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Annual Reports
AIA, Inc.
Dai-Ichi Kangyo Bank AR
In 1985 I went to Japan to become a Senior Writer at AIA, Inc., an investor relations firm in Tokyo. Most of our business was creating English-language annual reports for Japanese companies. For the President's Message and some other major parts of the report, I would receive a rough translation that I would "polish." I wrote the Management Discussion and Analysis section myself, and I would often research and write a special feature as well. For example, for the annual report of Dai-Ichi Kangyo Bank, I discussed the changing economic and regulatory environment in which Japanese banks operated.
The Banking Environment (1985)
The tight controls imposed on the Japanese financial system after World War II initially provided the stability necessary for economic recovery. As the economy grew and matured, however, the extensive regulations hindered its ability to adapt to structural change (like that which followed the oil crisis of the early Seventies) and environmental change (such as the internationalization of the world's economies).
In response, beginning in the middle Seventies, the Japanese government slowly began to lift some restrictions. By the end of the decade negotiable certificates of deposit carrying market interest rates had been introduced, and rates for call money and bill discounting had been liberalized. A different regulatory atmosphere was apparent by 1980. That year, a new Foreign Exchange and Foreign Trade Control Law went into effect that substantially reduced controls on currency and on the flow of capital in and out of the country. In 1981, the nation's banking law was completely rewritten, the first such revision in 52 years.
The refinancing of a large portion of the government's debt this year provides an additional impetus toward deregulation; the international financial community, meanwhile, has become increasingly insistent in its demands for equal footing. The pace of liberalization has indeed accelerated in the past year, especially with respect to interest rates and terms on deposits. In April 1985, the minimum denomination of negotiable certificates of deposit (NCDs) was decreased to ¥100 million from the previous level ¥300 million. Sales of money market certificates -- large denomination deposit instruments with market-determined interest rates -- also began this spring, an important step toward complete liberalization of rates.
Furthermore, deregulation of interest rates on large fixed-term deposits will begin this fall. Specifically, rates on fixed-term deposits of ¥1 billion or more will be liberalized in October 1985. Restrictions on smaller deposits will gradually be lifted and, by the spring of 1987, interest rates on deposits of over ¥100 million are expected to be liberalized. Further deregulation should eventually result in lending rates that fluctuate with the market.
Regulations concerning the business activities in which financial services firms may engage are also being relaxed. These restrictions have effectively partitioned the financial industry and limited entry in each sector to designated types of firms. The regulations are especially significant with regard to the segregation of activities between banks and securities firms. In recent months, though, the restrictions have become less severe: since June 1985, banks have been able to trade public bonds without previously imposed restrictions, and securities firms have been allowed to deal in the secondary market for NCDs.
Nevertheless, liberalization has not proceeded with the same speed as in the case of interest rates, and while certain barriers been lifted, the basic regulatory structure remains intact. To be sure, the sharp distinction between short and long-term financing has become somewhat blurred. The rapid pace of the technological revolution and the growing diversity of customer needs have resulted in new products and services that straddle various types of operations.
However, banks are still prohibited from underwriting corporate securities, and trust banking in domestic markets is limited to a few authorized institutions. In addition, banks are in increased need of stable sources of long-term funding to improve asset and liability management; such access, however, is still restricted.
We believe that the most fundamental operations of banks and securities firms -- e.g., deposit-taking and settlement functions for the former, stock brokerage for the latter -- should, for the time being, be left alone. But we think that in a number of other areas a relaxation of regulations would result in greater competition and better service. The transformation of the world economy has not only rendered these rules obsolete, but in many cases they actually hinder the efficiency of financial institutions and their ability to respond to social needs.
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