Long-term credit banks in Japan

Long-term credit banks in Japan

Besides the Bank of Japan, which implements government policy in short-term money markets, there is also the Industrial Bank of Japan which guides government policy in long-term bank lending.

Long-term credit banks like the IBJ are unique to Japan. There is nothing comparable in the United States. This is because the long-term credit banks acted as a proxy for a corporate bond market in Japan. In the US companies seeking long-term debt financing simply issue their own bonds. In Japan, except for some utilities, Japanese industrial firms were not allowed to issue their own bonds.

During the postwar reconstruction of Japan, government officials apparently felt uncomfortable with letting the free market decide where to allocate long-term debt funds. So the MoF appointed the long term credit banks to lend funds long-term. This was done through the Industrial Bank of Japan, the Long-Term Credit Bank of Japan and the much smaller Nippon Credit Bank.

Of the three, the IBJ is the largest with assets of $300 billion - about half again the size of Citicorp.

The Industrial Bank of Japan was formed as a government-owned bank at the turn of the century. After the war the bank was privatized, but close links between the IBJ and the government continued.

The government often winks at things that would not be tolerated in the United States. For example during a credit crisis in the 1960s the IBJ dispatched several of its personnel to serve as directors and executives at leading securities firms and at supposedly competing long-term credit banks.

The Industrial Bank of Japan is so powerful and influential that industrial firms try to gain its favor by buying and holding IBJ's shares. IBJ has the lowest float of any listed company - only two to three percent of its shares are turned over in a year. IBJ in turn, owns stock in over 600 listed companies.

The three credit banks gained power through their ability to control long-term lending. They obtained long-term funds through five-year bank debentures. This was a distinct advantage because other banks could not issue long-term debentures.

However, credit banks could not accept deposits from individuals so as to not compete with other banks. Bank debentures were issued to institutions like life insurers, and the procured funds were invested in government approved industries like steel and ship building.

In spite of their connections, the long-term credit banks are beginning to lose some of their luster. First their de facto monopoly on the issuance of bonds has been seriously eroded with the opening of the corporate bond markets.

Second their traditional clients like steel and shipbuilding companies are in decline. Finally, like the city banks, the credit banks have trillions of yen in bad property loans.

In spite of these problems, deregulation has opened up new doors for the credit banks. With new securities subsidiaries, long-term credit banks see their roles shifting from a surrogate for the bond market to Japan's premier investment bankers.