by Noriyuki Morimoto
The Japan Financial Services Agency (JFSA) has raised the issue of “Japan-style lending exclusion”. This refers to the situation in which entities “without strong collateral/guarantee/balance-sheet but with solid future business prospects or pivotal roles in the local economy” fail to receive sufficient funding, because financial institutions make credit and financing decisions based on fixed standards that focus on financial indicators of whether a company has sufficient collateral/guarantee and a strong balance sheet.
This kind of lending exclusion is not a uniquely Japanese problem. So why is it explicitly called “Japan-style lending exclusion”? The intention of JFSA or Commissioner Nobuchika Mori behind this expression is not indicated, but I assume it is related to the weak market functions which are characteristic of the Japanese finance industry.
The Japanese finance industry is overwhelmingly dependent on indirect financing, or the intermediary function of financial institutions such as banks that handle deposits. Its direct financing function, delivered through the capital market, is very weak. Therefore, when lending exclusion occurs in the financial intermediary function, the market function falls short of supplementing its role. It seems that the term “Japan-style lending exclusion” was adopted to raise awareness of the structural problem of the Japanese finance industry.
The current direction of the JFSA is clearly aiming for the shift from indirect to direct finance. The fundamental shift from indirect to direct (i.e. from the financial intermediary to capital market function) is not expressed in its Strategic Directions and Policies, but there are several signs that the order of priority has changed. For example, policy measures for the financial intermediary function used to be listed before those for the capital market function, but the order was reversed from last year.
And above all, the emphasis in the direction of retail financial service from saving to asset building essentially means the shift from deposits to trusts and other investments. This is an indication of the shift in priority from financial intermediary to capital market functions.
In other words, “Japan-style lending exclusion” not only refers to the need to strengthen the financial intermediary function, but also entails issues in the capital market function.
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.