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Osekkai Japanese Finance

Sep 10, 2018
byNoriyuki Morimoto

If you look up the word “osekkai” in the dictionary, it is defined as unnecessarily interfering with people’s matters. But whether any act is unnecessary or not depends on the subjective view of the recipient of osekkai: for the person who carried out the osekkai act, it is done because it is necessary. Tetsugoro Obara, who was a leading figure in the Japanese financial industry, is quoted as saying "not lending is also kindness". He meant that when considering a loan application based on the customer's true benefit, there are cases where refusing the loan may be beneficial to the customer, depending on factors like the purpose of the money. Tetsugoro Obara was adamant in refusing loans, even with sufficient collateral, when their intended use was something like real estate speculation. He reasoned that it would ultimately prove to hurt the customer. Whoever was refused a loan in this manner must have been very frustrated. By contrast, those who took out loans to buy real estate during the Showa bubble period must have felt very satisfied at the moment. However, given that many of them were economically destroyed, such actions of the financial industry had been proven to run against the true interests of their customers, and the financial community itself suffered a huge loss as well. If the financial community had been faithful to Tetsugoro Obara’s philosophy, the Showa bubble could have been prevented. Tetsugoro Obara believed that it is kindness to consider the real benefit of the customer. Therefore, as long as one maintains kindness, he believed that he could not lend what he could not lend, even if it damaged customer satisfaction. And he was convinced that maintaining that kindness would prove beneficial for the financial community. Actually, Tetsugoro Obara referred to financing a customer as "worrying for” a customer. That is a totally osekkai attitude.

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The Ideal Global Civil Society Beyond Japan

Aug 27, 2018
byNoriyuki Morimoto

The history of mankind is the history of dominance by violence. The formation of modern society is defined by the formation of the nation state. While the establishment of the national state at least establishes the rule of reason within the country, it in turn justifies the exercise of violence among nations in the name of war. Globalization involves the progress of history, advancement of human wisdom, and creative development of reason. The progress of globalization shall eventually overcome the limitations of the nation state and ultimately establish rule of reason on the earth as one global civil society. No matter how far it may seem, the direction of mankind being set, that day will definitely arrive. Globalization is at the horizon of social philosophy. However, this in turn tells how the real society is far from global. A prime example is the Olympic Games. Although it is supposed to be a truly global celebration of the sports, it actually represents the competition among nations, from the structure of each sport to host city selection. Rather than the Olympic Games, global economic activities may be actually supported by truly global coordination and mutual understanding. Perhaps that is due to the underlying universal principle of economic rationality within economic activities. Since Japan exists on the earth, it is in a sense global. As far as the economic field is concerned, Japan is a very big part of the global economy. The global economy is not the external environment surrounding Japan, but one that contains Japan as a major element. As Japan is a part of the earth, denying Japanese elements and eliminating uniquely Japanese features are not acts of globalization. Globalization is not to be integrated into any one thing. Besides reason, human beings do not have anything in common in the first place. Everything is unique. Globalization is not only the rule of reason but also the coexistence of diverse tastes, mentalities, values, languages, food, clothes and everything else that is unique. Therefore, another important concept along with globalization is diversity. Global becomes meaningful only in combination with diversity. Diverse elements remain diverse as they respect, stimulate, absorb, and interact with each other to create new things. That is what it means by the progress of human beings, creative innovation of world culture, and growth of economic society.

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Will the Japanese Court Rule in English?

