Upload
phungkhue
View
222
Download
0
Embed Size (px)
Citation preview
The Financial and EconomicFutures of Japan and the U.S.May 14, 2009 in Tokyo, Japan
Japanese translation inside
Welcoming Remarks Hugh Patrick, Director, Center on Japanese Economy
and Business, Columbia Business School
Panel One: Executive Roundtable: A CorporatePerspective on the Global Economy
ModeratorHugh Patrick
PanelistsRichard Folsom, Representative Partner,
Advantage Partners, LLPSusumu Kato, President and CEO, Sumitomo CorporationCharles Lake II, Chairman, Aflac JapanYuzaburo Mogi, Chairman and CEO, Kikkoman CorporationKatsuhiro Nakagawa, Vice Chairman and Representative
Director, Toyota Motor Corporation
Panel Two: What New Regulatory Arrangements AreNecessary?
ModeratorMerit E. Janow, Professor of International Economic Law
and International Affairs, Columbia University
PanelistsCharles Calomiris, Henry Kaufman Professor of Financial
Institutions, Columbia Business School
Louis Forster, President, Cerberus Japan K.K.Atsushi Saito, President and CEO, Tokyo Stock Exchange
Group, Inc.Takafumi Sato, Commissioner, Financial Services Agency Kazuo Ueda, Professor, The University of Tokyo
Panel Three: What Is the Future for AlternativeInvestments?
ModeratorAlicia Ogawa, Senior Advisor, Center on Japanese
Economy and Business, Columbia Business School
PanelistsKats Ashizawa, CEO, GCM InvestmentsF. T. Chong, Managing Director, AIG Investments Akio Kawamura, Counsel, Nishimura & AsahiTakashi Oyama, Advisor for Global Strategy of the
Norinchukin Group, The Norinchukin Research InstituteChristopher Wells, Partner, White & Case LLP
Concluding RemarksDavid Weinstein, Carl S. Shoup Professor of Japanese
Economy, Columbia University
Center on Japanese Economy and BusinessPROGRAM ON ALTERNATIVE INVESTMENTS
2 The Financial and Economic Futures of Japan and the U.S.
The Financial and Economic Futures of Japan and the U.S.May 14, 2009
Professor Hugh Patrick began the conference by
describing its context and overarching purpose. Amid
persistent global economic and financial difficulties, he
said, the conference’s three sessions will offer a range of
future-oriented, comparative perspectives on the short-
and medium-term financial and economic futures of Japan
and the United States.
Panel One: Executive Roundtable: A Corporate Perspective on the Global EconomyModerated by Professor Patrick, a panel of senior-level,
Japan-based business leaders from various industries
explained their personal views about the difficult eco-
nomic environment and the challenges and opportunities
it presents for their respective companies and industries.
Susumu Kato, president and CEO of Sumitomo
Corporation, began by noting the disastrous impact of the
global recession on Japan’s export market, which has led
to the country’s downward economic spiral despite its
relatively sound financial system. Sumitomo’s export fig-
ures, for the second half of fiscal year 2008, for instance,
declined 25 percent in value and 30 percent in quantity.
Mr. Kato praised the Japanese government’s attempts
to stimulate domestic demand and said he expects it to be
targeted at the few potential growth sectors: products and
services for seniors; the media industry; and alternative
energy. Sumitomo itself is focusing on these three sectors
domestically. It initiated a very successful Japanese TV
shopping channel that focuses on seniors, and it is also
entering into the business of supermarket shopping via the
Internet, which is aimed at senior citizens and housewives.
Mr. Kato added that, ultimately, external demand is
critical for Japan to grow, and in the long term the greatest
export growth frontier is Asia, where Japanese technology
is increasingly needed. For instance, Sumitomo is actively
engaged in business development in Asia and in the devel-
opment of renewable energy projects globally.
Richard Folsom, representative partner at Advantage
Partners, explained the changing landscape of the merger
and acquisition market in Japan and, particularly, the role
for private equity. After a decade of tremendous growth in
the overall M&A market, as well as in the number of deals
sponsored by private equity, current conditions have
caused the number of private equity transactions to
decrease from 2008.
