Abstract
Employing a unique micro dataset on the financial relationships between Japanese firms and their main banks and the use of collateral in their debt financing, this chapter provides a detailed account of the current landscape of business financing in Japan. The findings can be summarized as follows. First, main bank relationships are stable for most firms: less than 1 % of firm switch their main bank in any particular year, although more than 80 % of firms have established relationships with multiple banks. Second, main bank relationships are stronger in terms of deposit transactions than in terms of borrowing: the share of deposits with the main bank in the total amount of deposits is larger than the share of the amount borrowed from the main bank in the total amount of borrowing outstanding. Third, the most frequently pledged type of collateral is real estate property. And fourth, more than 30 % of real estate properties are used as collateral for multiple secured loans, suggesting that the use of junior liens is quite common in Japan.
This study was conducted under the project “Designing Industrial and Financial Networks to Achieve Sustainable Economic Growth” under the Ministry of Education, Culture, Sports, Science and Technology’s program “Promoting Social Science Research Aimed at Solutions of Near-Future Problems.” The authors would like to thank Teikoku Databank Ltd. for providing data and Masahiro Miyatani and Takurou Kitou, who provided us with a detailed explanation of the TDB database. The authors also thank Noriyuki Yanagawa, Daisuke Tsuruta, Koji Sakai, and Takashi Hatakeda for their helpful comments. The views expressed in this chapter are those of the authors and do not necessarily reflect those of the institutions with which they are affiliated.
This is a preview of subscription content, log in via an institution to check access.
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
Notes
- 1.
A detailed description of the basic characteristics of firms in the TDB database and their inter-firm relationships, with special emphasis on the use of trade credit, can be found in Uchida et al. (2010).
- 2.
Note that since the aim of the analysis is to examine firm–bank relationships, financial firms such as banks, securities firms, insurance companies, and finance companies were excluded in the compilation of the dataset.
- 3.
See Uchida et al. (2010) for further details.
- 4.
In Japan, SMEs are officially defined in Article 2, Paragraph 1 of the Small and Medium-sized Enterprise Basic Act based on the amount of capital (up to 300 million yen) or the number of regular employees (up to 300). Lower limits apply to enterprises in the wholesale, retail, and services industries.
- 5.
Whether a firm is owner-managed is determined by checking the surname of the owner of the majority of the capital stock of the firm and the surname of the CEO or firm representative. If the two are the same, it is assumed that the firm is owner-managed.
- 6.
- 7.
A detailed discussion of the different bank types in Japan can be found in Uchida and Udell (2010).
- 8.
The TDB score is a metric that evaluates the creditworthiness of a firm. The score ranges from 1 to 100 points, and a higher score indicates higher creditworthiness. See Uchida et al. (2010) for more on TDB scores.
- 9.
- 10.
However, (and as will be seen below), firms whose main bank is a government FI are not necessarily riskier.
- 11.
More precisely, a main bank is a bank with which a firm has a deposit account and obtains loans (short-term and/or long-term loans). When a firm has a deposit relationship with one bank and a lending relationship with another, TDB identifies the latter as the main bank, even though the firm is allowed to list multiple banks as its main banks. Similarly, when a firm obtains short-term loans from one bank and long-term loans from another, then the former is labeled as the main bank.
- 12.
- 13.
The TDB database also contains information regarding discounted bills (tegata-waribiki), a traditional method for short-term financing in Japan. See Ono et al. (2010) for more on discounted bills.
- 14.
Mester et al. (2007) provide empirical evidence on the importance of deposit relationships (transaction accounts) in monitoring borrowers.
- 15.
The percentage of firms with paid-in capital of more than 100 million yen in the real estate registry data is approximately 3 %, whereas it is 8 % in the full sample used here. Similarly, the percentage of firms with more than 100 employees in the real estate registry data is approximately 6 %, while it is 8 % for the full sample.
- 16.
Ono and Uesugi (2009) showed that 66.7 % of Japanese SMEs use personal guarantees.
- 17.
In Japan, most firms open a checking account with their main bank, because promissory notes or checks are accepted and discounted only when drawn against a checking account with a bank and produced by using the uniform format promulgated by the bankers’ association. Once such a checking account is opened, a large part of the firm’s cash flow goes through the account. Therefore, taking deposits in the checking account as collateral could be seen as equivalent to collateralizing the cash flow of the firm.
- 18.
In Fig. 12.3, account receivables and inventories are included in the item “other.”
- 19.
Following the tradition of the Civil Law system, Japanese law does not allow non-possessory security interests in movables. The Civil Code stipulates that movables cannot be the subject of a mortgage, but can only be the subject of a pledge, which requires that the debtor (pledgor) gives possession of the movable to the creditor (pledgee). However, in order to enable the debtor to utilize their property as a security for their debt and still use the same property for the business, the practice of “transfer by way of security” has developed. This is the legal practice of transferring the ownership of the movable to the creditor based on the agreement that the transfer is only for the sake of securing the credit and that ownership will revert to the debtor when the latter has repaid the debt. In 1998, a registration (filing) system for account receivables was introduced with the expectation that registration enhances the effectiveness of transfers by way of security. Under the new registration system, the security interest is “perfected,” i.e. becomes valid vis-à-vis the third party (another creditor). In 2004, the registration system was extended to movables (inventories and equipment). Notwithstanding these reforms, the system has several limitations. In particular, registration is not the exclusive means for the perfection of the interest in a transfer by way of security; another means of perfecting the creditor’s right remains taking possession of the property. Therefore, registration does not preclude the possibility that another creditor claims an interest that has priority over the registered creditor based on the fact that the unregistered creditor had taken possession of the property (typically through the “fictitious possession” by the debtor’s declaring that the debtor possesses the movable for the sake of the unregistered creditor) prior to the registration. As a result, a creditor cannot be sure whether they can rely fully on a registration to secure the loan (Kozuka and Fujisawa 2009). The low level of account receivables and inventories registered as collateral may partly be the result of such shortcomings of the registration system.
