Changes in corporate finance extend deregulation in Japan
Thus the large-scale issue of government bonds played a role in destroying the segmentation and interest-rate regulation of Japanese finance. But changes in corporate finance at Japanese companies also accelerated this deregulation.
As Japanese industry recovered from World War II the years of working, saving, investing and exporting began to bear fruit. Now, instead of being chronically in need of funds for investment, Japanese companies began to show positive cash flow. By the 1980s, instead of looking for funds to borrow, Japanese corporations began to look for places where they could invest their excess cash.
This had a profound effect on the banks. The banks, which had made a comfortable living out of loaning money to corporations, now had to scramble to find new people to lend to. Loans to Japanese consumers were off limits because revolving consumer credit was banned until 1992, so the banks turned to property loans.
This trend towards property lending occurred for all the banks - the city banks, the long term credit banks and the trust banks. In the boom years of 1987 and 1988, loans collateralized by property accounted for more than half of city banks' incremental loan growth.
Also, as corporations became successful, they became less willing to let bankers run their companies. Companies want to keep good relations with bankers in case of trouble, but in one respect Japanese managers are similar to American managers - neither group likes to have their company run by bankers. Much better to deal with a diffuse group of share or bond holders than to mollify constantly a few nosy bankers. Thus when extra funding for a new project was needed, Japanese companies in the 1980s increasingly skipped the middleman - the banks - and obtained funds directly from investors through equity or bond issues.
Equity issues had become increasingly popular after Japanese firms discovered in 1969 that they could get much more "bang for their buck" by issuing shares at market price. Previously, they had treated common stock issues as an American financial officer would treat an issue of preferred shares. Japanese firms had offered common equity at par value, and the cost of the equity was seen as the dividends paid on the par issues.
However, after the advent of issue at market price, and with the increasingly high price to earnings multiples on stocks in the 1980s, companies issued loads of equity. What did companies do with this the money obtained from equity issues? They replaced their bank debt. For example in 1980 corporations received 12 percent of their funds from equity and corporate debt issues, 87 percent from their banks and one percent from other sources. By 1989 corporate financing consisted of 27 percent debt and equity issues, five percent commercial paper, 64 percent bank loans and four percent other sources.
Also, increasingly cosmopolitan Japanese corporations began to learn that they could obtain better rates for bonds than bank loans. However, although Japanese corporations knew corporate bonds were a good source of funds, bonds were not available to most corporations until the late 1980s. Unsecured, straight-debt corporate bonds (with no links to equity) were simply not allowed in Japan until 1985. There had been a bond market in Japan, but it was mostly limited to secured bonds issued by utilities. In 1989 only two percent of Japanese corporate debt was in the form of bonds. The comparable number in the US was 48 percent. Banks didn't want to allow companies to issue bonds because it posed a direct conflict with their business.