Given that the private equity market was already a
small percentage of the overall M&A market in Japan, the
critical task remains to develop the private equity market
by demonstrating success stories. Mr. Folsom was opti-
mistic, noting that history has shown that the two to three
years following major financial crises have produced some
of the best opportunities for private equity investments. In
particular, the imperative for large corporate divestitures
of noncore businesses is stronger today than ever before,
and because the current public market is very difficult, he
anticipated that an increasing number of companies would
seek to go private through a friendly, cooperative sponsor
that could take their businesses to the next stage.
He added that because Japanese financial institutions
have fared relatively well despite the financial crisis, there
is still ample financing in the Japanese private equity
market. But because exit opportunities are currently very
limited, a big challenge for Advantage Partners is to prove
that it can hold companies for a longer period and position
them to be more competitive and profitable when economic
recovery does take place in the future.
Katsuhiro Nakagawa, vice chairman and representative
director of Toyota Motor Corporation, discussed the
impact of the global financial crisis and economic recession
on Toyota’s near-term strategy, as well as the longer-term
outlook for the auto industry. Mr. Nakagawa said the
severe shrinkage of the global auto market has caused
Toyota to cut production dramatically, so its major concern
is securing employment while weathering the difficult
times. It is trying to cushion the effect of production
decreases by taking various measures that effectively
reduce the salaries of blue-collar and white-collar regular
employees without reducing jobs and employment.
Mr. Nakagawa was optimistic that the stimulus meas-
ures taken by the Obama administration would help the
U.S. economy recover early, which would then increase
demand for automobiles. While he didn’t expect the
American auto market to rebound to its previous levels,
he did believe that the government’s “scrap incentives”
Center on Japanese Economy and Business May 14, 2009 3
(the cash-for-clunkers program) to buy new, fuel-efficient
cars would help the auto market recover soon to a level
that would make Toyota’s short-term production adjust-
ments feasible. The long-term future of the auto industry
remains bright given the high market growth potential in
developing countries, he concluded.
Charles Lake II, chairman of Aflac Japan, discussed
the impact of the economic downturn on Japan’s insurance
market. He noted that Japan’s economy has suffered the
worst of all of the major economies, and while the govern-
ment has responded aggressively with fiscal stimuli, this
will exacerbate the public debt, which already stands at
173 percent of GDP. In this context, the structural chal-
lenges that Japan has with respect to its aging population
and declining birth rate have become even more daunting,
particularly in terms of financing social security and the
public health care system.
Nonetheless, Aflac’s position remains strong. The
Japanese public’s consternation about the inadequacies
of public health care creates a major growth opportunity
for Aflac’s products, which aim to cover many health care
expenses not covered by the public system. Aflac is com-
mitted to its core business of supplemental health and life
insurance products and is well positioned to introduce new
products as demand continues to change within the context
of the economy and the government’s finances.
Yuzaburo Mogi, chairman and CEO of Kikkoman
Corporation, gave his views on the recovery of the
Japanese economy, as well as the future challenges for
Kikkoman. He said that with the collapse of Japan’s
exports, the government has been correct to attempt to
stimulate domestic demand through fiscal expansion. He
argued that a longer-term economic strategy will require a
reemphasis on deregulation, so that the market economy
will become further embedded in Japan and the shift will
continue from public to private sectors.
Mr. Mogi also stated the Japanese political system
needed administrative reform. Politicians should be less
populist and better focused on specifying policies that
solve the country’s problems. To achieve this, he suggested
a switch to the UK style of parliamentary democracy in which
parties have policy manifestos.
Mr. Mogi outlined the challenges to Kikkoman, and the
food industry more broadly, posed by Japan’s demographic
trends. Older people consume less food, exacerbating a
domestic market that is shrinking along with the population.
To address this challenge, Kikkoman must offer value-
added food and increase the percentage of its overseas
business.
