In the third conference of the CEPR European Network on the Japanese Economy a variety of recent research on financial and labour markets was discussed. The conference took place on 1/2 December 1995 and was jointly hosted by the Wissenschaftzentrum of Berlin and the Japan-German Centre and was organized by Jenny Corbett (Oxford and CEPR) and Julie Elston (Wissenschaftszentrum Berlin).
In the first paper "On Strategic Use of Relationship Banking" Yishay Yafeh (Hebrew University of Jerusalem) and Oved Yosha (Tel Aviv University), documented the strategic behaviour of banks in bank-firm relationships. Results indicate that reforms which facilitate market entry and competition may induce incumbent banks to strengthen their relationships with firms. Julie Elston suggested to include the firms' viewpoint on relationship banking. Some German firms prefer to use the equity markets for external finance according to Chirinko and Elston (1995) rather than debt.
In "Systemic Risks in Japan's Financial Markets" Onno W. Steenbeck (Erasmus University) discussed objectives of regulation in financial systems. In any financial system there are three objectives of regulation: maintaining stability, protecting investors and ensuring efficiency. He argued, that Japan's regulators used to place highest priority on maintaining stability, especially by not allowing "creative destruction" to eliminate the weaker elements of the system. In the middle of the 1990's this policy seemed to have backfired, showing disturbing weakness in the financial systems, which indicated high systemic risks. He mentioned ways to reduce these risks. Richard Deeg (Max Planck Institute, Cologne) pointed out that in addition to the three goals mentioned, there is a political agenda implicit in regulation (from supporting industrial development to promoting international competitiveness of the financial sector).
In the Paper "How Much Equity Capital Did The Tokyo Stock Exchange Really Raise?" Francesco Briosci (Politecnico di Milano) written with Stefano Paleari (Politecnico di Milano) presented a model for computing the actual equity capital raised by companies listed in a given stock exchange over a specified period of time. This is a non-trivial problem when firms are connected by cross-shareholdings and own the shares of other countries. A definitional model is developed which shows how problems of share buy-backs, equity carve-outs and acquisitions should be handled. A numerical computation of the net amount of equity financing in the Tokyo Stock Exchange in the period 1971 - 1992 is reported: it shows that the net (or true) measure is significantly different and, in most cases, lower than the conventional one. Jenny Corbett noted that an alternative way of deriving the same correction for acquisitions of shares by companies (in whatever manner) was to use the methodology for calculating net financing (Corbett and Jenkinson, 1994).
In "Amakudari in the Japanese Banking Industry: An empirical investigation", Adrian van Rixtel (Free University of Amsterdam) discussed the system of post retirement placement of Japanese officials ("amakudari") in the private banking industry. Although the delicate nature of amakudari obstructs independent and objective research. The paper shows, that despite the enormous changes of the past 20 years in the Japanese financial system, the presence of Ministers of Finance (MoF) and Bank of Japan (BoJ) amakudari kanryo (amakudari bureaucrats) in the boards of private banks is characterised by a pattern of continuity. Interestingly, most of the biggest city banks, especially the ones belonging to a keiretsu, do not have any former BoJ or MoF as high ranking executives, whereas the smaller, regional banks do. Thomas Westphal (Wissenschaftszentrum Berlin) noted that this paper is valuable to outsiders in giving an overview of existing schools of thought, presenting results of empirical analysis and establishing its own framework for analysing the system. In addition, the data collected is probably unique.
The next four sessions of the conference dealt with issues in labour markets. In "Two-Sided Ranking, Institutional Ties and Market Behaviour: The Japanese Labour Market for University Graduates", Marcus Rebick (Oxford University) studied the job placements of university graduates. He found that persistence in the flows of graduates from individual university faculties to individual firms is present both in the natural sciences and in non-science disciplines. Furthermore persistence is found not only between firms and faculties in the best universities but also with low-ranked universities and higher-ranked firms. The importance of persistence is limited, however, and the largest part of the hiring pattern can be attributed to random matching once the relative quality of firms and locational advantages are accounted for. Thus, the conventional view that only good universities supply the best firms is not supported and there is evidence that the market for graduates is relatively open. Giorgio Brunello (Università degli Studi di Venezia) suggested three reasons why good firms hired from less good universities: i.e. excess demand, education may be an imperfect signal of ability and firms may want to have a hierarchy of good and less good workers.
In "Occupational and Internal Labour Markets in Japan", Giorgio Brunello (Università degli Studi di Venezia) developed a simple measure of internal versus occupational labour markets based on the relationship between firm-specific tenure and occupation-specific tenure, and applied the measure to Japanese data. The paper found that occupations with a higher value of this measure have steeper wage-tenure profiles - independently of firm size. The relationship between seniority and promotion is an important ingredient of Internal Labour Market Employment Systems. The paper concludes that firm-specific tenure often matters in Japan, however merit is also important. Ronald Shettkatt (Wissenschaftzentrum Berlin) noted that the new measure would be particularly useful in international comparisons and was important in the light of recent US findings that, controlling for individual characteristics, there are persistent wage differentials across different industries.
