ECONOMIC RESEARCH CENTERDISCUSSION PAPER
E-Series

No.E05−3

Recent Development of Information Technology inJapanese Banksby
Nobuyoshi Yamori
Kozo Harimaya
Yoshihiro Asai

April 2005

ECONOMIC RESEARCH CENTERSCHOOL OF ECONOMICSNAGOYA UNIVERSITY

Recent Development of Information Technology in Japanese Banks

Nobuyoshi Yamori
Professor, Graduate School of Economics, Nagoya University
Nagoya 464-8601 Japan([Tel.) (+81)52-789-4935, (fax) (+81)52-789-4924(e-mail) yamori@soec.nagoya-u.ac.jp
Kozo Harimaya
Assistant Professor, Department of Economics, Sapporo Gakuin University
Ebetsu 069-8555 Japan(e-mail) harimaya@sgu.ac.jp
And
Yoshihiro Asai
Graduate Student, Graduate School of Economics, Nagoya University
Nagoya 464-8601 Japan(e-mail) yoshihiroasai@hotmail.com

1Recent Development of Information Technology in Japanese Banks
ABSTRACT
Although Japanese banks have suffered from huge non-performing loans since theburst of the bubble, they have invested as much as possible in information technology.
However, due to the shortage of available funds, each bank has felt that its investment
was not high enough to compete with leading U.S. and European banks. This is one
important reason why major Japanese banks have been merging with each other in recent
years. Information technology has now become a key issue in the Japanese banking
business.
This chapter discusses the recent development of information technology in Japanesebanks in detail. The section titled THE CHANGE IN THE BUSINESS MODEL
provides a brief explanation of the current Japanese banking environment. In THE
STEADYPROGRESSOFNEW

INFORMATIONTECHNOLOGYIN

FINANCIAL INSTITUTIONS, we discuss how Japanese financial institutions, mainlybanks, have dealt with new information technology. The section on INTERNETBANKING provides a detailed discussion of new Internet banks and the Internet banking
services of existing banks. As information investment has an external effect, the market
will fail without government assistance. Therefore, in GOVERNMENT EFFORTS:
E-JAPAN STRATEGY, we explain what the Japanese government has done in terms of
IT usage in financial services. Finally, the CONCLUSION section concludes thischapter.
KEY WORDS(1) Internet, (2) Internet Banking, (3) Japanese Banks, (4) Soft information, (5) e-Japan,(6) Japanese Economy, (7) Regional Banks, (8) Information Technology, (9) RelationshipBanking.
2

Biographies of Authors
Nobuyoshi Yamori was born in 1963. He graduated from Shiga University and obtained
an MA from Kobe University and a Ph.D. from Nagoya University. He is currently aprofessor at Nagoya University, Japan. He has been appointed a visiting scholar at several
institutions, including Columbia University, Long Island University and the Federal
Reserve Bank of San Francisco. He has published many papers in international banking
and financial journals, such as Journal of Banking and Finance, Journal of Financial
Research, and Journal of Risk and Insurance. He also serves as an editor of several
professional journals, including International Journal of Business.

Kozo Harimaya was born in 1968. He graduated from Kansai University and obtained
an MA from Kwansei Gakuin University and a Ph.D. from Kobe University. He iscurrently a lecturer at Sapporo Gakuin University, Japan. His major research interest is
the efficiency measurement for financial service institutions. He has published several
papers in Japanese academic journals, such as Review of Monetary and Financial Studies.

Yoshihiro Asai was born in 1977. He graduated from Nagoya University and obtained an
MA from the State University of New York at Buffalo and Nagoya University. He iscurrently a Ph.D. student at Nagoya University. He has published papers on the Japanesefinancial system, corporate governance and institutional investors, including the paper“Do Institutional Investors Discipline Corporate Managers in the U.S.?” (Japanese
Security Analyst Journal, in Japanese), and “The Demise of Bank-centered Economy andIncreasing Roles of Credit Ratings in Japan” with Professor Yamori (in Robert S. Uh (ed.),Financial Institutions and Services, New York: Nova Science Publishers, forthcoming).

3

INTRODUCTION
It is commonly agreed that financial transactions are inevitably accompanied with
so-called asymmetric information problems. For example, lenders are not sure whether
applicants are honest and will do their best to pay back their loans. Because information
issues may make transactions in the financial markets impossible, financial institutions
play a crucial role in solving these issues.
As pointed out in the literature, there are two kinds of information, hard informationand soft information (see Boot, 2000; Berger and Udell, 2002; Onega and Smith, 2000;
Petersen and Rajan, 1995; Scott, 2004; and Stein, 2002). Soft information, such as
considering an owner’s motivation, is important in small business loans. Usually, loan
officers who maintain daily contact with borrowers are able to produce soft information.
Soft information is difficult to quantify and verify to a third party. In contrast to soft
information, hard information includes verifiable figures, such as financial ratios
calculated from firm’s financial statements and stock market prices. These figures areeasy to quantify and verify by using a computer, and due to the rapid development of
information technology, the usage of hard information has become highly advanced. For
example, money market mutual funds require daily interest payments. Huge calculation
tasks have become possible by using high-performance computers, and financial
institutions recognize that information technology is a key technology for their business,because strategic technology investment reduces costs, increases efficiency and enables
institutions to offer value-added and competitive products and services.
Leading international banks have spent a great deal of money on information
technology. For example, CELENT (2002), a consulting and research firm, pointed outthat the largest commercial banks in the United States spent as much as 25% of their total

