The crisis of Japan’s financial industry without risk taking

October 9, 2018
by Noriyuki Morimoto

In finance, risk taking is easily confused with risk management. Looking at the actual business of financial institutions, the risks they take are within the scope set by regulations as banking businesses, to the extent that such risks can be taken – rather than should be taken – under such regulations, in a passive, or – by a stronger expression – unaware manner, often merely as an extension from the past.

 

Finance is also a business, and as common business sense, financial institutions should have to determine the unique differentiated scope of their business, identify priority customers, and take the risks that should be taken to create value from the customer’s point of view. Such risks have to be strictly defined, and risk-taking must be carried out with awareness.

 

The confusion between risk-taking and risk management is particularly noticeable in Japan. It may be a result of the fact that full-scale financial regulation reform was late to be implemented. Unfortunately, there are no financial institutions that conduct risk-taking with full awareness.

 

However, the Japanese financial industry is now at its ultimate crisis. Moreover, the crisis was not caused by external factors such as negative interest rates. As a result of fruitless interest rate competition, sales of investment trusts and insurance diverged from the customer’s point of view, and cost reduction without strategy, their capability of fundamental risk-taking declined consistently. When the results materialized, it had just been a matter of time, although the external environment did certainly accelerate the crisis.

 

Therefore, in recent years, the Financial Services Agency has been strongly demanding financial institutions to take risks with awareness. Certainly, the FSA’ sense of urgency should have been deeply and quietly penetrating the financial world, but on the surface, it seems that the financial industry is hardly aware of this crisis.

 

It’s not easy to provide an answer on how to get out of the crisis. Because it is not easy, financial institutions have not been able to take concrete actions, and look like they have no idea of what should be done. That is the current state of Japanese finance.