US Japan Economic Cooperation to cope with international ......Hokkaido Tohoku Hokuriku North Kanto...

US‐Japan Economic Cooperation to cope with international

Downturn

Naoyuki Yoshino Professor of Economics

Keio University, Japan

[email protected]

1, Bubble Economy

2, Changes in Japanese Economy

3, Engine of Growth

China, India, and ASEAN

4, Infrastructure Bond

5, Small and Medium sized enterprises’ (SMEs’) Database

6, Possible US‐Japan Cooperation

Japan: Share Price, Land Price, Bank Loans

China, Shanghai Share Price

Why does Bubble Occur in Many Countries ?

1, Easy Monetary Policy Excess Liquidity

2, Share Price starts to rise

3, Wealth effect higher consumption

expansion of sales

4, Improvement of Business Condition

5, Increases in Investment

6, Consumption, Investment, Higher growth

7, Everybody is happy

8, Difficult for the central bank to stop

Bubble Indicators(i) Changes in the ratio of banks’

real estate‐

related loans to the loans of banks overall

In Japan, this ratio rose from 16% to 32.6%

ΔLr/Lr > ΔLt/Lt

(ii) Comparison of the pace of growth in banks’

real estate lending with the real

economic growth rate ΔLr/Lr > ΔY/Y

(iii) The rise in the housing prices compared with the average income of workers

Ph

>

αY

Planned Business Investment

Industrial Production (Japan)

Japan’s Exports by Area

12

８、日本の資金循環の変化

Map of Japan from the North to the South

Hokkaido

TohokuHokuriku

NorthKanto

South KantoTokaiShikokuSouthKyushu

NorthKyushu

Chugoku Kinki

Okinawa(not included)

Marginal Productivity of Public Capital (Regional Disparity)

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

Hokkaido Tohoku NorthernKanto

SouthernKanto

Hokuriku Tokai Kinki Chugoku Shikoku NorthernKyushu

SouthernKyushu

SecondaryIndustry

TertiaryIndustry

Highway Map in Apr.1, 1970

Highway Map in Apr.1, 1980

Highway Map in Apr.1 2001

Economic Effect of Public Capital (Productivity Effect)

TFP Regression

ttt

tP

tPtL

t

ttL

t

t

t

t

uCapitalPublicTFP

KK

sLLs

YY

TFPTFP

++=

⎟⎟⎠

⎞⎜⎜⎝

⎛−−⎟⎟

⎠

⎞⎜⎜⎝

⎛−⎟⎟

⎠

⎞⎜⎜⎝

⎛=⎟⎟

⎠

⎞⎜⎜⎝

⎛

−−−−

)ln()ln(

ln)1(lnlnln1,

,,

1,

11

βα

Year 1956-69 1960-64 1965-69 1970-74Private Capital Stock 0.7558 0.7304 0.6463 0.4131Public Capital Stock 0.6487 0.8016 0.8168 0.0842

Year 1975-79 1980-84 1985-89 1990-93Private Capital Stock 0.3124 0.2578 0.2280 0.1995Public Capital Stock 0.0397 0.0590 0.2525 0.2246

Source: Yoshino, Nakajima, and Nakahigashi (1999) Table 2-4

Translog Production Function ),,( KgLKpfYt =

Regressor (1) (2) (3) (4)Strict Strict Broad Broad

Constant -9.546** -7.148** -9.806** -8.066**Dummy (1974-) 6.448** 4.599** 5.495** 4.183**Dummy (1990-) 2.639 2.557** 1.641 1.603* Public Capital 0.587** 0.432** 0.600** 0.487**Public Capital (1974-) -0.367** -0.261** -0.310 -0.235**Public Capital (1990-) -0.134 -0.129** -0.080 -0.079* Trend Term ー 0.110** － 0.086**R-Squared 0.991 0.998 0.996 0.999D.W. 0.382 1.112 0.475 1.187

Note: *: statistically significant at 5% level **: statistically significant at 1% levelDummy(1974-) : dummy variable (after 1974=1, before 1973 = 0)Dummy(1990-) : dummy variable (after 1990=1, before 1989 = 0)Public Capital (1974-) : coefficient dummy (after 1974 = 1, others = 0)Public Capital (1990-) : coefficient dummy (after 1990 = 1, others = 0)