- 20.
In cases where land and building are not separable (as in the case of an apartment), this is counted as one piece of real estate.
- 21.
Note, however, that the share of firms with four or fewer properties is probably overestimated, since it is possible that TDB does not investigate whether a firm has other properties.
- 22.
Although the official real estate registry provides information about seniority among secured loans, the TDB does not collect such information.
- 23.
Ono et al. (2014) study the cyclicality of LTV ratios and whether LTV ratios are good predictors of firms’ ex-post performance.
References
Aoki, M., Patrick, H., & Sheard, P. (Eds.). (1994). The Japanese main bank system: Its relevance for developing and transforming economies. Oxford: Oxford University Press.
Degryse, H., Kim, M., & Ongena, S. (2009). Microeconometrics of banking: Methods, applications, and results. New York: Oxford University Press.
Kano, M. (2007). When does the relationship banking break up? An empirical analysis in Kansai area (relationship banking ha dono youna baai ni chuudan sarerunoka: kansai-chiiki ni okeru jisshou bunseki). In Y. Tsutsui & S. Uemura (Eds.), Relationship banking and regional finance (relationship banking to chiiki kinyu). Tokyo: Nihon-Keizai Shimbun Shuppansha (in Japanese).
Kawai, M., Hashimoto, J., & Izumida, S. (1996). Japanese firms in financial distress and main banks: Analyses of interest-rate premia. Japan and the World Economy, 8, 175–194.
Kozuka, S., & Fujisawa, N. (2009). Old ideas die hard? An analysis of the 2004 reformation of secured transactions law in Japan and its impact on banking practices. Thomas Jefferson Law Review, 31, 293–315.
Mester, L. J., Nakamura, L. I., & Renault, M. (2007). Transactions accounts and loan monitoring. Review of Finance, 20, 529–556.
Ono, A., & Uesugi, I. (2009). Role of collateral and personal guarantees in relationship lending: Evidence from Japan’s SME loan market. Journal of Money, Credit, and Banking, 41, 935–960.
Ono, A., Uchida, H., Kozuka, S., Hazama, M., & Uesugi I. (2010). Current status of bank–firm relationships and the use of collateral in Japan: An overview of the Teikoku Databank Data. Hitotsubashi University Research Center for Interfirm Network Working Paper Series.
Ono, A., Uesugi, I., & Yasuda, Y. (2013). Are lending relationships beneficial or harmful for public credit guarantees? Evidence from Japan’s Emergency Credit Guarantee Program. Journal of Financial Stability, 9, 151–167.
Ono, A., Uchida H., Udell G., & Uesugi, I. (2014). Lending pro-cyclicality and macro-prudential policy: Evidence from Japanese LTV ratios. TCER Working Paper Series E-70.
Sheard, P. (1989). The main bank system and corporate monitoring and control in Japan. Journal of Economic Behavior and Organization, 11, 399–422.
Uchida, H., & Udell, G. (2010). Banking in Japan. In A. Berger, P. Molyneux, & J. Wilson (Eds.), Handbook of banking, Ch. 35. Oxford: Oxford University Press.
Uchida, H., Ono, A., Kozuka, S., Hazama, M., & Uesugi, I. (2010). Current status of interfirm relationships in Japan: An overview of the Teikoku Databank data. Hitotsubashi University Research Center for Interfirm Network Working Paper Series No. 3.
Uesugi, I., Sakai, K., & Yamashiro, G. M. (2010). The effectiveness of public credit guarantees in the Japanese loan market. Journal of the Japanese and International Economies, 24, 457–480.
Author information
Authors and Affiliations
Corresponding author
Editor information
Editors and Affiliations
Rights and permissions
Copyright information
© 2015 Springer Japan
About this chapter
Cite this chapter
Ono, A., Uchida, H., Kozuka, S., Hazama, M. (2015). A New Look at Bank-Firm Relationships and the Use of Collateral in Japan: Evidence from Teikoku Databank Data. In: Watanabe, T., Uesugi, I., Ono, A. (eds) The Economics of Interfirm Networks. Advances in Japanese Business and Economics, vol 4. Springer, Tokyo. https://doi.org/10.1007/978-4-431-55390-8_10
Download citation
DOI: https://doi.org/10.1007/978-4-431-55390-8_10
Published:
Publisher Name: Springer, Tokyo
Print ISBN: 978-4-431-55389-2
Online ISBN: 978-4-431-55390-8
eBook Packages: Business and EconomicsEconomics and Finance (R0)