banks shown in Table 1 and the term loans of other member banks (which are estimated to represent about one third of their-total loans) are combined, the resulting total is equal to about 35 per cent of total private investment in plant and equipment. In Japan, on the other hand, the equipment loans of the city and local banks amount to nearly 20 per cent of such investment. Even if it is assumed that Japanese statistics understate equipment loans to a larger extent than do the statistics of the United States or the other countries, and if the ratio of such loans to total loans is taken as 15 per cent, the Japanese loans amount to about 35 per cent of private investment in plant and equipment, i.e., more or less the same proportion as in the United States. If the qualification regarding automatic renewals in the United States mentioned above is taken into account, the percentage for the United States becomes higher. For Germany, Italy, and France the roughly comparable proportions vary around 25 per cent. For each of these three countries, the commercial banking system to which the data refer corresponds more to the broader data for Japan and the United States discussed above than to the data for these two countries which are shown in the table.10

In Italy and France, relatively low ratios of term loans to total loans are associated with comparatively high ratios of term loans to private investment in plant and equipment. For Italy, this may be related to the presumption that a relatively large proportion of term loans is utilized for financial, rather than for real, investment.

Some Views on Term Lending

The number of years covered by Table 1 is too small to attach significance to the indication that the percentages generally tended to rise. In this context, however, it is of interest that the Radcliffe Committee observed that “the principle of the term loan is no longer completely alien to British banking practice,” and recommended that “the banks should be ready to offer term loan facilities within reasonable limits, having due regard to their liquidity requirements, as an alternative to a running overdraft for creditworthy industrial and commercial customers.” 11 Early in 1964, it was reported that London’s big deposit banks were taking an increasing interest in international financing, particularly in realms that have normally been considered on the periphery of their operations, e.g., longer-term export credits, capital project financing, and underwriting of security issues.12 Similarly, a U.S. banker has pointed to the increasing inclination of U.S. commercial banks to make term loans abroad.13 A Japanese study of developments in the 1950’s, on the other hand, came to the conclusion that “the degree of independence of investment on [total] bank loans has been heightened more as investment of enterprises has become more vigorous. . . .” 14 In 1962, the sources of the net increase in funds for industrial equipment were as follows: net issues of industrial stocks and bonds, 42 per cent;15 loans by government financial institutions, including special accounts for financial purposes, 13 per cent; and loans by private financial institutions, 45 per cent. Of the last group, however, commercial banks (both city and local banks, excluding trust accounts) provided only 7 per cent; the remainder was furnished by private institutions, such as long-term credit banks, trust accounts of all banks, mutual loan and savings banks, credit associations and cooperatives, and insurance companies.

Japan’s monetary authorities consider it “desirable that a larger proportion of personal savings which are currently channeled chiefly into the banking system should be invested directly in the capital market and that, at the same time, banks should refrain from making medium- and long-term loans.” 16 This view is based on concern over a combination of factors which, perhaps paradoxically, has made it possible in recent years to exert “a very powerful influence” through a tight money policy.

This combination of factors and the pertinent Japanese views may be summarized as follows: 17 Corporate businesses rely on financial institutions and capital markets for about 60 per cent of their (total) funds, whereas the figure in the United States is about 30 per cent. The predominance in Japan of “indirect” finance tends to create too close a relationship between banks and enterprises. Partly as a result, banks tend to lend even if their lending capacity is dangerously low. Consequently, they have been driven to perpetual dependence on borrowing from the Bank of Japan, and they tend to be chronically “overloaned” (i.e., they have negative net free reserves, or loan/deposit ratios, of close to—or even more than—100 per cent).

This tendency has been strengthened further from the supply side. Economic growth requires an approximately parallel increase in the issue of banknotes, but the rise in foreign exchange reserves has been generally insufficient to provide for this increase. Nor have open market operations made possible the necessary expansion, because the bond market is too limited—one reason being the absence of bond issues by the central government. Consequently, the Bank of Japan has had to rely mainly on the passive instrument of lending to banks in order to provide the necessary increase in the note issue. This has perpetuated the “overloan” situation, which in turn has made open market operations difficult and the effective use of changes in reserve requirements virtually impossible. Moreover, it has hindered the development of the capital and money markets and hampered flexible market responses to interest rates. While tight money (discount) policies have been highly effective in re-establishing balance of payments equilibrium, they have been associated with severe business fluctuations. As restrictions on foreign trade and payments are increasingly liberalized, more reliance may be placed on monetary policy to maintain over-all equilibrium with stable growth; at the same time, however, it will be more difficult to carry out monetary policy, because of the increased freedom of international capital movements. In order to make possible an appropriate flexible monetary policy, working through interest rates, open market operations, and changes in reserve requirements, the “overloan” situation must be corrected, the capital market must be developed, and banks must refrain from making medium-term and long-term loans.