Effectiveness of Public Capital Stock ‐

“Private capital/Public capital ratio”

to “Marginal productivity of Public capital”

‐

Secondary Industry (Industrial Sector)

0

0.1

0.2

0.3

0.4

0 0.2 0.4 0.6 0.8 1 1.2 1.4 1.6Private Capital / Public Capital

Mar

gina

l Pro

duct

ivity

of P

ublic

Cap

ital

Southern KantoTokai

Kinki

Chugoku

Northern Kanto

Hokkaido

Southern Kyushu

Tohoku

Northern KyushuShikoku

Hokuriku

Effectiveness of Public Capital Stock ‐

“Private capital/Public capital ratio”

to “Marginal productivity of Public capital”

‐

Tertiary Industry

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0 0.5 1 1.5 2Private Capital / Public Capital

Mar

gina

l Pro

duct

ivity

of P

ublic

Cap

ital

Southern Kanto

Kinki

Tokai

Northern Kyusyu

Hokkaido ChugokuShikoku

Southern Kyushu

TohokuHokuriku

Northern Kanto

Table3 Allocation of Public Infrastructure in Japan: (Pooled data, 47 prefecture) Coeffcient Explanatory

Variables Agriculture Land

Conservation Industrial Infrastructure

Improvement of living standardsｙ

0α Constant -35.44 (-10.46**)

-34.26 (-11.32**)

-61.58 (-11.84**)

52.32 (8.00**)

1α Yp (Income) 0.01 (7.21**)

0.01 (13.18**)

0.02 (17.99**)

0.036 (25.86**)

2α Sp(AreaSize) 4970 (28.47**)

2090 (13.40**)

3855 (14.39**)

2730 (8.10**)

3α Rp(Political Power)

8280 (16.88**)

7274 (16.60**)

10956 (14.55**)

-7434 (-7.85**)

4α Dummy1 -23.21 (-6.69**)

-34.27 (-11.06**)

-59.81 (-11.23**)

-36.85 (-5.50**)

5α Dummy2 27.43 (9.26**)

-1.65 (-0.62)

65.87 (14.48**)

66.89 (11.70**)

Adj. 2R 0.675 0.486 0.458 0.527 (1) ( ) denotes t-value

(2) ** is significant with 99.0% level,

Determinants of regional allocation of public investment (Political Power plays a role)

Reform of the Allocation of Public Investment

Define the level of “National Minimum”School, Police Protection, Education, Basic Infrastructure

(1) User‐Based Infrastructure Bond(a) Beyond the level of National Minimum should be based on

Revenue Bond(b) Issue Bond for specific project such as Air‐port, Highways(c) The rate of return on bonds depend on the revenue of each

project(d) External Benefit ‐

Tax should be subsidized

(2) PPP (Private Public Partnership)(a) Public Projects are partly financed by private funds(b) Failures of the Third Party Project of Japan(c) Weak Governance, No Responsibility in case of failure

23

Japan’s Wind Power Plant1, Construction Costs, 2 million US$

2, Investors are individuals.

Unit: 5 thousand US$

3, About 300 investors + Donations

4, Power Supply ‐‐‐

Power Company

5, Local banks ‐‐‐‐

Servicer

6, 3 years, so far 1.8 thousand US$

YoshinoKeioUniversity @CopyRight 24

Wind Power Mill FundHokkaido, 500,000 yen

Wind MillRevenue

Individual Investor

IndividualInvestor

Invest Money

Invest Money

Return

Return

25

Figure 5 Revenue Bond for Infrastructure

InterestPayments

AndPrincipalPayment

(70%)

Tax Payers’Money(30%)