Panel Two: What New Regulatory ArrangementsAre Necessary?Merit E. Janow, Professor of International Economic
Law and International Affairs at Columbia’s School of
International and Public Affairs and Law School, moder-
ated a panel of leading experts on financial regulation in
Japan and the United States. Professor Janow began the
session by noting that, in Japan, the Financial Services
Agency provides a centralized regulatory framework
within which new regulatory adjustments can be contem-
plated in light of the recent crisis. Just as the United
States considers major regulatory reforms to address the
main causes of its financial crisis, Professor Janow said
serious thought is being given to similar centralization in
Japan. While there are a number of proposals in the United
States for strong domestic reform and greater international
cooperation, there is no appetite for any type of global
regulatory authority, she noted.
Louis Forster, president of Cerberus Japan K.K., said
the main cause of the U.S. financial crisis was that certain
classes of financial assets were issued without collateral
requirement, which allowed large financial institutions
such as Lehman Brothers and AIG to incur tremendous
amounts of leverage off their balance sheets without
adequate collateral against their financial obligations. This
posed a systemic risk that regulators failed to address;
preventing another such systemic risk should be the regu-
lators’ primary concern. While many experts point to other
causes of the U.S. financial crisis and make arguments for
how the U.S. regulatory system must be designed to per-
form better in those respects, he warned against tasking
regulators with ensuring model behavior from financial
institutions at the expense of focusing on the large risks that
can destroy the system.
Kazuo Ueda, professor at The University of Tokyo out-
lined the “mixed blessing” that the global financial crisis
has been for Japanese financial institutions. The reason
these institutions suffered very little compared with their
European and U.S. counterparts is because they failed in
their efforts to develop American-style business models and
credit markets. Nevertheless, the Japanese financial system
and, in particular, the real economy still have been
affected by the global crisis. Despite this, he praised the
4 The Financial and Economic Futures of Japan and the U.S.
Japanese government and the Bank of Japan for taking
measures that averted the worst-case outcomes.
If the Japanese stock market and real economy remain
weak, there will be severe consequences for Japanese
financial institutions, Professor Ueda said. While there
seems to be a global regulatory trend toward disciplining
banks through higher Tier 1 capital requirements, as Mr.
Forster suggested, other options proposed by academics
such as reverse convertible bonds and capital insurance
should also be considered. While Professor Ueda declined
to recommend a particular regulatory approach, he
pointed out that global regulation in the direction of higher
Tier 1 capital requirements would cause Japanese banks
serious difficulty since they currently have very low Tier 1
capital ratios, and it is still unclear whether efforts to
reduce their massive equity holdings will be successful.
Takafumi Sato, commissioner of the Financial Services
Agency, said that the FSA, like regulators in other coun-
tries, is dealing with short-term crisis management issues
and medium-term regulatory reforms aimed at preventing
the recurrence of similar financial crises. He noted that
regulators must strike a careful balance between the two
objectives to avoid causing moral hazards and exacerbating
the current crisis.
Short-term policies include capital injection schemes
and the supervisory review of bank lending practices, both
of which are necessary to maintain the financial intermedi-
ation that supports the real economy and keeps it from
deteriorating further. Over the medium term, the FSA
has strengthened requirements for firms to disclose their
exposure to the securitization market, and the Diet is work-
ing on a bill to regulate credit rating agencies, consistent
with steps taken in the United States and Europe.
He added that the FSA has also established collegial
supervisory panels for systemically important firms in
Japan, and the FSA also serves on supervisory panels for
foreign firms that wield significant influence in the Japanese
market. Finally, the FSA is working on other policies, such
as the Better Market Initiative and Better Regulation
Initiative, both aimed at increasing the competitiveness of
Japan’s financial and capital markets, as well as improving
regulatory effectiveness, efficiency, consistency, and
transparency.
Atsushi Saito, president and CEO of the Tokyo Stock
Exchange Group, Inc., began by remarking that, while
most of Japan’s financial regulations have been relaxed,
the Japanese market has yet to become globally competi-
tive. Establishing Japan as a global financial center and
tapping into the growth potential throughout Asia are criti-
cal to transitioning the Japanese economy away from its
reliance on export-driven growth and achieving sustain-
able growth through a balance of foreign and domestic
demand.