Aug 13, 2018
byNoriyuki Morimoto

There is a concept to make Tokyo the largest international financial center in Asia, although experts who know more about Japan's financial situation tend to dismiss it as an unrealistic delusion. The first challenge is English. English, not just as a language problem, but the need to establish the common law system in the same way as the US and UK in legal culture. An international financial center would need to be regulated by an internationally accepted legal system, and in the current world of international finance, the common law system has an overwhelming advantage. This is not about translating Japanese law into English. Translation would be confusing rather than useless. For example, considering that trusts under the U.S. law are quite different from Japanese trusts, simply translating the word is a source of misunderstanding. It is necessary not to translate but to make Japanese trusts the same as trusts under common law. Of course, we cannot change Japan’s entire legal system, so we need technical arrangements. One of such arrangements is the concept of ​​national strategic special zones. The purpose of such zones has to be to create a special legal space within domestic law, allowing for exceptional treatment not only for legal affairs related to international finance, but also for a variety of legal fields including tax treatments, land use, and employment. Then, in these special zones, will the court make decisions based on common law as a means to ensure legal effect? Special judicial systems operate in some specialized fields, such as marine accident inquiries. Given the high expertise required in financial transactions, shouldn’t there be consideration for establishing an independent special court in special fields such as cross border transactions, if not the entire financial system? Anyway, since laws work as laws only when their effect is ensured, the establishment of the judicial system is a critical element. Then, will the trials be done in English? Setting aside lawyers, it’s hard to imagine judges speaking English under the present circumstances. However, assuming that non-Japanese parties will be involved in the litigations, to become a truly international financial center, it will have to be an English trial. In any case, there is a serious issue of jurisdictional arrangements in contracts. Given the current situation of Japan, overseas participants in transactions are likely to be reluctant to set the jurisdiction in Japan. If the Japanese side makes a compromise and recognizes jurisdiction overseas, it becomes significantly disadvantageous to Japan. Again, if it is necessary to set the same conditions for litigation in Japan and litigation abroad, we need to change the judicial practice in Japan.

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The Economics of Japanese sake

Jul 30, 2018
byNoriyuki Morimoto

Kagoshima is an area whose land is covered in volcanic ash. Sweet potato was chosen as a suitable produce that grows in the poor soil, and this led to the creation of Kagoshima’s unique shochu culture. The world has an extremely diverse range of traditional alcoholic beverages, as the result of people developing ways to produce alcohol with whatever was locally available. This is also why the fact that beer and whiskey can now be produced in Japan, at world-class quality, is a symbol of the nation’s industrial development since Meiji era and a source of pride. Now, although Japanese cuisine has spread throughout the world, Japanese sake has not. In Japan, imports of French and Italian wine probably grew together with the rising popularity of French and Italian cuisine. For France and Italy, wine has become an important industry, because it was backed by a comprehensive strategy to export food culture. For Japanese sake, that strategy was missing. While wine in France and Italy became major regional industries and also global ones at the same time, Japanese sake, which lacked a food culture strategy, seems to have dwindled into regional industries that are not even very big, let alone global. In Okinawa, people basically drink awamori. That’s because awamori is strongly integrated in its distinct food culture. Without this established food culture, there is no tourism industry or penetration of Okinawan cuisine and awamori outside of Okinawa. It’s not clear whether economic domains created cultural domains, or the other way round: it may have been simultaneous, and the order does not matter. Then, given Japan’s current situation, some fundamental development should be needed, where the revitalization of regional cultures leads to the revitalization of regional economies. Initiatives to create regional industrial clusters that accommodate the full process from R&D to production activities for advanced fields, such as advanced medicine, international finance, or life science, also have to overcome the traditional framework of attracting facilities. They have to go all the way to creating a new cultural zone extending to education, with people taking initiative in putting medicine at the core. Or we may have to go back in history. The old realm of cultural exchange back in the Edo era was naturally overlapped with the economic realm built upon a logistics network centering on waterways. By looking back at old layers of industrial clusters, we might be able to find an outlook for building a new economic realm. An economy has to be a cultural foundation that people create. A rich economy is nothing else than a rich culture.

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The Risk Appetite Framework of FSA Commissioner Mori

Jul 17, 2018
byNoriyuki Morimoto

Financial regulations demand financial institutions to comply with extremely elaborate and lengthy numerical standards as preparation for expected losses. However, while such a defensive approach may be effective in stabilizing the financial system, it encourages passive risk-taking behavior appropriate for one’s equity capital. It inhibits the financial institutions’ efforts to improve skills in aggressive risk-taking.   Commissioner Mori of Japan’s Financial Services Agency was early to identify the drawbacks of these regulations surfacing in the Japanese economy, and led a drastic reform in financial regulations ahead of many countries. The reform encourages financial institutions to return to the fundamentals of management: to take risks actively within a customer-centric approach, realize capital profit appropriate to the taken risk, and actively work to procure necessary capital.   This principle of Commissioner Mori can be described, using financial terms, as application of a risk appetite framework at its highest level.   In a risk appetite framework, the starting point is to define the risks that financial institutions should knowingly take in order to execute their unique business objectives and strategies. In other words, this is to identify the subject of primary risk-taking as a business. According to Commissioner Mori’s words, the objective of primary risk-taking is for financial institutions to create shared value with their customers. Here is a clear indication of active risk-taking from the customers’ perspective.   There are various other risks that are derived from primary risk-taking, but is should be noted that the risks in primary risk-taking and the derivative risks are on a clearly different level, or dimension. The shortfall of conventional risk management was the lack of a clear distinction between these two levels, and that it treated primary risks in a relative sense.   Conventional risk management pursued objectivity and precision so far that it overemphasized unification by numbers, control over the total amount of quantified risks, and reference to past statistics as a condition for precise quantification. Consequently, it had serious harmful effects such as ignoring the difference in the nature of different risks, failure to capture unquantifiable risks, and lack of a forward-looking perspective that incorporates future developments.   By contrast, the risk appetite framework aims for at least three important improvements. First, risks within primary risk-taking are clearly put at a higher level as a direct management subject. Second, the framework avoids unified quantification and directs attention to different risk natures and unquantifiable risks. Third, it incorporates developments that are particular to the future, rather than envisioning a static future as an extension from the past.