4

expenses on information technology, and certain specialist banks spent even higher
percentages1. In addition, CELENT (2002) reported that U.S. banks spent over US $34
billion on technology in 2002. Citigroup’s IT budget for 2002 was US $5.1 billion. JP
Morgan Chase followed Citigroup, with an IT budget of US $4.7 billion. Bank ofAmerica with an IT budget of US $3.3 billion was third, fourth was Wells Fargo with an
IT budget of US $2.0 billion, and fifth Bank One with an IT budget of US $1.9 billion.
Furthermore, CELENT (2005) indicated that IT spending in the North American banking
industry will continue to rise at a moderate rate from US $42.6 billion in 2004 to US$47.9 billion in 2007.
Regarding European banks, CELENT (2004) estimates that they spent EU44.6 billion
in 2004. The largest IT investor among European banks was HSBC Holdings, whichspent EU 3.05 billion as an IT investment, followed by Deutsche Bank (EU 2.64 billion),
UBS (EU 2.63 billion), ABN Amro (EU 2.26 billion), the Royal Bank of Scotland (EU1.68 billion), Credit Suisse (EU 1.44 billion), ING (EU 1.41 billion), and BNP Paribas(EU 1.37 billion).
Although Japanese banks have suffered from huge non-performing loans since theburst of the bubble (see Figure 1), they have also invested a huge amount of money on
their information facilities. However, due to a shortage of available funds, every bank has
felt that its investment was not high enough to compete with leading U.S. and European
banks2. This is reported to be one of the main reasons why large Japanese banks chose to
1

See the CELENT’s homepage at http://www.celent.com.

2

Actually, many Japanese banks have recorded net losses since the late 1990s. Concretely

speaking, the net current profits or losses of Japanese banks as a whole were +908 billion
yen for fiscal year 1999, -176 billion yen for FY2000, -4,199 billion yen for FY2001,
5

merge with other banks3. CELENT (2003) estimated that Japanese banks would spend
US $11.9 billion on technology in the fiscal year 2004. Mizuho Holdings spent US $1,940
million, followed by Sumitomo Mitsui Banking Corporation (SMBC) (US $1,065
million), Mitsubishi-Tokyo Financial Group (US $930 million), UFJ Holdings (US $895
million), and Resona Holdings (US $735 million). The recent mega-mergers in Japan
have enabled Japanese banks to spend as much on IT as major U.S. and European banks.
This chapter discusses the recent development of information technology in Japanesebanks in detail. This chapter is organized as follows. The section THE CHANGE IN
THE BUSINESS MODEL provides a brief explanation of the current Japanese banking
environment. In the section titled THE STEADY PROGRESS OF NEW
INFORMATION TECHNOLOGY IN FINANCIAL INSTITUTIONS, we discuss
how Japanese financial institutions, mainly banks, have dealt with new information
technology. In INTERNET BANKING, a detailed discussion on new Internet banks andInternet banking services of existing banks is provided. As information investment has anexternal effect, the market will fail without government assistance. Therefore, in
GOVERNMENT EFFORTS: E-JAPAN STRATEGY, we explain what the
government has done to encourage IT usage in financial services. Finally, the
CONCLUSION section concludes this chapter.

-4,851 billion yen for FY2002, and -780 billion yen for FY2003.
3

In 1990, there were 13 city banks. In 2005, there were five city bank groups; four megabank groups and Resona Holding.

The four Japanese mega bank groups are

Mitsubishi-Tokyo Financial Group, Sumitomo Mitsui Financial Group, UFJ Holdings,
and Mizuho Financial Group. All five city bank groups were established in the 2000s.
6Figure 1
Non-performing Loans and Write-off Costs of Japanese Banks
45
40(trillion yen)

35

Bad Loan Write-off
Costs
Risk Management
Loans

30
25
20
15
10
5
0
1992

1994

1996

1998

2000

2002

2004FH(Note) Figures from FY 1992 to FY1994 cover only major banks (i.e., city banks,
long-term credit banks, and trust banks). Figures since FY 1995 cover all banks (i.e., thefirst and second-tier regional banks as well as major banks). The figures for FY 2004 arethose as of the end of the first half of FY2004. Data source is Financial Services Agency.