Some Conclusions

Statistical analysis does not confirm the view that in Japan term lending by commercial banks amounts to a larger proportion of total commercial bank lending and of private investment in plant and equipment than it does in certain other industrial countries. Even if it is assumed that the more or less automatic renewal of short-term credits is more customary in Japan than it is in the other countries, the respective orders of magnitude remain comparable.

This conclusion is not incompatible with the Japanese authorities’ concern over the heavy reliance of enterprises on “external” rather than on “internal” finance and their reliance on credits from all financial institutions rather than from the capital market. In fact, Japanese enterprises do rely to a relatively large extent on external finance for investment funds. Nevertheless, commercial banks appear to contribute a relatively smaller share to equipment financing than is frequently believed. The primary sources for such financing seem to be the security markets and private and public financial institutions other than commercial banks.

Les prêts des banques japonaises pour les investissements privés fixes

Résumé

On semble avoir l’impression en général que les banques commerciales japonaises effectuent le financement des investissements dans une mesure beaucoup plus grande que les banques commerciales des autres pays. De plus, on suppose souvent que le crédit des banques commerciales joue au Japon un rôle d’une importance exceptionnelle pour le financement des investissements privés dans les installations et le matériel industriels. Le présent article s’efforce de soumettre cette supposition à un test en comparant les données relatives au Japon et à quatre autres pays industriels (Etats-Unis, France, Italie, et République fédérale d’Allemagne).

L’auteur y examine certaines différences de concept dans le domaine des statistiques nationales et des méthodes bancaires, et constate qu’elles ne s’opposent pas à l’utilisation des données bancaires pour obtenir les ordres de grandeur pertinents. L’analyse statistique qui suit ne confirme pas le point de vue selon lequel les prêts des banques commerciales du Japon dont l’échéance dépasse un an représentent une proportion du montant global des prêts des banques commerciales ou des investissements privés dans les installations industrielles plus élevée que dans les quatre autres pays industriels considérés. Même en supposant que le renouvellement plus ou moins automatique des crédits à court terme est chose plus courante au Japon que dans ces autres pays, les ordres de grandeur respectifs n’en demeurent pas moins comparables.

Cette conclusion n’est pas incompatible avec la préoccupation causée aux autorités japonaises par le fait que les entreprises font appel dans une mesure très importante à des moyens de financement “externe” plutôt que “interne” et le fait qu’ils ont recours au crédit de toutes les institutions financières plutôt qu’au marché des capitaux. En fait, les entreprises japonaises font appel dans une mesure relativement importante aux moyens de financement externe pour les fonds d’investissement. Néanmoins, les banques commerciales semblent contribuer dans une proportion relativement plus faible qu’on ne le croit souvent au financement de l’équipement. Les principales sources d’un tel financement semblent être les marchés des valeurs et les institutions financières publiques et privées autres que les banques commerciales.

Préstamos bancarios para inversiones fijas del sector privado en el Japón

Resumen

Parece existir la impresión general de que los bancos comerciales japoneses se ocupan de financiar inversiones de capital en un grado mucho mayor que los bancos comerciales de otros países. Además, a menudo se supone que en el Japón los créditos otorgados por los bancos comerciales desempeñan un papel excepcionalmente importante en el financiamiento de inversiones privadas en instalaciones y equipos. En este apunte se procura determinar la certeza de esta conjetura mediante una comparación entre los datos del Japón y los de otros cuatro países industriales, a saber, Estados Unidos, Francia, Italia y la República Federal de Alemania.

Se examinan ciertas diferencias de concepto existentes en las estadísticas nacionales así como en las prácticas bancarias, y se saca en conclusión que no queda desvirtuada la utilización de los datos bancarios para conocer los órdenes de magnitud correspondientes. El análisis esta-dístico que sigue no corrobora el criterio de que en el Japón los préstamos a plazo de un año o más de los bancos comerciales alcancen una proporción mayor que en los otros cuatro países industriales, ni del total de los créditos otorgados por los bancos comerciales ni de las inversiones privadas en instalaciones y equipos. Aun en el caso de que se dé por sentado que la renovación más o menos automática de los créditos a corto plazo es más usual en el Japón que en los otros países, los órdenes de magnitud respectivos siguen siendo comparables.

