‘By a Silken Thread’: Regional Banking Integration and Pathways to Financial Development in Japan’s Great Recession

‘By a Silken Thread’: Regional Banking Integration and Pathways to Financial Development in Japan’s Great Recession

Mathias Hoffmann 

University of Zurich – Department of Economics Library; CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Toshihiro Okubo 

University of Geneva – Graduate Institute of International Studies (HEI)
January 31, 2013
CESifo Working Paper Series No. 4090

Abstract: 
How do financial development and financial integration interact? We focus on Japan’s Great Recession after 1990 to study this question. Regional differences in banking integration affected how the recession spread across the country: financing frictions for credit-dependent firms were more severe in less integrated prefectures, which saw larger decreases in lending by nationwide banks and lower GDP growth. We explain these cross-prefectural differences in banking integration by reference to prefectures’ different historical pathways to financial development. After Japan’s opening to trade in the 19th century, silk reeling emerged as the main export industry. The silk reeling industry depended heavily on credit for working capital but comprised many small firms that could not borrow directly from larger banks. Instead, silk merchants in Yokohama, the main export hub for silk, provided silk reelers with trade loans. Many regional banks in Japan were founded as local clearing houses for such loans, and regional banks continued to account for above-average shares in lending in the formerly silk-exporting prefectures long after the decline of the silk industry. Using the cross-prefectural variation in the number of silk filatures in 1895 as an instrument, we confirm that the post-1990 decline was worse in prefectures where credit constraints were tightened through low levels of banking integration. Our findings suggest that different pathways to financial development can lead to long-term differences in de facto financial integration, even if there are no formal barriers to capital mobility between regions, as is the case in modern Japan.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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