While the Tokyo Stock Exchange has strong competitors
in Asia, he expressed his confidence that by improving the
security taxation system and increasing the public’s finan-
cial literacy, Japan can become the central destination for
the flow of capital in Asia. He praised the recent revision
to the tax system that allows foreign investors to avoid
capital gains taxes if they invest through a fund managed in
Japan and meet other requirements, such as not attempting
to influence the fund’s investment decisions. He suggested
that further aggressive actions should be taken to reduce
the cost of trading in the Japanese market.
Mr. Saito also noted that despite the fact that Western
corporate governance failed to prevent the U.S. financial
crisis, Japanese companies must not use this as an
excuse to avoid making changes to the Japanese corpo-
rate governance system. Globalization demands that
Japanese companies meet minimum standards of corpo-
rate governance that are globally accepted, such as
having outside directors. However, he cautioned against
excessive government regulation of such standards and
suggested there be common understanding of shared
goals between corporations and the government.
Charles Calomiris, Henry Kaufman Professor of
Financial Institutions at Columbia Business School,
asserted that the current massive financial crisis presents
an opportunity to address the past 30 years of regulation
failure, during which there have been 140 banking crises
globally. There is conclusive evidence that the cause of
these crises stems from the extensive degree to which
governments protect banks, he said, absent commensu-
rate restriction of banks’ abuse of the protection.
Professor Calomiris listed three key measures that
should be taken to improve prudential regulation. First, at
the micro level, there needs to be a credible measurement
of risk to discipline banks and supervisors. Second, at the
macro level, when regulatory authorities believe there is a
bubble, they should increase capital and liquidity require-
ments for banks in order to deflate the bubble quickly.
Third, there must be a way of resolving the problem of large,
complex, insolvent financial institutions without either
offering complete protection of managers and stockholders
Center on Japanese Economy and Business May 14, 2009 5
or causing a systemic crisis. Since the heart of the problem
is the ex post facto allocation of the losses across national
borders, there should be advance agreements about loss
allocations specified by the financial institutions and
approved by the relevant regulators. These suggestions
are not new, and the major impediment has been, and
remains, a lack of political will, he noted.
Panel Three: What Is the Future for AlternativeInvestments?Alicia Ogawa, the senior advisor at the Center on Japanese
Economy and Business at Columbia Business School
and adjunct associate professor at Columbia’s School
of International and Public Affairs, conducted a Socratic
dialogue with a panel of experts in the field of alternative
investments. She began by asking the panelists to address
the role of hedge funds in the recent financial turmoil.
F. T. Chong, managing director, AIG Investments,
and managing partner, AIG Vantage Capital, New York,
responded first by saying that while it is tempting to single
out a particular group for blame, all of the participants in
the market bear responsibility, including hedge funds,
investment banks, proprietary desks, regulators, and rating
agencies. He said the mistake that initiated the crisis was
the use of 10 years rather than 20 years of data to make
the projections for mortgage-backed securities.
Kats Ashizawa, CEO of GCM Investments, said there
is a common misunderstanding that hedge funds were
highly leveraged. It was actually the investment banks that
were often leveraged 30 times or even greater, and he
attributed the tremendous growth of assets on American
investment banks’ balance sheets to the Gramm-Leach-
Bliley Act of 1999.
Takashi Oyama, advisor for global strategy of the
Norinchukin Group at the Norinchukin Research Institute,
added that many prominent hedge funds internalized the
management lessons of the Long-Term Capital Management
crisis. In addition, as a result of the LTCM crisis, banks
began to monitor the hedge funds that they dealt with,
and this external force also helped discipline hedge fund
management.
Christopher Wells, partner at White & Case LLP, said
that there were dramatic winners and losers among hedge
funds. Too few hedge funds understood that the market
trends would soon come to an end, but those that did
made a lot of money. He identified regulators and policy-
makers as deserving of blame for the financial crisis.
