Prospects for Financial Reform

Does the FSA Have An Effective Agenda?

Finance is the lifeblood of capitalism. It decides who gets to produce what, and how much. All day and all through the night, going back and forth across borders, it shifts capital from one company to another. If it’s working well, it dispenses credit to firms likely to use it well and withdraws it from those that no longer do so. The process not only raises living standards but also the financial returns to capital (i.e., whether ¥1,000 of capital earns 2% or 5%). That, in turn, is how the system provides better returns to the nation’s households, whether through bank accounts, pensions, or the stock market.

            Unfortunately, for at least four decades, Japan’s financial system has mishandled both of its jobs, allocating capital to its most efficient use and providing good returns to households, It has handed out money to zombies and mediocrities while denying it to innovative new companies. E.g. a stunning 12% of GDP is devoted to government loans and loan guarantees that shore up small and medium enterprises that would otherwise go belly up. It’s disguised unemployment. At the same time, dysfunctional capital markets have kept hoards of fallow cash in corporations that cannot use it productively while denying households their proper share of those profits, whether via the stock market or the banking and insurance systems. Japan cannot grow better without fixing its finances. All this is detailed in Chapter 13 of my book, The Contest for Japan’s Economic Future.

            This week, I engaged in a dialogue on policy developments (or lack of such) in Japan’s financial system with Deputy Commissioner Toshiyuki Miyoshi of the Financial Services Agency (FSA) It was hosted via the web by Nicolas Version of the Peterson Institute for International Economics (PIIE).

            Miyoshi-san off with a tour d’horizon on all sorts of financial developments in Japan, devoting time to Tokyo’s decades-long (and futile) hope to make it a major international financial center (starts at minute 3:30). I then discussed the areas where Japan needs reform. Miyoshi largely agreed and discussed the political obstacles to making this happen (my comments start at minute 17:50). The three of us then engaged in a dialogue (begins at minute 24:25).

The topics covered include:

·        Should/can become a major international financial center

·        Why are Japan’s megabanks orienting so much to global markets

·        Does such an expansion pose a risk to financial stability; how does the FSA handle this

·        How the financial system allocates capital poorly and thereby stifles growth

·        What is the political reason for poor financial functioning and what is the FSA doing about it

·        Has the increased presence of foreign banks had a positive impact on structural reform in Japanese finance

·        How lowering dividend taxes could induce household investors to invest in high-dividend investment trusts and gain a share of companies’ high profits

·        How METI prioritizes big firms instead of fighting for tax incentives for more startups

·        Should the government finance venture capital

·        How are the regional banks doing

To view the dialogue, click

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