Preface to the volume of papers presented at IMF–Hitotsubashi
University Conference
Tokyo, September 24-25, 2001

It is a pleasure for us to provide you with this softbound volume of papers presented at the conference on "Designing Financial Systems in East Asia and Japan: Toward a Twenty-First Century Paradigm". We hope you find this volume useful, especially in revising your papers.

This conference was held during September 24-25, 2001 at the Hitotsubashi Memorial Hall in Tokyo. It was attended by some 40 paper presenters and discussants, as well as 60 additional participants who joined discussions from the floor. The papers presented totaled 17, which are put together in this volume. The conference was co-organized by the Regional Office for Asia and the Pacific of the IMF and the Center for Economic Institutions (CEI) of Hitotsubashi University. The CEI is a new research center, which conducts research on financial systems and corporate governance in Asia. The CEI aims to create international research networks to enhance collaboration among academics in this area of study.

The conference took place against the background of considerable uncertainty and concerns about the future, arising from a global economic slowdown that began in late 2000/early 2001 and, more recently, from the terrorist attacks of September 11 in the U.S. For Japan, problems were compounded by the frustration with the slow progress in resolving long-standing financial sector issues, and in establishing an alternative system that would fit better in an increasingly globalized world.

The theme of the conference was broad and the papers presented at the conference covered a wide range of issues. So did the discussions. Accordingly, it is not possible for us to summarize these discussions in a broad brush without being unfair to some of the participants. Nor is it our intention to do so. However, to help bring the discussions forward, we thought it might be useful to highlight some of the key features of the discussions in four broad areas—(i) prevailing banking problems in Japan, (ii) possible future financial systems for Japan and East Asia, (iii) corporate governance in Japan and East Asia, and (iv) Japan's contribution to regional financial stability.

Discussions first focused on ways to enhance the process of resolving prevailing banking problems in Japan. Many participants stressed the need for tighter loan classification and better provisioning, as well as for the Financial Service Agency (FSA) to play a greater role in this respect. Views differed regarding the next steps in the process—that is, the restructuring of non-performing loans (NPLs) and eventual bank re-capitalization. To expedite these steps, some participants argued for government support and intervention, including injections of additional public funds and establishing a more active and publicly supported asset management corporation. However, some others felt that such intervention would slow the process and argued for a market-based resolution without public support or intervention. In their view, markets for NPLs and entry of new agents into those markets should be encouraged. These discussions mirror the ongoing policy debate in Japan.

Another focus of discussion was the ongoing change in the existing financial system, and the possible alternative system that may emerge when these changes are completed and the present financial crisis is brought to an end. Many participants argued that the existing system—of bank-centered financial intermediation with bank-lead corporate governance ("main bank" system) and a close, informal, but not very transparent business-government relationship—is no longer playing a useful role and is now on its way out.

But in what direction is the system moving and what new type of regime is likely to emerge when the dust finally settles? It was generally felt that the future system must be based on stricter market-based discipline combined with more transparent and rule-based official supervision and interventions. The importance of greater disclosure of information and of adopting and implementing international standards and codes was also noted. Beyond this, some participants considered that a shift is now occurring towards securities-market based intermediation, with households and enterprises, the ultimate suppliers and users of funds, interacting more directly, utilizing new and increasingly sophisticated financial instruments. The roles of relatively new players—institutional investors and venture capital funds—are expected to rise. Others downplayed this vision and instead, envisaged a new system still dominated by banks, but with fewer and larger banks engaged in universal banking.

The third major focus was on corporate governance, and especially the relationship between the financial system and corporate governance. Topics covered on this subject included: effects of product market competition on productivity, the role of internal capital markets and market diversification in East Asian countries, effects of company groups on herding behavior, effects of ownership structure on economic performance, ownership structure and informativeness of accounting return in Asia, the relationship between sources of funds and investment strategies of venture capital, and the relationship between financial systems and corporate governance, with particular emphasis on new technology.

Finally, the discussion turned to the issue of Japan's contribution to regional financial stability. Clearly, establishing a competitive, sound, and crisis—resilient system—based on internationally agreed standards and codes—would be the best contribution, as would be the case for all other countries in the region. Beyond this, some participants suggested that Japan could play a leading role in fostering the development of regional financial markets, for example, of government and corporate bonds, by revamping existing markets substantially. References were also made to Japan's efforts towards the internationalization of the yen, which brought about the subject of an ideal exchange rate arrangement for countries in the region. One view that emerged from the discussions was that, given the flexibility among major currencies, pegging to one currency, for example, the U.S. dollar, is not desirable in dealing with a crisis and, perhaps, for regional financial stability.

In concluding, we would like to note that the issues in the four areas mentioned above are covered in greater depth and with broader insights in the papers contained in this volume. We hope that the readers go over these papers and enjoy doing so, since as we mentioned at the outset, no attempt has been made to summarize them here.

We would also like to note that the task of resolving existing banking problems and establishing a new financial system remains a formidable challenge. The conference provided an opportunity for us to renew this realization, and as co-organizers of this conference, we hope that the conference contributed to expediting work to lay down a basis for the future.