PrivateInvestors

High‐WayToll

Governm

ent

26

Figure 6

Multi‐Currency Revenue Bond

TollRevenue

ThaiBaht

USDollar

JapaneseYen

ThailandInvestors

InternationalInvestors

JapaneseInvestors

27

Figure 4, Several Steps toward the Development of Bond Market in Asia

1, Government Bonds

2, Semi‐public Government Bonds

Such as Power Plant

3, Infrastructure revenue bond

such as high ways

4, Multi‐currency infrastructure bond

5, SME securitized bonds

28

A

B

C

D

Figure 8, Rate of Return and the revenue bondr

rG

29

Figure 9, Convertible from Government Bond to Revenue Bond

r

rGGovernmentBond Revenue Bond

Success Case

Failed Case

Time

Floor

ConstructionPeriod

Operation Period

Convertible Government Bond to Infrastructure Revenue Bond

Construction Period Investors

Government Bond Rate

Operation Period Investors

Infrastructure Revenue Bond Rate

30

Naoyuki Yoshino, Keio University, Japan

@CopyRight31

Effectiveness of Infrastructure Investment and Revenue Bond

(1) China’s growth 8%

Low income people will satisfied (2) Export, Investment

(3) Stimulus, Domestic Demand (4) Rural Development

(5) Engine of growth, China and India

Infrastructure Investment in Asia

1, Rural Development

2, Export Oriented Growth

3, Train network and Highways

4, Local SMEs and development of Agricultural region

@Copyright=Naoyuki Yoshino,: [email protected] 34

Small Business Financing and

the Development of the Bond Market in Asian


Num of Employee

Num of Companies

Sales


Table 2. Productivity Index (Whole Industry)Employment Size

2.7

1.1

0.5 0.40.2

0

0.5

1

1.5

2

2.5

3

0-20 21-50 51-100 101-300 301-


SMEs Lag behind Large Companies


Financial Position of Companies – Large, Middle and Small Companies


Wage Differentials between Large companies and SMEs


Types of Financial Institutions –>SME trillion Yen


Private Financial InstitutionsLoans to SMEs

¥227,463 (89.9%)

Share of Loans to SMEs in Japan

Government Financial InstitutionLoans to SMEs

¥25,466(10.1%)

4 Big Banks lend to large companies, China



ABMI

(Asian Bond Market Initiative)Steps so far1, Government Bond Market2, Semi‐Government Bond (Power plant)3, Large Companies4, Infrastructure Financing (Revenue Bond)5, Housing Loan, SecuritizationSmall Businesses are neglectedCredit Data is difficult to obtain


Three Accounts by SMEs

SMEs

Tax Authority

Banks

His Own


Lack of Data for SMEs

Largecorporations

SMEs

Banks

Local Credit

CapitalMarket

Stocks and Bonds

CreditRating

Loan Securitization


Collection of Credit Data of SMEs

SMEs79160002007/3

Defaults717000

Financial Institutions

253Regional Banks

Credit AssociationsCredit CooperativesGovernment Banks

Credit GuaranteeCorporations

(Collect Data of SMEs)52

1, Government Support2, Reliability

3, Security of Information

48

Figure 7Securitization of SME Loans

SMEs

PrivateBanksLoans

TAXPayersMoney

Credit Guarantee

INVESTERS

Loans

Securitization

Loan Guarantee


SMEs Database 1, Common Database

2, Credit Scoring

3, Securitization of SME loans

It is circulated in Asian Bond Market

4, Benchmark for SME credit analysis

5, Statistical Examination

Default Risk

6, Reduce Information Asymmetry


More than 60% use Credit Data

Naoyuki Yoshino, Keio University, Japan @CopyRight 51

Naoyuki Yoshino, Keio University, Japan @CopyRight 52

53

Lack of Cross Border Capital Flows

Among East Asian Countries1, Lack of Financial Instruments

2, Lack of Liquidity

2, Lack of Information across East Asia,

Home country information

Information Asymmetry

Macro, Micro, Sector, Regional etc.

3, Different Rules and Regulations

(Tax rates, un‐clear Legal system)

4, Under developed Financial Infrastructure


ABMI

(Asian Bond Market Initiative)

Steps so far1, Government Bond Market2, Semi‐Government Bond (Power plant)

Financial LinkageLack of Financial Products,

Asian Savings Bond market in US & Europe

US‐Japan Cooperation in Infra‐bond

1, Infrastructure Bond

China, India and ASEAN countries

2, Project evaluation

3, Structure Infrastructure Bond

Financing methods

4, Hardware, Construction

5, Operation

6, Investors (Pension funds are growing in Asia)


Local Government Budget and

Local Government Bond

Naoyuki Yoshino

Professor of Economics, Keio UniversityChair Person, Fiscal Council (FILP)Member of Local Government Bond Meeting


Number of Prefectures etc.