Regulators are tasked with preventing crises, but if the
aftermath of the Japanese banking crisis of the late
1990s serves as a guide, regulators in the United States
will not be held accountable for their failures. He criticized
Congress for being caught up in an old regulatory paradigm
and for lacking the ability to think conceptually about
contemporary regulatory challenges.
Akio Kawamura, counsel at Nishimura & Asahi, added
that, in a situation like a financial crisis, people usually
blame the short-selling of hedge funds for pushing down
stock prices. But in Japan there was no evidence of this,
and, moreover, rules enacted in December actually curbed
the practice, he stated.
Professor Ogawa next asked, “What is the outlook for
alternative investments in an environment where leverage
is difficult to obtain?” The panelists all agreed that a lack
of leverage will not be a major concern for alternative
investments funds.
Mr. Oyama said that alternative investments will
inevitably become less reliant on debt financing, which
means that fund managers will need to be able to make
direct returns on the core investment, rather than on
the ability to use leverage. With banks’ ability to lend
constrained in the current environment, alternative invest-
ment funds may actually become an important source of
credit and liquidity in the near future.
Mr. Ashizawa said hedge funds can achieve similar,
double-digit returns without leverage.
Mr. Chong emphasized that there are various ways
financial instruments can be created to provide leverage,
with the exchange-traded fund market as one example.
As long as there is a demand for higher yields, there will
be people who design instruments to satisfy the demand,
and this presents a significant opportunity for alternative
investment funds and a major challenge for regulators.
Mr. Wells said the main concern of hedge fund man-
agers with whom he works is capital, not leverage. But he
was also bullish about the future of alternative invest-
ments, since people who have money are unlikely to invest
it with banks, which they view as run by governments and
unable to take advantage of creative strategies.
In light of the Bernard Madoff scandal in the United
States, the Alan Sanford scandal in the United Kingdom,
and the Stephen Tsui scandal in Taiwan, Professor Ogawa
then asked what the effects have been on investor
sentiment toward the fund-of-hedge-funds sector.
6 The Financial and Economic Futures of Japan and the U.S.
Mr. Ashizawa said that the Madoff scandal has had a sig-
nificant impact in the amount of redemptions sought by
wealthy investors in his fund. However, he argued there
needs to be an even greater role for funds of funds, point-
ing out that his fund decided not to invest in Madoff’s fund
because of the nature of the investment and operational
due diligence they conducted. In this way a large, estab-
lished fund of funds can protect individual investors from
such Ponzi schemes.
Mr. Kawamura agreed that the Madoff scheme and
similar ones have provided real tests that separated well-
managed and poorly managed funds of funds. Mr. Wells
anticipated that the legacy of the Madoff scandal will be
to shift away investors’ reliance on such funds as primary
gatekeepers.
Professor Ogawa concluded by asking the panelists to
address the recent regulatory trend in Japan with respect
to alternative investments, as well as the impact in Japan
of Lehman’s failure—particularly the extent to which
current laws helped the panelists’ clients in the wake of
Lehman’s bankruptcy.
Mr. Kuwamura said the main regulatory issues with
respect to Lehman were in the United States. Both the
Financial Instruments and Exchange Law in Japan as well
as the new tax-exempt policy for overseas investors
investing in Japanese management companies with
Japanese assets have fostered a more favorable environ-
ment for alternative investments in Japan. This deregulation
is not a result of the Lehman shock, he said, but it does
encourage more alternative investments, particularly
through hedge funds.
Mr. Wells argued that the Lehman shock has had a
major impact on Japanese intermediaries, since no one
in the Japanese market was prepared for the bankruptcy.
In particular, it was a wakeup call to many of Lehman’s
trading partners, who had previously assumed that Lehman
was probably too big to fail, and that there would now be
systems in place to handle the aftermath if another Lehman
were to fail.
Mr. Wells said the main issue has been rehypothecation,
with all of the trade contracts taking a long time to be set-
tled. Ultimately, this will lead to concentration within the
industry, since many Japanese counterparties are very
conservative and need to be assured the other side is
well capitalized. As Japanese counterparties move away
from prime brokerage to highly capitalized custodians,
Mr. Wells said the introduction of a third party will offer
technological and legal challenges that are just now being
broached.