In "Shunto: Employer and Union Coordination for Pay Determination at the Industry and Inter-sectoral Levels" Marie Sako (London School of Economics) noted that since the 1980s decentralisation of collective bargaining is said to have become a trend among major advanced industrialised countries. In most cases the driving force behind the shift was the employer who regarded centralised bargaining as an obstacle to flexible management. In Japan, however, enterprise-level bargaining has been in place for decades. Much coordination in fact takes place through the process of wage bargaining known as Shunto. In order to understand the function of higher-level coordination the paper considered how a consensus on wage increases, which is compatible with sustaining international competitiveness of the economy, emerges in Japan. Sako asked why employers and unions have an incentive to establish and observe such a norm. The paper concludes that on the union side, industry and national level coordination has been seen as a means to overcome the shortcomings of enterprise unionism. On the management side employers wish to take wages bargaining out of competition by coordinating their respective wage increases. In Japan such coordination occurs through informal, not formal, means. David Soskice (Wissenschaftzentrum Berlin) commented that the paper was particularly helpful in providing detailed examination of the Shunto process which helped to resolve the apparent paradox that Japan, which seemed to have a very decentralised bargaining structure, still managed to achieve wage settlements which were beneficial at the macro level.
In a work-in-progress session "Schooling and Earnings Growth in Japan" Seiichi Kawasaki (Stirling University) presented the effects of schooling on earnings-tenure profiles of Japanese male workers. He found that earning profiles (in log form) for different schooling levels were virtually parallel with each other. He argued that these findings are at odds with simple human capital predictions, and that team incentives are the crucial factor determining the earnings profiles.
In "Finer Varieties of Advanced Capitalism: Industry Versus Group Based Coordination in Germany and Japan" David Soskice (Wissenschaftzentrum Berlin) discussed the differences in production regimes in different economies. That is, the way in which companies operate and perform as a consequence of being embedded within an "institutional framework". He used this approach to explain the developing (and different) choice of company strategy in Germany and Japan in the period since the 1970s. The paper stressed a number of important differences between the two systems. In particular he emphasised the requirement of strong competition between large companies within the same industry in Japan, compared to the high degree of intra-industry cooperation among companies in Germany. This is seen as a reflection of the location of the main coordinating capacity of Japanese companies in vertical and horizontal keiretsu groups while German companies are primarily coordinated within the industry or sub-industry. Jenny Corbett (Oxford University) pointed out that the implicit causality in the paper ran from the institutional framework to a capacity for certain types of production regime. One could argue that an industrial structure arising out of factor endowments, comparative advantage and the pattern of post-war industrial policy had determined the institutional framework.
Etsuro Shioji (Universitat Pompeu Fabra) presented "Regional Growth in Japan". He showed that the income convergence result across the regions in Japan is robust to uses of alternative measures of output, labour input and prices. Furthermore he studied the role of internal migration, since neoclassical theory predicts migration as an important source of convergence. On the other hand, regression results suggest that migration either did not contribute to the convergence, or even worked against it. He concludes that, although an "educational composition effect" of migration slows convergence, its magnitude was too small to account for the discrepancy between the theory and the empirics. Akiko Suwa-Eisenman (INRA and DELTA, Paris and CEPR) raised a number of data and mis-specification points which might help to resolve the puzzle of the wrong sign on the migration effect. She noted that the quantity effect might be offset by a quality effect (e.g. highly educated, young workers migrating to richer areas).
The final paper by Kiyonori Sakakibara (London Business School) and Antti Ainamo and Christian Lindholm (both London Business School) addressed rather different issues than the previous papers. In "Product Development Strategies in Emerging Markets: The Case of Personal Digital Assistants", the development of personal digital assistants (PDA) is charted. Two ideal strategies for product development in the PDA market are identified. An `accumulative strategy' facilitates the objective of getting positive feedback from the market and consists of efforts by companies to improve existing products by small incremental innovations. Alternatively, a `point-to-point' strategy is the outcome of a company's heuristic efforts to create wholly new products. The basis of new products is advances in scientific knowledge. In general, Japanese firms have preferred the incremental innovation approach while European firms have innovated in leaps. Juergen Mueller (Free University of Berlin) wondered whether the incremental design strategy always involved close connections with distributors and therefore presented a barrier to entry of new players in the market. There might be interesting implications for the way R&D is organized as a result of the different development strategies and this warranted further research.