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Monday, June 23, 2008


The savings exodus and Japan's pursuit of higher financial IQ

On May 20, the Education, Culture, Sports, Science and Technology Ministry and the Financial Services Agency jointly submitted a request letter asking the heads of national and private universities across Japan to improve the quality of financial education.

The FSA, as stated in a plan in revealed in December to boost Japan's financial competitiveness, wants to beef up "high-level and practical" education on financial matters and make better use of people skilled at finance.

In response, several financial industry organizations — including the Japanese Bankers Association, the Japan Securities Dealers Association, the Life Insurance Association of Japan, the General Insurance Association of Japan, the Trust Companies Association of Japan, and the International Bankers Association — set up a liaison office to stay in touch with the nation's universities and graduate schools. The May 20 request urged the schools to make efficient use of the office to improve Japan's financial IQ.

I would like to explain why such a request was made at this point in time.

The biggest factor behind the move is the falling competitiveness of Japan's financial and capital markets, which has triggered a flight of Japanese savings to overseas destinations and reduced the inflow of foreign capital to Japan.

It is obvious this is happening because of the fact that it has become less attractive to invest in Japan and to manage funds in Japanese markets.

In its bid to rebuild the economy amid the devastation following World War II, Japan created — at the initiative of the bureaucracy — a system whereby the nation's limited savings could be efficiently distributed among various industries, mainly through indirect financing. Japan's rapid postwar growth and its entry into the club of rich nations owe much to this system.

However, it is this very success — and the bureaucracy's penchant for clinging to vested interests — that delayed Japan's financial and capital market reforms — even after it accumulated a savings surplus — and ultimately hampered the internationalization of the yen.

In the days when I used to work for a bank, I attempted to introduce Japan to bankers acceptance (B/A), a short-term credit investment commonly used in industrialized countries. This was rejected by financial regulators with the argument that such a tool could disturb the markets. What they actually feared was the threat of financial liberalization and new products undermining their regulatory power.

Today, the pressures of international competition have forced Japan's top banks to consolidate into three major groups. Despite this, the nation has more than 300 small financial institutions ranging from regional banks to credit unions. At the top is Japan Post Bank, the behemoth created by the privatization of the national post office network. Japan continues to be plagued by an excess of financial institutions.

Given Japan's lower growth compared with Europe, the United States and emerging economies, as well as near-zero interest rates and the yen's lack of relative strength, it is hardly attractive to invest in and hold yen-denominated assets.

But it's not that the capital inflow from foreign sources is declining. It's that the outflow of Japanese savings is increasing. You could call it the Japan savings exodus.

It is the central and local governments, saddled with ¥1 quadrillion in public debt, that are being hurt worst by this exodus. If fewer people are willing to invest in JGBs, bond yields will rise, increasing the fiscal burden on them.

A 1 percentage point rise in the JGB yield theoretically pushes up interest payment costs by ¥10 trillion. This is a huge burden at a time when the central government's annual tax revenues stand at around ¥50 trillion.

Technological innovation will obviously be needed to achieve higher growth and respond to rising energy prices. At the same time, the nation needs to build the human resources it needs to regain financial competitiveness. This is the objective of the request.

While cases of wasteful spending in the public sector make newspaper headlines almost daily, lawmakers and bureaucrats are debating whether to hike the consumption tax, citing the need to pay for steadily rising social security costs exacerbated by a rapidly aging society.

On the other hand, heinous crimes continue to grow, as evidenced by the shocking murder spree in Akihabara.

Financial knowledge is, of course, important. But education is also important for dealing with other issues, including questions of morality, peace, the long-taboo issue of constitutional amendment, and religion. For example, Japanese need better knowledge of Islam in order to understand the rapidly growing trend in Muslim financing.

It takes time for investments in education to bear fruit. As a former financial worker now engaged in higher education, I acutely recognize the importance of education and the wide range of areas it covers.

Teruhiko Mano is a professor at Seigakuin University Graduate School.

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