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International Equity Returns Distorted by Japan’s Bubble Economy

Jul 02, 2018
byNoriyuki Morimoto

The global economy has integrated into one, as companies increasingly became multinational or lost national identities. It is the time of global equities without borders. The asset category of international equities, which is based on the distinction between equities of one’s country and equities of others, is a thing of the past. Nevertheless, until quite recently in Japan, international equities, not global equities, were the mainstream. Suppose during that time, a Japanese investor attempted to choose a management firm with which to invest in international equities (from a Japanese perspective). The investor would find that actually very few firms manage such assets. Neither do they have much experience in managing global equities. The useful information turns out to be management results of international equities, from a US perspective. In the 1980s, when Japan went through the so-called bubble economy, how to treat Japanese equities was a tricky question for other countries. Especially with international equities from a US perspective, the weight of Japan had become overwhelming. At that time, many of the management firms were viewing Japanese equities as overpriced, so they probably had drastically reduced the percentage of Japanese equities in their portfolios compared to their actual weight. When the bubble burst, because of the single factor of the weight of Japanese equities, many management firms ended up beating the market. So what value does this track record hold when assigning the management of international equities from a Japanese perspective, excluding Japan? And suppose there is an asset management firm that operates globally: for Japanese clients, it manages international equities from a Japanese perspective, and for US clients, it manages international equities from a US perspective. In this case, it would be quite common that one beats the market while the other loses. For example, when the stock selection of US equities doesn’t go well, the results would differ significantly depending on whether those stocks are included in the portfolio. Such odd situations in international equities would not occur with global equities. There is only one global category, so they can be compared consistently. Although this is a technical point, it is also one advantage of global equities.

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The Fate of the Japan Atomic Power Company

Jun 18, 2018
byNoriyuki Morimoto

The Japan Atomic Power Company (JAPC) is the entity that started the first commercial nuclear power generation in Japan with Tokai Power Station in 1966. This station ended its operation in 1998 and is now in the process of decommissioning. JAPC’s Tsuruga Power Station Unit 1 also stopped operation last year and is due to be decommissioned as well. Currently, JAPC still operates the Tokai No.2 Power Station and Tsuruga Power Station Unit 2. But as the Nuclear Regulation Authority (NRA) identified an active fault line beneath Tsuruga Power Station Unit 2, it is virtually inevitable for it to be decommissioned. If JAPC could operate just one nuclear reactor (if it can be restarted) while having to decommission three, it may be too much pressure for the company even to survive. For Japan’s nuclear power industry, whether the business is to keep going or not, decommissioning technology is going to be vitally important going forward. In that sense, JAPC’s history as pioneer of both starting and ending nuclear power generation is a valuable one. Therefore, the company’s experience and skills as a group of technical experts have to be maintained. Even if the Japanese people choose to phase out nuclear power generation, it would take an extremely long time to complete the process. In order to phase out safely and to rationalize costs, a high level of nuclear technology has to be maintained and developed as a political agenda. Moreover, in theory, the government’s nuclear power policies should have settled with keeping nuclear power generation: the NRA, a government agency, is very active in enhancing safety of nuclear power generation and the healthy development of the nuclear power industry. Such activities would be an unacceptable waste in the direction of nuclear phase-out. Under the new regulatory standards of NRA, there will be a huge amount of additional cost including major refurbishing expenses. Such additional costs would ultimately be funded by the citizens, in form of utility fees or tax. If Japan was to phase out nuclear power after such a burden, it would be a tremendous waste.It the policy is to go toward nuclear phase-out, the NRA would have to focus its purpose strictly on safe decommissioning measures. And even in that case, the agenda of maintaining and developing advanced nuclear technology cannot be crossed out. 

