12/31/22, 6:15 AM Shaken by Collapse of Bubble Economy, The Mindset of Investors Begins to Change : Japanese Come to Terms With

ms With Idea of Cr…

https://www.nytimes.com/1997/09/23/news/shaken-by-collapse-of-bubble-
economy-the-mindset-of-investors-begins-to.html

Shaken by Collapse of Bubble Economy, The Mindset of

Investors Begins to Change : Japanese Come to Terms With
Idea of Credit Risk
By Miki Tanikawa, International Herald Tribune
Sept. 23, 1997 6 MI N READ

TOKYO— In the past few years, Japan has seen some of its trusted corporations listed on
the Tokyo Stock Exchange go bust and some smaller financial institutions declared
insolvent, prompting a fundamental shift in attitude among investors and the public alike
toward the concept of credit risk.

This is a countryin which people have had an almost legendary beliefthat banks and firms
listed on the Tokyo Stock Exchange could never gounder.

But the series of nerve-racking events, including a highly publicized run on failed banks and
the massive bottom-line losses by the top banks — incidents that had once been considered
virtually impossible inJapan —are challengingthe mindset of people who once described
their system as the most risk-free, stable economy in the world.

And fueling the market jitters are the spate of recent bankruptcies of firms in Japan's
construction sector which is paying forthe wild expansion of theeconomic heyday of the late
1980s.

"Collapse of the bubble economy altered investors' perspective on risk," said Wakako
Komatsu, analyst at Daiwa Institute of Research. "There have been companies whose
performance swung wildly and the potential for bankruptcy loomed."

At a deeper level, it was the abrupt end of the economic system underpinned by ever-
appreciating asset prices that brought about profound changes. The steep rise in asset value
— many companies carried sizable assets in the form of stocks and land holdings on their
balance sheets — had served as a comfortable cushion when the business environment
turned sour.

"At a time when such a mechanism was at work, bankruptcy was not a possibility," said
Masaru Kakutani, representative director of Moody's Japan K.K. "There was a legendary
belief that under the Japanese system, big companies never go under."

https://www.nytimes.com/1997/09/23/news/shaken-by-collapse-of-bubble-economy-the-mindset-of-investors-begins-to.html 1/3
12/31/22, 6:15 AM Shaken by Collapse of Bubble Economy, The Mindset of Investors Begins to Change : Japanese Come to Terms With Idea of Cr…

Another significant movement paralleledthe collapse of the bubble economy. The

government began torelease its grip on Japan Incorporated.

"In the past, there was supposed to be no such thing as individual credit risk [for big
companies] in Japan," said MarikoKodama, credit analyst atMikuni & Co. Risk, as it were,
was socialized, she explained, because of the efforts by the financial authority to control and
limit private-sector risk.

Under this system, big companies in Japan were under the embrace of the banks, which
were committed to extendingprotective support should companies fall into financial trouble.
The government, in turn, ensured that no financial institution wouldfail.

This "syllogism," Ms. Kodama said, was the centerpiece of the nation's system of risk
management, making corporate riskvirtually a matter of sovereign risk.

The shift in the government'sstance was evident when it ordered the shutdown of Hanwa
Bank, an ailing regional bank based in Wakayama Prefecture, last November, sending a
clear signal to the market that the government would no longer lend a helping hand to
financial institutions.

ONEOF the greatest challenges facing Japanese banksis toshiftfrom loan practices based on
the collateral value borrowers can offer to assigning risk premium in accordance with the
perceived risk of default.

The embarrassment felt from the series of loan fiascoes, which eventually pushedbanksinto
the red for the first time in postwar history, is causing the banks to reconsider their
conventional loan methods, said Shinichi Taniguchi, deputy manager of corporate planning
at Sanwa Bank. Bankers are now turning, albeit slowly, to scientific methods of risk
analysis, quantifying risk and charging differentiated premium as they see fit to the
borrowing entities,Mr. Taniguchi said.

Japan's lack of training and accumulated know-how in analyzing risk is, in fact, one main
reason that its financial institutions lag considerably behind their Western peers in
competitiveness. Banks are not well equipped to profitably loan to companies and the lack
ofa mechanism to control risk holds back institutional investors from initiating risky but
lucrative investments.

Japan'sinsurance firmsare also ill-prepared tocompete with their Western rivals because the
government-controlled premium rate has shielded them from developing the sophisticated
technology in risk assessment that is essential in underwriting insurance.

https://www.nytimes.com/1997/09/23/news/shaken-by-collapse-of-bubble-economy-the-mindset-of-investors-begins-to.html 2/3
12/31/22, 6:15 AM Shaken by Collapse of Bubble Economy, The Mindset of Investors Begins to Change : Japanese Come to Terms With Idea of Cr…

Rationalization of the Japanese financial marketsis a welcome ingredient for foreign

investors like Clifford Shaw, president of Mercury Asset Management Japan Ltd., because
markets behave in a fashion more akin to the ways foreigners are used to at home. In
addition, risk management and analysis a new domain for the Japanese, are Western
financiers' strong suit.

"This is the time we have been waiting for," remarked Mr. Shaw.

The trend is even more auspiciousfor people in the risk-related business such as Moody's
Japan K.K., the Japan unit of Moody's Investor Service.

The credit-rating agency indicated — without giving out numbers onthe growth of sales or
readership of its publications — that business has grown, pointing outthat its staff has
increased from20 people six years ago to 50 today.

Tokyo Shoko Research, which maintains credit information on one million Japanese
companies, said that the number of company reports it sells to clients has been growing by
at least 10 percent annually and that subscribers to its on-line information service almost
tripled in the past year from 700 to more than2,000.

MIKI TANIKAWA is a journalist based in Tokyo.

https://www.nytimes.com/1997/09/23/news/shaken-by-collapse-of-bubble-economy-the-mindset-of-investors-begins-to.html 3/3