ADBI-Keio Executive Training in Macroeconomics

3-7 November 2014 Conference Hall, North Building

Keio University, Mita Campus

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Copy right @yoshino-Dean-ADB Institute

The views expressed in this presentation are the views of the author and do not necessarily reflect the views or policies of the Asian Development Bank Institute (ADBI), the Asian Development Bank (ADB), its Board of Directors, or the governments they represent. ADBI does not guarantee the accuracy of the data included in this paper and accepts no responsibility for any consequences of their use. Terminology used may not necessarily be consistent with ADB official terms.

SME Finance and

Hometown Investment Trust Funds

Naoyuki Yoshino Dean, Asian Development Bank Institute

(ADBI) Professor Emeritus at Keio University, Japan

nyoshino@adbi.org October 2014

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Asian Development Bank Institute (ADBI) 2014

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Conditions for Sustainable Grow th 1 Polit ical stability and Macroeconomic Stability Sound monetary&fiscal policy and exchange rate 2 Support equitable grow th, Income equality Housing Policy, Inheritance tax Savings are kept in abroad 3 Central–Local government relations and Fiscal sustainability. Local government bond 4 Promote competitiveness and innovation Financing for venture business and SMEs Hometown Investment Trust Funds

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5 Protect the environment and stable energy supply 6 Develop financial market Financial Inclusion, financial regulation and financial education (Access to finance) 7 Education and Healthcare public school 8 Enhance seamless connectivity Infrastructure investment, free trade 9 Improve governance issues, transparency

Characteristics of Asian Financial Market

1, Bank-dominated financial system 2, Small share of bond markets Needs for long term financing 3, Lack of long term investors such as

pension funds and insurance companies 4, High percentage of SME 5, Large share or Micro Credit (Finance

companies), Lack of venture capital 7

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Population Trends in Japan

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0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

Age 65 and over

Age 15-64

Age 14 and less

Aged toPopulation Ratio

Employment toPopulation Ratio

Current BirthRatio

Source: Ministry Internal Affairs a Communication

Forecasts (2012

current) 10 of Thousands

Current Figures

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Japanese Debt, 92% are held by Domestic Investors

HOLDERS %

Banks and Postal Savings 45% Life and Non-life Insurances 20% Public Pension funds 10% Private Pension Funds 4% Central Bank of Japan 8% Overseas’ Investors 8% Households 5% Others 3% 11

Source: MOF

Greece, 80% of their debts are held by overseas’ Investors (2011)

HOLDERS ％ Eurozone 15% ECB 15% IMF 6% Greek banks & non-banks 23% Other European Banks 10% Non European Banks 8% Non-Greek non-Banks 23%

Source：Financial Tim 12

0

0.5

1

1.5

2

2.5Ja

nuar

y-00

Janu

ary-

01

Janu

ary-

02

Janu

ary-

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Janu

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Janu

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Janu

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Janu

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Janu

ary-

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Janu

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Janu

ary-

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Janu

ary-

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5-year10-year

Source: M

Japanese Government Bond Yields

Japan’s Supply and Demand for Bonds

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Government long-term bond yield

Eurozone 5-year CDS

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Greece Supply and Demand for Government bonds

Changes in Japan’s Money Flow High Growth Period Households Savings Corporate Capital Investment Stock S I K Recent Period Corporate Savings Government Elderly people S G Abolish Retirement Age Increase working population Pension payment will start 65 or later Wage rate be based on marginal productivity

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Vertical IS curve is Japan’s problem Yoshino and Sakakibara (2002)

Current State of Japanese Economy

Asian Economic papers, MIT Press

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Where do Asian savings go?

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Bank-Dominated Financial Systems and the Economic Importance of SME

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3. SME database and stable finance

SME database Database provided by the credit

risk database Hometown Investment trust funds Long-term finance in Asia How to develop Long-term investors in

developing economies 28

Borrower, Lender and Market

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Borrower SMEs Individuals

Lender Banks MicroCredit

Market

Information Asymmetry Especially SME market

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Hometown investment trust funds

4. Analysis of SME credit risk using Asian data

Selection of the variables Principal Component Analysis Cluster Analysis

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Principal component analysis

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Cluster analysis: the average linkage method

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Credit Rating of SMEs by Use of Asian Data

(i) Sales (ii) Assets (iii) Liquidity (Cash) (iv) Total Debt

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42 -1.6

-1.4

-1.2

-1

-0.8

-0.6

-0.4

-0.2

0

0.2

0.4

0.6

-4 -2 0 2

Z1-Z2 Group B

-1

-0.5

0

0.5

1

1.5

-2 -1 0 1 2

Z1-Z2 Group A-1

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0.5

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1.5

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-1 0 1 2

Z1-Z2 Group A-2

Healthier Group of SMEs

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Bank based SME financing and Regional financing to Riskier Borrowers

1, Bank Loans to relatively safer borrower 2, Hometown Investment Trust Funds/

E-Finance, Internet financing Banking

Account

Hometown Investment

Trust Funds

Riskier Borrowers

Investors

Depositors Safer SMEs

Banking Account

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YoshinoKeioUniversity @CopyRight 46

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Donation and Investment to community

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Two Types of Investors Community Type Infrastructure Hometown Investment Trust Funds Wind power Generator Funds Japanese Wine Fund Local Airport Agricultural Sector Large Projects and Professional Investors Pension Funds Brown fields Insurance companies not green field Mutual Funds Reference, Cargill and YOSHINO “Postal Savings and

Fiscal Investment in Japan” Ｏｘford University Press 49

Naoyuki Yoshino Naoyuki Yoshino is Dean of the Asian Development Bank Institute (ADBI), Senior Advisor at the Japan Financial Services Agency’s (FSA) Financial Research Center (FSA Institute), and Professor Emeritus of Keio University, Tokyo, Japan. He obtained his PhD from Johns Hopkins University in 1979. Dr. Yoshino was a visiting scholar at the Massachusetts Institute of Technology (United States) and has been a visiting professor at various universities including the University of New South Wales (Australia), Fondation Nationale des Sciences Politiques (France), and University of Gothenburg (Sweden). He was an assistant professor at the State University of New York at Buffalo and an economics professor at Keio University since 1991. He was appointed Chair of the Financial Planning Standards Board in 2007, and also served as Chairperson of the Japanese Ministry of Finance’s Council on Foreign Exchange and its Fiscal System Council (Fiscal Investment and Loan Program Section), and was also a Board Member of the Deposit Insurance Corporation of Japan, Chairperson of the Meeting of Japanese Government Bond Investors (Ministry of Finance), and President of the Financial System Council of the Government of Japan. Dr. Yoshino was conferred honorary doctorates by the University of Gothenburg (Sweden) in 2004 and by Martin Luther University of Halle-Wittenberg (Germany) in 2013, and also received the Fukuzawa Award for his contribution to academic research in 2013.