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Are Japan's Power Companies Actually With Negative Equity?

Jun 04, 2018
byNoriyuki Morimoto

An asset is an asset because there is value in using it. If there is zero possibility for it to be used any more, it is no longer an asset but a lump of waste. So, accounting-wise, you have to book an impairment loss for its total book value. Supposing that the Japanese people choose to phase out nuclear power generation as early as possible, and all nuclear power stations are to permanently discontinue operations, the power companies that own nuclear power businesses would have to book huge amounts of impairment losses. This would cause the companies a negative equity, which makes it extremely difficult for them to procure funds, putting stable power supply at risk. In addition, something that has turned into waste is not only retired in accounting books but also physically. The process of physically retiring facilities requires costs, which have to be booked in advance as losses on retirement. A more serious issue is that no one can tell what the costs needed to retire the facilities would amount to, given that you are scrapping a nuclear power station. If such costs are estimated conservatively and booked in advance, power companies are sure to have a negative equity. Of course, policy measure can be taken to address such situations, such as introducing a special accounting treatment. But that doesn’t keep the companies’ equities from virtually turning negative. If power companies with huge liabilities end up having negative equity, that would be an emergency: much confusion and tremendous social costs should arise in the course of protecting stable power supply. It would at least become a hard question from a financial perspective: the financial industry would be facing problems. If problems are expected from the beginning, they should be prevented from a long-term perspective. This means that phasing out nuclear power has to be a thorough long-term strategy that includes detailed, technical discussions on account processing. Phasing out nuclear power is essentially a matter of decision by the people, so once it is decided it may as well go forward. But the practical procedures of achieving a nuclear phase-out is another issue. In any case, it would take time and money. Setting a shorter timeline would probably add to the overall cost. Therefore, it is certain that a rational timeline has to be set based on a rational estimate of costs to take planned steps in phasing out nuclear power.

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The Significance of Housing Allowances in Japan

May 21, 2018
byNoriyuki Morimoto

In Japan, there used to be apartments built exclusively for government employees. They tended to be well built structures in attractive locations, with disproportionately low rents, making them a benefit in kind with huge advantages. Apartments for government employees were probably established due to the nature of the bureaucrats’ job, which frequently required the person to move to any part of Japan, as well as housing conditions in the past. But they seem to have had a stronger aspect as a symbol of the bureaucrat’s privileged status. Company housing apparently had a similar background, together with the aspect of the company offering special treatment to its employees. But since the number of people to which a company can provide housing is limited, the need to adjust for the unfair allocation gave rise for housing allowances, as well as companies systematically leasing apartment complexes for their employees. It should not be overlooked that benefits in kind, like company housing, have a tax advantage. Housing allowances are a part of taxed income, but the difference in the lower rates of company housing compared to market rates is not subject to tax. Companies must also have had the intention to correct unfairness resulting from employees’ relocation. The system might have been a representation of the company’s will to treat employees fairly. For example, if an employee was assigned to a job in Hokkaido, companies often used to provide a “cold climate allowance”. Heating was initially provided by wood, which then shifted to coal, so the allowance was also called “coal allowance”. The cost for coal was an additional expense resulting from the relocation to a cold area, so at that time, it made sense to companies to compensate. In the past when cooling appliances were not available, heating expenses for cold areas stood out as additional cost. But things have changed. Cold areas have the advantage of needing less cost for cooling, and after all, the cost for living in a rural area is relatively low. In organizations with nation-wide operations and headquarters in Tokyo, as with government agencies, compensations are set based on Tokyo standards, so employees outside of Tokyo have a large benefit from the difference in living costs. Since companies can no longer deliberate on the indeterminable question of whether that is fair or unfair, they decided to abolish all kinds of allowances. 

