A 'Main Bank' System Supported Japan's Postwar Economic Growth; Where It Is Today

As of 2023, Japan's city banks, which numbered 10 in 1998, have been reorganized into four financial groups: Mitsubishi UFJ, Sumitomo Mitsui, Mizuho, and Resona. Long-term credit banks are gone, regional banks are still restructuring, and the number of banks in Japan has been greatly reduced. Gone are the days when you could get off the train and find all the stations full of bank branches. In the 70s and 80s, banks were the top job choice for graduating college students, but their popularity has since faded. 

Changes in the Japanese banking industry began with the bursting of the bubble economy in the early 1990s and continued through the financial crisis of the late 1990s. The decline of the banking industry also coincided with the slowdown of the Japanese economy. This shows how important a role banks had played in the Japanese economic landscape.

Banking in the 1980s

In the 1980s, when Japan was hailed as "Number One," the position of banks as the engine of Japan's economy was unshakable. Banks belonging to any Keiretsu Group were at the center of the economy. Those not affiliated with any Keiretsu Group still had considerable influence on the economy as a whole. 

The banking industry operated as a group, forming the so-called "convoy system." The Ministry of Finance reigned at the top as the "last resort." Under the ministry's leadership, banks used the deposits they collected to make loans and profit from the difference between the deposit rate and the lending rate. 

This was at a time when interest rates were high, unlike today. Companies with low equity capital were able to generate profits by aggressively investing and leveraging their liabilities in the form of bank loans. 

The 'Main Bank' System

Among the multiple banks from which a company received loans, the bank from which a company borrowed most and relied on most was considered its "main bank." 

The main bank functioned as both a lender to the client company and a shareholder. Since client firms were limited in the amount they could borrow from a single bank, they also obtained loans from other banks. In this context, the main bank had the largest share of loans and offered the lowest interest rates. Moreover, the loans from the main bank were long-term or rollover loans.  This pseudo-equity-like loan combined with the client company's stock effectively made the main bank a major shareholder of the client company.

Based on this relationship, client companies received timely advice from the main bank. If a problem occurred, the main bank assisted in various ways. This included increasing loans and providing management support through the temporary deployment of the bank's personnel.

Capital Adequacy Ratio Requirement

Nine of the top ten largest banks in the world by market capitalization in 1990 were Japanese banks. This shows the strength of Japanese banks at that time. However, in 1988, the Bank for International Settlements (BIS), of which the world's central banks are members, decided that banks with international operations should achieve a Capital Adequacy Ratio (CAR) of at least 8% starting in 1992. CAR is calculated by dividing a bank's shareholders' equity by its risk-weighted assets. 

CAR was low for Japanese banks to begin with. However, the Bank of Japan (BOJ) did not object to the decision on the grounds that unrealized profits on stocks held by banks could be included in the numerator of the CAR calculation. BOJ likely believed that Japanese banks could achieve the 8% target, as they were in the midst of an economic bubble. The stock market was expected to continue to rise steadily. However, the bubble burst, stock prices fell, and the stocks held by banks began to post unrealized losses. This made it increasingly difficult for Japanese banks to achieve the 8% CAR.

Collapse of the Main Bank System

Then, in the late 1990s, the situation of Japanese banks and the main bank system, which had underpinned the nation's economy, took a turn for the worse. This decline was caused by the disposal of non-performing loans following the economic bubble burst and the bankruptcies and restructuring of major financial institutions.

The Industrial Bank of Japan, Ltd. (IBJ) was a major contributor to Japan's economic development after World War II. In the 1980s, the bank received the highest ratings from Standard & Poor's and Moody's, two major American credit rating agencies. IBJ was highly respected in the global financial community. 

IBJ provided long-term financing to the nation’s key industries. Because it was not affiliated with any particular Keiretsu Group, it could do business equidistantly with companies belonging to any group. For example, IBJ was the main bank for Nissan Motor, a member of the Fuyo Group. It was IBJ that bailed out Nissan Motor when it faced a crisis after a serious labor dispute in 1953. 

However, after the bursting of the bubble economy and the financial crisis, IBJ was too busy dealing with its own non-performing loans to bail out Nissan Motor. The latter was on the verge of bankruptcy in 1999. Thus, Nissan Motor became a subsidiary of the French company Renault. IBJ was no longer in a position to help Nissan. This symbolic event marked the decline of the main bank's function.

Subsequent Corporate Behavior

With the weakening of the main bank system in Japan, companies that had previously relied on borrowing from banks were forced to rely on self-help efforts. This was the case not only for fundraising but also for overall corporate management. 

As a result, even under low interest rates, companies did not increase capital investment significantly due to risk aversion.  Instead, they scrambled to increase their equity capital and secure their own funds. Therefore, since 2001, companies have moved toward a shareholder-oriented approach. 

Furthermore, with the enactment of the Corporate Governance Code in 2015, shareholders demanded higher ROE (return on equity). Companies became eager to increase their ROE. ROE is calculated as net income divided by shareholders' equity. With net income failing to rise and ROE stagnating, some companies have begun to buy back their own shares to reduce their equity capital.　

In other words, since 2001, Japanese companies have increased dividends and retained earnings while curbing labor costs and investment. If wages and investment are suppressed, human resources will not be nurtured. Employees' perspectives will be narrowed, motivation will not increase, and employees' loyalty to their companies will decline. These are natural consequences.

Employee-Oriented Management

For companies, each employee is not merely an expense but an asset. While it is important to increase dividends to shareholders, investment in human resources is critical to the long-term development of a company. A company that keeps labor costs low by hiring a high percentage of non-regular employees, restrains capital investment, and emphasizes dividends to shareholders will not be able to develop itself.

In the past, Japanese companies developed with long-term goals in mind, investing profits as they rose. Since 2001, however, many companies have been driven by short-term goals of three months, six months, or one year. They have prioritized shareholder dividends and retained earnings. 

Such companies need to rethink and shift their management focus from shareholder-oriented to employee-oriented. They must also increase capital investment. 

Invest in Human Resources

In other words, they should distribute more profits to employees, attract good human resources, and provide them with training. This will lead to the formulation and implementation of a feasible long-term plan for the company's growth by well-trained personnel. In turn, this will lead to corporate development. As a result, the company should be able to contribute to shareholders. Dividends to shareholders are not an objective, but a result.

When the main bank system was functioning well, banks involved themselves in the management of client companies as needed. The banks provided not only financial but also managerial advice, contributing to the development of the company. 

Now, the main bank system no longer functions as it used to. However, it is neither the shareholders nor outside management consultants who can replace the main bank system in directing the long-term development of a company. Those who can take on the role are the people who have been nurtured within that company.

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Author: Yoshifumi Fukuzawa 

Yoshifumi Fukuzawa is a business consultant and former lecturer at Waseda University.