The Scientific Approach of Japan’s Financial Administration

February 6, 2017
by Noriyuki Morimoto

The new Strategic Directions and Policies announced by the Japan Financial Service Agency (JFSA) refer to “lending exclusion”. The meaning of it is “unavailability of lending to companies” that lacks a strong collateral/guarantee/balance-sheet, resulting in the failure of financial institutions to assist growth in corporate value as well as to capture business opportunities.

It’s only natural that a financial institution can finance companies with a sufficient collateral/guarantee/balance sheet. This simply leads to competition for lower interest rates, and does not offer an attractive business opportunity.

Rather among the companies that lack sufficient collateral/guarantee and seem to have a weaker balance sheet, there should be ones that may improve their credit standing and boost corporate value through the financial institutions’ active support. They should be attractive business opportunities because a higher interest rate can be applied to them.

However, the JFSA is not demanding the financial institutions to put an end to “lending exclusion”. This is a hypothesis presented by the JFSA as a situation that may be present, and its task is to monitor and understand what is actually happening.

This hypothesis is based on hearings by the JFSA to borrower companies, which showed that financial institutions still refuse loans unless the borrower has sufficient collateral/guarantee.

Based on the results of the hearings, JFSA assumed that the reasons are that financial institutions make credit and financing decisions based on fixed standards that center on financial indicators of whether a company has sufficient collateral/guarantee and a strong balance sheet. It built the hypothesis of “lending exclusion” based on the assumption that there are companies that lack a “strong collateral/guarantee/balance-sheet” but with “solid future business prospects or pivotal roles in the local economy”.

The JFSA expressed its intention to monitor the financing attitude of financial institutions through hearings from both the financial institutions and borrower companies. The verification is done as objectively as possible. The current financial administration takes a highly scientific approach in observing the actual situation, formulating a hypothesis, and testing the hypothesis.

Noriyuki Morimoto
Noriyuki Morimoto

Chief Executive Officer, HC Asset Management Co.,Ltd. Noriyuki Morimoto founded HC Asset Management in November 2002. As a pioneer investment consultant in Japan, he established the investment consulting business of Watson Wyatt K.K. (now Willis Towers Watson) in 1990.