- Mar. 22, 2019
- Mar. 13, 2019
- Mar. 7, 2019
Bank of Japan
Research and Statistics Department
Banks' asset portfolios changed significantly in the 1980s in Japan. This reflected the structural changes in corporate financing, namely, the shift from reliance on bank lending to capital market financing--the behavior particularly evident among large manufacturing firms--against the background of stable but slower economic growth and the deregulation of financial markets.1 The large fluctuations in asset prices in the late 1980s also contributed to the changes in banks' portfolios.
The most striking feature of the changes in banks'asset portfolios was the expansion of lending to small and medium-sized firms and the real estate industry, the sectors which still had limited access to the capital markets and from which banks could secure relatively large lending margins. Banks'aims in this expansion of lending were to (1) cover the decline in the volume of lending to large firms due to the above structural changes in corporate financing; and (2) make up for the drop in their profits caused by the diminished interest rate margin, resulting from intensified competition with the capital markets.
Although the lending to small and medium-sized firms and the real estate industry did carry a larger margin compared to that of large firms, in retrospect, the expansion of such lending in the 1980s failed to generate margin profit sufficient to cover the substantial risk involved: when the risk materialized as asset prices fell, banks were left with large amounts of nonperforming assets.
This article aims primarily to provide a quantitative description of the changes in corporate finance in Japan that lie behind the above developments in banks' lending activities, by surveying the changes in the corporate balance-sheet structure since 1980, using data gathered from firms.
The conclusions of the paper are summarized as follows.
(1) From the second half of the 1970s, structural changes in corporate finance emerged and proceeded, in the form of a smaller demand for financing, a subsequently lower reliance on external funds, and a decline in borrowings from banks as a proportion of external funds. Such changes were evident particularly among large manufacturing firms, against the background of stable but slower economic growth and the deregulation of financial markets.
As the large manufacturing firms shifted away from borrowings from banks in their financing of funds, banks were prompted to expand lending to small and medium-sized firms. As a result, larger amounts of external funds became accessible to these firms. For example, the shares of borrowings from banks in the total funds raised and of long-term borrowings in the total borrowings from banks rose, particularly for small and medium-sized non-manufacturing firms, reflecting the relatively stable demand for funds of these firms backed by the relative expansion of the service sectors in the economy.
(2) The upsurge in asset prices from the second half of the 1980s significantly affected corporate finance. Large manufacturing firms and banks raised funds though various "equity financing " instruments, as stock prices rose while interest rates remained low. A substantial portion of the funds raised was reinvested in the stock market. In addition, demand for land investment increased sharply among small and medium-sized firms particularly in the non-manufacturing sector, and among firms in the real estate industry, as land prices surged.2 Most of such land investment was financed by borrowings from banks reflecting the aforementioned keenness of banks to lend to small and medium-sized firms. The increase in such land investment led to a further rise in land prices. Land as collateral gained in value, and small and medium-sized firms enjoyed easier financing conditions as a result, which subsequently led to further land investment using further borrowings from banks.
(3) In the second half of the 1980s, business fixed investment increased markedly. Fixed investment of small and medium-sized firms had begun to recover gradually in the first half of the 1980s, presumably reflecting the increased availability of funds from banks mentioned above, as they shifted their lending to these firms. On the other hand, fixed investment of large manufacturing firms, which started to expand from around 1988, may have been excessive in the end, since these firms considered equity financing as a means of "low-cost " fund-raising on the basis of low nominal coupon rates.
(4) From the beginning of the 1990s, the fall in stock prices made it difficult for large firms to continue equity financing, and at the same time, reduced the value of these firms' assets, including stocks. Similarly, the fall in land prices not only devalued corporate assets but also impaired the balance sheets of small and medium-sized firms in the non-manufacturing sector and firms in the real estate industry, which had been investing in land using mainly borrowings from banks.3