institutional winter final study guide

8/13/2019 Institutional Winter Final Study Guide

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1) Crisis of the locals banks in 1920s:a. Local banks can better assess the risk level of entrepreneurs compare to outsiders such

as state banks.

b. However, as firms grow and build their reputations, in addition to the establishment ofthe new commercial codes, allow firm to issue corporate bonds and move into direct

financing.

c. At the same time, large city banks were expanding their branches and undermine theinformation rent of local banks and cause many of them to go bankrupt and cause the

crisis.

d. However, share of lending also grew as the market share of large banks grew. This alsoundermines the relevance of local culture.

2) The occurrence and disappearance of dual labor structure:a. In the rural area, heads of household provide for the less productive members of their

families and only use them during planting and harvesting seasons. This created the

slack labor.

b. Also, at the time, transportation cost was high while personal security was lower. Therisk-averse agents preferred the provision of household heads instead of working in the

urban area and therefore stayed home and submitted to the authoritarian control of the

household heads.

c. In the city, as modern industries such as cotton spinning grew, the need for labor forceincreased. This increased their real wage. Also, since the transportation system was not

as developed, these urban laborers enjoyed location rent.

d. However, as real wage increases pass the reservation wage level, it attracts more andmore rural workers. Also, as the transportation system develops and decreases the costs

and risks of commuting to the urban area, there was an inflow of labor into the cities

where the manufacturing plants are. This increase the supply for labor and undermine

the dual labor structures.

e. Also, as the real wage increases, many firms move toward automation processes todecrease labor costs. This decreases the demand for labor.

f. The combination of increasing supply and decreasing demand for labor resulted in anoutflow of labor from the urban areas.

3) Why is building internal labor beneficial during the 1920s and after WWII:a. Internal labor market is where firms hire fresh graduates and trained them within the

company to build up firms-specific human capital.

b. Stable growth of the heavy industries faced with tight amount of skilled labor. Also,since skills from Japanese traditional craftsmanship did not fit the need for these sectors,

firms needed to train unskilled workers.

c. Since the firms with modern technology were minority, skilled tended to be firm-specificinstead of industry-specific.

d. Also since employees were afraid of hold-up problems, firms sought fresh graduates andtrained them for long-term employment.

4) Structure of labor in manufacturing sector:


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a. Larger firms tend to have higher firm-specific labor force and paid higher wage. Whilesmaller firms require less firm-specific skills and paid lower wage.

b. Smaller firms had less technology and required less firm-specific knowledge and offerlower wage. This creates an incentive structure where employees prefer higher wage

and tries hard to enter the larger firms to earn the quasi-rent but the reverse direction

does not happen.

5) Tenant farmers and their buy-outa. Since manufacturing wages was growing fast, it attracts many laborers to the city and

effectively decreases the supply of agricultural labor. This in turn increases the real

wages of the remaining tenant farmers and often causes disputes between landlords

and their tenant farmers.

b. Since the disputes could destabilize the economy, the government took measures tocalm the contention between two sides. The government favored the tenant farmers

side and give cheap loans to tenant farmers who met certain conditions to buy-out

farming lands from their landlords.

c. With the assistance from the government, the risk for tenant farmers decreased. Also,the remaining farmers are expected to be able to take risk as land-owners.

d. Tenancy was less profitable since wages increased.6) Government coordinated investment of manufacturing sectors

a. After the war, the Japanese government abolished the regulations on dividends but kepttight controls on corporate bonds issuance by forming the Bond Issuance Committee to

set requirements to issue bonds.

b. Most banks and firms were not able to issue bonds except for some long-term creditbanks which could issue bonds of several yearsmaturity. This created artificial

advantages for the long-term credit bank to fund raise money from the stock market

whereas other firms could not do so.

c. For that reason, any firm that needed fund for development needed to borrow fromthese designated banks which were controlled by the Ministry of Finance. The MoF then

can allocate funds to industries which they deemed to be strategically important. These

strategically important industries were coal and steel and light manufacturing

d. In addition, during the 1960s, the government allocate foreign currency reserves tocertain export and import industries, which means subsidies for their growth. In

addition, there were special tax discounts and subsidies for machineries important for

certain sectors. In this way, the government coordinated the investment of

manufacturing sectors.

7) Key factors of rapid growth in the 1960sa. Technology transfer: FDI was regulated the government and forced Western firms to

collaborate with Japanese firms in these projects which allowed Japanese firms to

inherit some technological spill-over and high-tech training.

b. Integration of Labor market: data shows that there was a huge transfer of labor fromtraditional sectors to the manufacturing sectors which provided the necessary amount

of labor for firmsexpansions.


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c. High investment in R&D by the private sectors improved productivity and real wageswhich further attract labors from the rural areas.

d. The government also had large investment in public education which increased laborproductivity and return on education.

e. Coordinated lending and subsidies from the government helped.f. Increase demand from the Pacific area due to economic integration.

8) Lost of industrial policies in the 1980s:a. During the 1970s and 1980s, Japanese government faced with several international

challenges including the fact that the US went off the gold standard and depreciated its

currency which caused a small recession in the Japanese economy.

b. The Oil Shock by the OPEC group in the 1970s severely affected the price level andcaused further trouble for the industrial policies. But this factor also forced

manufacturing firms to be more competitive internationally.

c. Joining the OECD group forced Japanese government to liberalize capital imports andother deregulations which further undermined the power of industrial policies.

d. Also, the US deficit level and Japans political tie with the US forced Japanesegovernment to agree to the Plaza Accord and appreciate its currency and caused further

difficulty for the Japanese economy and greatly undermined the industrial policies.

9) Change of corporate financing in 1980sa. Increased in public spending caused drastic increase in budget deficit and forced the

Japanese government to revitalize the bond market to support the budget.

b. Also, the financial deregulation movements in the US and UK in the 1980s alsopressured the Japanese government to liberalize the financial markets.

c. Famous manufacturing firms were also able to raise fun in domestic and internationalmarkets. As the result, they switched from indirect to direct financing and decrease

their dependence on main banks.

10)Before and after Hashimotoa. Before: Strict regulation, lax monitoring

i. During this period, only long-term credit banks can issue bonds and fundraise inthe market. If firms want funds for investment projects, they have to go through

the main bank. While this is tougher to get money, once transacted, the main

banks are more lenient to the firms in short-term down time as long as the firms

have profitable long-term projects. Firms focused a lot more on long-term

growth.

ii. Market entry for banks was impossibleb. After: Relaxed regulation, strict monitoring

i. The Big Bang deregulation included 1) Using the stock market as the dominantway of corporate financing. 2) MoF switched to rule of law instead of

discretionary policies. 3) Market entry was liberalized.

ii. Monitoring became much stricter. Any bank that seemed to close to bankruptcywas order to stop operation and nationalized.

iii. The court system expanded to increase monitoring capacities.


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iv. This heavily affected the reliance on main-bank system and undermined thelong-term employment structure of Japan.

v. Cross-share holding also slowly disappear

institutional winter final study guide

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