ConclusionDavid E. Weinstein, Carl S. Shoup Professor of the
Japanese Economy, Columbia University, and associate
director for research at the Center on Japanese Economy
and Business, gave concluding remarks in which he
reflected on the context of the conference and some of its
major insights. After the shocking events of the last year
in Japan and the United States, many ideas that recently
prevailed about the structure of the global economy are
now dead. There can no longer be any doubt that the real
economy and trade are highly dependent on the global
financial system and that national economies are deeply
interrelated. For instance, countries’ business cycles are
linked, and it was through the export channel that the
global financial crisis was principally transmitted.
Just as financial systems and economies are increas-
ingly integrated, so too must regulation be internationally
coordinated, he said. Beyond calls for “better regulators,”
fresh ideas about how to identify troubled institutions to
mitigate the frequency and severity of crises and protect
against macroeconomic risk are needed. Professor
Weinstein said that achieving this in a time of increasingly
complex financial instruments makes this challenge even
more difficult—in Japan, the United States, and, indeed,
globally.
This was the final year of the Center’s successful Program
on Alternative Investments, launched in 2002. At the time,
many Japanese were unfamiliar with alternative investments
in the United States and elsewhere, and non-Japanese
knew little about the state of alternative investments in
Japan. CJEB could play a useful role in educating the
public. Having successfully achieved this goal, and with
alternative investments having entered mainstream
finance, the Center decided to bring the program to a
close with this May 14, 2009, conference in Tokyo.
The Center is especially grateful to Nomura Holdings,
Inc., Daido Life Insurance Company, and Advantage Partners,
LLP for their support of our Program on Alternative
Investments. Without their strong support and encourage-
ment, this Program would not have been possible.
Center on Japanese Economy and Business May 14, 2009 7
Panel One (from left to right): Susumu Kato, Katsuhiro Nakagawa, Hugh Patrick, Yuzaburo Mogi, Charles Lake II, and Richard Folsom
Panel Two (from left to right): Atsushi Saito, Charles Calomiris, Merit E. Janow, Louis Forster, Takafumi Sato, and Kazuo Ueda
Panel Three (from left to right): Christopher Wells, Takashi Oyama, Alicia Ogawa, Akio Kawamura, Kats Ashizawa, and F. T. Chong
12 The Financial and Economic Futures of Japan and the U.S.
Center on Japanese Economy and BusinessColumbia Business School
321 Uris Hall, 3022 Broadway
New York, NY 10027
Phone: 212-854-3976
Fax: 212-678-6958
Email: [email protected]
http://www.gsb.columbia.edu/cjeb
Sponsors of the Program on Alternative Investments
Lead Corporate SponsorsDaido Life Insurance Company
Nomura Holdings, Inc.
Corporate SponsorsAdvantage Partners, LLP
Sponsors of the Center on Japanese Economy and Business
Lead Corporate SponsorsSumitomo Corporation of America
Senior Corporate SponsorsDaiwa Securities America Inc.
Major Corporate SponsorsKikkoman Corporation
RISA Partners, Inc.Saga Investment Co., Inc.
Takata CorporationTsuchiya Co., Ltd.
Corporate SponsorsAFLAC Japan
Caxton Associates, LLCJapanese Chamber of Commerce & Industry of New York, Inc.
Mitsubishi International CorporationMitsubishi UFJ Trust and Banking Corporation
Mitsui Sumitomo Insurance Company, Ltd.Mitsui USA FoundationMori Building Co., Ltd.
Pacific Investment Management Company (PIMCO)The Tokyo Electric Power Company, Inc.
Yaskawa Electric Corporation
Individual SponsorsRobert Alan Feldman
Shigeru Masuda, M.B.A. ’74, CEO, ZERON Group
Friends of the CenterJohn and Miyoko Davey
Sumitomo Chemical CorporationSadao Taura