1996 2005 Population 2000

Prefectures 47 47

Big cities 12 13 27.7 million

Middle size 35 11.8

Small cities 652 644 60.3

Villages 2568 1789 27.0

Total 3271 2568 126.9 million


Revenues of Local Government(i) Local Tax 33%

(Residential tax 23.5%、2004)

(Corporate tax 30.0%)

(Consumption tax 18.0%)(ii) Transfer from Central Government 25‐30%

(local allocation from tax, Gov. expenses)

(iii) Local Government Bond 10‐15%

(iv) Other Revenues


Tax Allocations between Central and Local Governments (2004)

Total Tax Revenue 81.6 trillion yen(Direct tax 68.1% Indirect tax 31.9%)

Central Government 48.1 trillion yen(Direct tax 58.2% Indirect tax 41.8%)

Local Government 33.5 trillion yen

(Direct tax 82.4% Indirect tax 17.6%)(Local Government Expenditures 91.2 trillion)

National Income 361 trillion yen


Local Government Expenditures

(i) Personal Costs 28.1%

(Wages and salaries)

(ii) Construction 17.9%

(iii)Interest on Local Bonds 14.3%

(iv) Social Welfare 8.2%

(v)

Subsidies 7.5%

Total Spending 91.2 trillion yen


Central and Local Governments’

Debt


Local Government Bond (Demand)

Banks

Market

LPE fund

FILP

YoshinoKeioUniversity

@CopyRight 64

TotalGovernm

entFund

LocalPublicEnterpris

e Fund

PrivateBanketc. Market

Bond(FY1996) 181,103

(100.0) 87,300(48.2)

22,200(12.3)

71,603(39.5)

14,400( 8.0)

57,203(31.6)

(FY1997) 173,659(100.0) 86,000

(49.5)22,200(12.8)

65,459(37.7)

14,400( 8.3)

51,059(29.4)

平成10(FY1998) 160,940(100.0) 76,000

(47.2)19,300(12.0)

65,640(40.8)

13,900( 8.6)

51,740(32.1)

平成11(FY1999) 163,970(100.0) 77,400

(47.2)19,700(12.0)

66,870(40.8)

15,100( 9.2)

51,770(31.6)

平成12(FY2000) 163,106(100.0) 76,500

(46.9)20,200(12.4)

66,406(40.7)

16,100( 9.9)

50,306(30.8)

平成13(FY2001) 164,998(100.0) 78,100

(47.3)19,600(11.9)

67,298(40.8)

16,900(10.2)

50,298(30.5)

平成14(FY2002) 165,239(100.0) 76,000

(46.0)19,000(11.5)

70,239(42.5)

19,400(11.7)

50,839(30.8)

平成15(FY2003) 184,845(100.0) 76,900

(41.6)17,800

(9.6)90,145(48.8)

24,000(13.0)

66,145(35.8)

平成16(FY2004) 174,843(100.0) 56,000

(32.0)16,140

( 9.2)102,703

(58.7)31,600(18.1)

71,103(40.7)

(FY2005) 155,366(100.0) 47,200

(30.0)15,330

( 9.9)92,836(59.8)

33,000(21.2)

59,836(38.5)

Bank Bond

YoshinoKeioUniversity

@CopyRight 65

１９９５FY ２０００FY ２００４FY

BANKS

Large Banks 24,614(28.9) 13,936(29.0) 13,769(17.7)

Regional Bank I 32,038(37.6) 12,618(26.3) 16,592(21.4)

Regional Bank II 2,941( 3.5) 1,818( 3.8) 1,726( 2.2)

Trust Banks 3,236( 3.8) 1,745( 3.6) 1,458( 1.9)

Long termCredit Banks

3,021( 3.6) 1,480( 3.1) 645( 0.8)

Sub-Total 65,850(77.4) 31,597(65.8) 34,191(44.0)

Securities Companies 8,327( 9.8) 11,972(24.9) 24,362(31.3)

Individuals 1,077( 1.3) 600( 1.3) 3,069( 4.0)

Total 85,132(100.0) 48,047(100.0) 77,726(100.0)


Market Based LGB (3.4trillion Yen)Including Redemption 5.4 trillion yen, 2004

(1)

10 year LGB (Local Gov. Bond)

(1‐1) 27 LG ‐‐‐

Common issue 1.2 trillion

(1‐2) Individual Issue ‐‐‐‐‐ 2.6 trillion

(2) 5 years and 7 years 1.2 trillion

(3) Long term (15, 20, 30 years) 1.2 trillion

(4) Individual residence bond 0.4 trillion


Joint Issue LG Bonds (27)