Esta conclusión no es incompatible con la preocupación de las autoridades japonesas con motivo de la intensa dependencia de las empresas en el financiamiento más bien “externo” que “interno” y de que recurran a los créditos de todas las instituciones financieras y no a los recursos del mercado de capitales. En efecto, las empresas japonesas optan en gran parte por el financiamiento externo como fuente de inversión. Empero, aparentemente, la banca comercial contribuye al financiamiento de equipos en una proporción que es relativamente menor de lo que a menudo se piensa. Las fuentes primordiales para ese financiamiento parecen ser los mercados de valores y las instituciones financieras privadas y públicas que no sean los bancos comerciales.

*

Mr. Ahrensdorf, Chief of the Far Eastern Division, was educated at the Universities of Berlin, Heidelberg, and Michigan. Before joining the Fund staff, he was professor of economics at the University of the East, Manila, and lecturer at the University of the Philippines. He has contributed several papers to economic journals.

1

For example, see Masuo Yanagi, “Role of Commercial and Development Banks in Economic Development,” Mitsui Bank, Monthly Review, April 1964, pp. 1–3; Kaoru Inoue, “Commercial Banking,” an address for the Fourth Seanza Central Banking Course, Tokyo, 1962; Edna E. Ehrlich, The Role of Banking in Japan’s Economic Development (unpublished dissertation, New School for Social Research, 1960), pp. 90–98 (includes numerous quotations from Japanese sources); and Hugh Talbot Patrick, The Bank of Japan: A Case Study in the Effectiveness of Central Bank Techniques of Monetary Control (unpublished dissertation, University of Michigan, 1960), pp. 106, 110.

2

Since January 1960, the Federal Reserve Bank of New York has been reporting these data (by industry and term) for every Wednesday.

3

Federal Reserve Bank of New York, “Term Lending by New York City Banks,” Monthly Review, February 1961, p. 29, and “Commercial Banks as Suppliers of Capital Funds to Business,” Monthly Review, December 1963, p. 185.

4

George S. Moore, “Term Loans and Interim Financing,” in Business Loans of American Commercial Banks, Benjamin Haggott Beckhart, editor (New York, 1959), pp. 215–16.

5

Ekhard Brehmer, Struktur und Funktionsweise des Geldmarktes der Bundesrepublik Deutschland seit 1948 (Kieler Studien 65, Tübingen, 1964), Table 2.

6

Yoshizane Iwasa, “Characteristics of Japanese Banking and the Modernization of Management,” Fuji Bank Bulletin, October 1963, p. 2.

7

Federal Reserve Bank of New York, Monthly Review, February 1961, p. 29.

8

G. S. Moore, op. cit, p. 215, citing Federal Reserve Bank of Cleveland, Monthly Business Review, September 1956.

9

In France, technically, medium-term credit consists of short-term credits (three months) automatically renewable up to five years. It is the fact that, legally, medium-term credit appears as short-term credit which authorizes the Bank of France to rediscount such credits.

10

These broader data were not used in the table because, for the United States, annual figures for term loans are available only for the large New York City banks.

11

Committee on the Working of the Monetary System, Report (Cmnd. 827, London, 1959), pars. 922 and 942. Generally, there are no comparable data on term financing available for the London Clearing Banks.

12

“Mobilizing Europe’s Capital,” The Banker, January 1964, pp. 15–16.

13

“Cooperation Between United States Commercial Banks and International Financial Institutions in Financing Economic Development,” address by August Maffry at Bankers’ Seminar (Asia), Commission on Asian and Far Eastern Affairs of the International Chamber of Commerce, Tehran, April 12–17, 1964.

14

Economic Research Institute, Economic Planning Agency, Economic Bulletin No. 10, An Analysis of Deposits, Loans and Liquidity of Japanese Banks (Tokyo, July 1962), p. 34.

15

It is interesting to note that U.S. data on sources and uses of corporate funds suggest that between 1959 and 1962 the ratio of net new security issues to plant and equipment outlays varied between 22 and 33 per cent; see Economic Report of the President (Washington, 1963), p. 250.

16

The Bank of Japan: Its Function and Organization (The Bank of Japan, Economic Research Department, March 1962), p. 125.

17

Based on ibid.

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Cover IMF Staff Papers
IMF Staff papers: Volume 12 No. 1
Author:
International Monetary Fund. Research Dept.
Volume/Issue:
Volume 1965: Issue 001
Publisher:
International Monetary Fund
ISBN:
9781451956122
ISSN:
1020-7635
Pages:
174
DOI:
https://doi.org/10.5089/9781451956122.024