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Anthony Rowley

East Asia’s “economic miracle” in the post-World War II period was predicated upon a number of factors, such as the region’s export-led growth model, but critically it also depended on an assured supply of capital to finance business investment.
One source of such finance was bank loans, the supply and direction of which can be officially influenced by various means rather than being chiefly market-determined. Even today, bank loans account for most of the business financing in Japan, the country that was at the vanguard of the Asian economic miracle.
Demand for funds to finance not only capital investment projects but also the rationalisation of industry structures can outstrip supply. Moves Japan is making now to meet this deficit without losing control over the restructuring process could influence financial development more widely in Asia.
Japanese authorities are promoting development of the domestic corporate bond market as an alternative to both bank and equity financing. Rising interest rates in Japan after decades of ultra-low, zero and even negative rates mean the timing is good.
The Bank of Japan bought huge amounts of Japanese government and, to a smaller extent, corporate bonds in recent decades to counter disinflation and stagflation, but it now seeks to dispose of some of those holdings. Bigger structural factors underlie the corporate bonds initiative, however.
The Ministry of Economy, Trade and Industry has formed a panel to draft an enabling strategy, according to a report in The Japan Times on April 11. It did so in the belief that more risk capital will be needed, in line with a surge in mergers and acquisitions in Japan.

Private equity and venture capital firms have become more active in Japan in recent years. Successive governments have sought to promote the concept of an “asset management nation” in which household savings are channelled into investment more efficiently and in greater volume.
Merger and acquisition activity has risen accordingly, much of it involving foreign financial institutions. This is in contrast to the long-running aversion by both the public and private sectors in Japan to the idea of losing domestic control over corporate activity.
Western markets have become dominated by the “cult of equity” to the extent that a small number of tech giants account for the bulk of capital raising there and thus influence the course of national investment. Japan is not eager to go down the same road, and the latest moves to accelerate corporate bond market development need to be seen in this broad context.
They are being undertaken by the administration of Prime Minister Sanae Takaichi, whose actions generally reflect growing nationalist sentiment in Japan. Unlike equity investment, which has been pushed by previous administrations, investment in corporate bonds does not carry voting rights in the affairs of the industrial and other business corporations issuing such debt. At the same time, it frees companies from the often constraining influence of bank lenders.


Corporate bond market development offers a middle way, hence Japan’s emphasis on this funding route. Currently, bank funding still accounts for some 80 per cent of corporate financing in Japan while corporate bond financing accounts for only around 13 per cent, according to industry estimates.
The experience of other East and Southeast Asian nations is somewhat similar to Japan’s in this regard. Post-war economic development and growth has been largely export-led and bank-financed, with corporate bond financing playing a relatively minor role in comparison.
Equity market financing has assumed a bigger role in much of Asia beyond Japan, however. Foreign investment institutions eager to broaden their portfolios and gain control over the natural resources owned by Asian companies have sought to foster stock market development and corporate listings in the region.
The International Finance Corporation, along with leading US investment banks, pushed the concept of emerging market equity investment from the 1980s onwards. This was despite some Asian governments arguing that corporate bond market development, which allowed them to retain control over industrial and business development, should be prioritised.


Japan never went down the same road as many other Asian nations in accepting liberal economic models instead of more state-directed ones. That reluctance to see foreign control over Japanese enterprises via equity market interventions seems to be reasserting itself now in the renewed emphasis on non-bank debt financing.
How well Japan does in its efforts to promote corporate bond market development and the acceptance of bond investment by institutional and individual investors as an alternative or supplement to bank lending and equity investment will be watched with interest by other nations in Asia. This will be especially true if, as seems likely, the current global political turbulence provokes a sharp correction in bloated equity market valuations.
Japan’s moves to promote development and expansion of its corporate bond market admittedly come at a time when debt levels at both the corporate and government levels are already high in Japan and elsewhere, giving rise to concern among some financial analysts.
But equity market valuations – the alternative route to debt financing – are also inflated, which means the rising cost of capital is a widespread phenomenon. The need for new investment capital in areas such as defence spending by equipment manufacturers in Japan and elsewhere is very real, however, and the trade-off between interest costs on corporate bonds and the rising cost of equity capital is seen to favour bonds.


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Why Japan’s bond moves could see shift in East Asia’s financing model

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Opinion

Asia Opinion

News

Asia

East Asia

Japanese authorities are promoting the domestic corporate bond market as an alternative for firms seeking funding without losing control


Japanese authorities are promoting the domestic corporate bond market as an alternative for firms seeking funding without losing control.


Banking & finance

Bonds

Macroscope

Sanae Takaichi

Bank of Japan

Expresses the views, ideas and conclusions of the author. (Eg. Enough of Crazy Rich Asians, think of crazy poor Hongkongers.)


Column

Why Japan’s bond moves could see shift in East Asia’s financing model

.css-1c6uqr6{color:inherit;font-weight:inherit;font-size:inherit;font-family:inherit;line-height:inherit;overflow-wrap:break-word;}Japanese authorities are promoting the domestic corporate bond market as an alternative for firms seeking funding without losing control

Japanese authorities are promoting the domestic corporate bond market as an alternative for firms seeking funding without losing control