1, Increase Liquidity

2, In case of Default,

27 local governments are responsible for repayment

3, Constant Issues

4, Enhance Credit Rating

Better LG issue its own bond


Methods of Issue (Marketable Bonds)

(1) Two Tables’

Method

(1‐1) Tokyo, Nagoya, Kanagawa

Individual Issues

(1‐2) Common conditions (up to 2006/9)

Other Local governments

(2) Individual Issues (after 2006/9)


Local Public Enterprises’

Bonds

Total Issue (2004) 3.6 trillion yen

(i) Water supply 0.5 trillion yen

(ii) Sewage 1.6 trillion yen

(iii) Transportation 0.3 trillion yen

(iv) Hospital 0.3 trillion yen


LG Bond for Individual Investors

1, Issued for specific project

such as Hospital, Rapid Train

2, Rate of Return is higher than CGB

3, Safety (Fixed Interest Rate and ?Guarantee?)

4, Individuals in the region feel their money

constructed each project

5, Concern by Yoshino

No responsibility in loss making projects


How did you know the bonds Issue RatioLocal Government Paper etc. ３９．４％

Financial Institutions２９．６％

News Papers２３．９％

Posters etc１０．９％

Local Government ４１．３％

Participation in the LG policy ２１．１％

Safety issued by LG。３１．５％

Better Rate of Return ３１．９％


３Year 4 Year ５Year 7 Year １0 Year Total

2001 FY ０( 0.0％) ０(0.0％) １

(100.0％) ０(0.0％) ０(0.0％) １

(100.0％)

2002 FY ４( 9.8％) ０(0.0％) ３５

( 85.4％２(4.9％) ０(0.0％) ４１

(100.0％)

2003 FY ６( 7.0％) ２(2.3％) ７３

( 84.9％) ４(4.7％) １(1.2％) ８６

(100.0％)

2004 FY ８( 8.5％) １(1.1％) ７９

( 84.0％) ４(4.3％) ２(2.1％) ９４

(100.0％)

2005 FY ９(13.0％) ０(0.0％) ５６

( 81.2％) ３(4.3％) １(1.4％) ６９

(100.0％)

Total ２７

( 9.3％) ３(1.0％) ２４４

( 83.8％)

１３

(4.5％) ４(1.4％) ２９１

(100.0％)

５０yeas old ～８３．５％

５０years of age ２０．６％

６０years or older ６２．９％

６０years ３５．７％

７０years ２３．０％

８０years ４．２％


Fiscal Investment and Loan Program (FILP, Before 2001/March)

PostalSavings

PostLifeInsurance

PensionFund

FILP

(MOF)GovernmentBanks

Public Enterprises

Local PublicEnterprise


Fiscal Investment and Loan Program (FILP, After 2001/April)

PostalSavings

PostLifeInsurance

PensionFund

FILP

(MOF)GovernmentBanks

Public Enterprises

Local PublicEnterprise

FinancialMarket

FILPBonds

FILPBonds

Agency Bond

AgencyBond

Agency Bond


Down Sizing of FILP 1, Privatization of Postal Savings

2, Down Sizing of FILP system

1996 (Flow) 40.5 trillion yen (Peak)

2000 (Stocks) 417.8 trillion yen (Peak)

2007 (Flow) 14.2 trillion yen

2007 (Stocks) 249.7 trillion yen

3, GDP = 500 trillion yen

G = (annual gov. spending) = 80 trillion yen


Own View for Local Government1, Define – National Minimum

such as school, water supply, transportation

2, Up to National Minimum

Government provides services

3, Beyond National Minimum Level

Revenue Bond for Project

Autonomy for Local Government

4, How to allocate tax revenues

Central government and Local gov.

5, Create Incentive Mechanism

to Public workers

US‐Japan Cooperation1, Financial Market Development in Asia

2, Infrastructure Investment

China, India and ASEAN

Engine of growth

3,Development of SME financing mechanism

Venture Capital

Bank credit

4, Exchange rate system in Asia

Dynamic adjustment toward basket system

US Japan Economic Cooperation to cope with international ......Hokkaido Tohoku Hokuriku North Kanto...

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