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The Significance of Family Allowances in Japan

May 07, 2018
byNoriyuki Morimoto

Until quite recently, it was usual practice for Japanese corporations to provide family allowances. An employee with a spouse would receive a spouse allowance, and monthly payments were made for each child of an employee as child allowance. Family allowances are not paid in accordance to the employee’s achievements or labor. They do not compensate for anything, so it doesn’t make sense from the logic of corporate governance. Then why did family allowances continue in Japan as an element of the human resources system? Actually, to say that monetary payments always have to compensate for some specific effect is narrow-minded. People give and receive money in various social occasions like celebrations and as thank-you gifts. Such payments are made for the purpose of conveying some kind of feeling. It is also possible for a company to pay money to convey a sense of appreciation. So what were companies trying to convey through family allowances? It would not make sense for companies to provide allowances based on one’s family structure, which is unrelated to the company, unless they are based on the belief that members of a company share a certain value, history and culture, and together make something like a community. In other words, companies probably held the view that those inside were different from the people outside the company. Currently, it has become the norm for companies to pay essentially the same amount for the same work, whether or not it is done by a regular employee. But in the past, it was normal for regular employees to have an advantage. The compensation gap can be justified only as a naturally (rather than logically) established privilege of a person inside the company. In essence, family allowances were probably a way to build a sense of unity or belonging. In that aspect, there was something they intended to convey, as money works as a message.

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Surume Finance in Japan

Apr 23, 2018
byNoriyuki Morimoto

Surume is dried squid that is commonly enjoyed as a snack to accompany alcohol in Japan. Its texture is like hard chewing gum, and it’s said that you get more flavor as you keep chewing it. A company is a living thing that swims vigorously like a live squid. However, the company shown in numbers on financial statements is just one expression of behavior in the past, which can be likened to a dead, dry squid. According to the Japan Financial Services Agency (FSA), Japanese banks finance dead surume instead of live squid. The FSA refers to the live behavior of companies as business feasibility, and is telling the banks to make financing decisions based on its evaluation. On the flip side, the FSA holds the view that banks cannot carry out their true financial role if they depend on static criteria such as historical financial statements, availability of collateral, collateral value, and availability of guarantors. To give a concrete example, companies that have been making losses for the last several years, or lack sufficient equity capital because of business fluctuations, may struggle to obtain financing from a bank. But the social role of finance is precisely to support companies through these situations. The FSA is saying that banks should base financing decisions not on the companies’ static snapshots, but on their future potential of actively expanding business, by evaluating the inner aspects of companies. But one question is whether a bank, essentially an outsider, is capable of doing something like that. It’s true that you can’t learn the behavior of live squid from surume. But observing a swimming squid is not enough to obtain necessary information to make financing decisions. You also have to dissect dead squid and dry it into surume to analyze its components. While true financing is unlikely to take place without the willingness to swim together with live squid, that is not possible for a bank in practical terms. After all, the FSA is simply reminding the banks that surume used to be live squid.

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Rebuilding the Lost Myth in Japan

Apr 10, 2018
byNoriyuki Morimoto

Once upon a time, a farmer at his deathbed told his lazy sons that there was treasure hidden somewhere in his vineyard. After his death, the sons dug up the entire vineyard but could not find anything. Instead, they had a great harvest. Above is the well-known Aesop Fable called The Farmer and His Sons? The moral is that hard work itself is a treasure. This fable is quoted by philosophers including Georg Simmel and Walter Benjamin as having a deep significance. The philosophical point of discussion is that the sons took the farmer’s lie as a fact: a historical truth without any room for doubt, and this was supported by the father’s authority that let a lie pass as truth. Every ethnic group has its own myths of origin and traditional tales. While a lot of the myth may be high-flying fantasy, the ethnic members more or less have faith in it. In other words, the scope of which the myth holds some authority defines the scope of ethnic groups, in the same way that believing in the farmer’s lie made his sons his sons after all. Companies also have what are called myths of origin, traditions, cultures, beliefs, or philosophies. This is not the personal conviction of the founder or management, but something that grew out of it to be shared by the organization, breathed like air, believed in, and becoming a natural discipline of the members of the organization. This may be the myth around past success, but also becomes a driving force for the company’s future growth. In the past, Japanese companies often had a more or less religious kind of atmosphere, singing company songs and chanting corporate philosophies like dedicating an ode. But the myth has long been lost. How can this myth be rebuilt? We can’t just get employees to sing the company songs as a ritual again. Take the myth of technological strength: we see various projects in which small companies with high processing technologies take on difficult tasks, and attract much public attention when they succeed. But such projects do not hold much economic rationale. The intention here is to foster the belief in technological strength to the level of a myth. Commissioner Mori of the Japan Financial Services Agency is also putting effort in creating a myth in the finance industry. “Creation of shared value with the customer” is a myth. Financial institutions should hold the conviction that they would benefit not from pursuing their own profits but from taking action for the customers’ benefit. In that sense, this is a myth they have to believe in.

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