THE CHANGE IN THE BUSINESS MODEL
The traditional business model of financial institutions such as banks and Shinkinbanks (credit associations) is that they collect funds as a form of deposits, which areusually protected by government-supported deposit insurance, and extend loans to those
who need funds. During the rapid economic growth period of the 1980s, Japanesehouseholds were net savers, and non-financial corporations were borrowers. Therefore,
Japanese banks intermediated funds between households and non-financial corporations
during that period. As there were a lot of profitable investment opportunities in the
fast-growing economy, a number of firms wanted to borrow as many funds as possible,
and it was easy for Japanese banks to find promising borrowers. As the amount of loansthat banks could extend were restricted by their ability to attract customers to open
savings accounts and therefore amass savings during the rapid economic growth period,

7the most important consideration for financial institutions was how much money they
could amass savings. Therefore, the ability to amass savings was the most critical sourceof competitive advantage in financial industries. In that circumstance, the larger a bankwas, the more profitable and stronger it was. Naturally, the hierarchy of Japanese banks
was dependent on the amount of deposits.
However, the economic environment has changed since the 1980s. The Japanese
economy has grown at lower rates than during the rapid growth period. Furthermore, as
large Japanese firms have grown and accumulated their own funds, they have not needed
to borrow funds from banks as often as before. In addition, the development of financial
markets has accelerated the disintermediation of large firms, which means that large firms
are increasingly less dependent on bank loans for financing and actively use financial
markets. Thus, financial institutions do not always find prospective customers even if
they have the ability to absorb funds. Therefore, the ability to absorb deposits does notnecessarily mean the ability, anymore, of making profits. In summary, the source of thecompetitive power of financial institutions has changed from the ability to absorb
deposits to the ability to create lending (i.e., find good borrowers).
Unfortunately, because the tendency to absorb as many deposits as possible was anestablished practice by Japanese banks, some financial institutions could not adapt
themselves to the new economic environment. They did not change their business model,
and were recklessly active in absorbing deposits during the bubble period (i.e., in the late1980s). As these institutions faced difficulties in finding traditional industrial borrowers,
they were forced to increase loans to real estate companies and construction companies,
which seemed prosperous during the asset price appreciation period. Yamori (2004) findsthat financial institutions that went bankrupt after the burst of the bubble economy had

8increased their deposits during the bubble period more rapidly than sound financial
institutions. Furthermore, the stagnant deflation and the Bank of Japan’s substantial credit
relaxation in the 1990s made the ability to create loans even more important. In sum, theability to absorb deposits that is not accompanied by a decent ability to create loans is nota source of competitive power, and may in fact be a cause of bank failure.
While funds in the money market were superabundant in the late 1990s and financial
institutions claimed that it was increasingly difficult for them to find good borrowers,
many small and medium-sized enterprises (SME) ironically had serious trouble withbanks' reluctance to lend (i.e., credit crunch). In the extreme, several small firms sufferedbecause banks peeled off their loans. In other words, Japanese financial institutions havenot been able to perform an essential role (intermediary role), and Japanese financial
institutions might lose their roles in financial business in the future.
In March 2003, the Council on Financial Services, which is the advisory council of the
Financial Services Agency (FSA), released its report, “In preparation for reinforcing thefunction of relationship banking.” This report recommended that regional financial
institutions, such as regional banks, Shinkin banks, and credit unions, develop the ability
to give loans to regional customers. That is, the report suggested that regional financial
institutions have no other choice but to do relationship banking; a banking businessmodel in which banking with customers is conducted using soft information accumulated
through long-term and close relationships. Previous studies found that a closer
relationship between banks and borrowers leads to lower interest rates on loans (e.g.,
Berger and Udell, 1995; Harhoff and KoÈrting, 1998), more favorable collateralrequirements (e.g., Berger and Udell, 1995; Harhoff and KoÈrting, 1998), smaller
dependency on expensive trade credits (e.g., Petersen and Rajan, 1994, 1995), less9

volatile interest rates on loans (e.g., Berlin and Mester, 1998), and larger credit
availability (e.g., Cole, 1998; Elsas and Krahnen, 1998).
Berger and Udell (2002) pointed out that small institutions are more suited to provide
relationship banking services than large banks, because small institutions can handle soft
information more efficiently than large institutions. Therefore, whether small regional
financial institutions can adequately assess credit risks regarding local businesses throughbank-firm relationships is a key condition for their survival. Of course, the importance ofrelationships in regional banking services was well recognized before the Council’s
report was published, but the Council on Financial Services stressed that the ability ofmany regional institutions to establish such relationships was not satisfactory, and that
financial institutions should develop this ability immediately.
One of the reasons that Japanese banks are poor at screening loan applications andjudging the credit risks of borrowers is that these functions have often been routinely
performed based on each staff member’s personal experience, and that the “know-how”
to screen applicants and to judge each applicant’s risk has not been adequately shared in
the organization. Of course, soft information is not easily shared, but if hard informationthat can be shared easily is used to make loan decisions, a poor outcome is more likely toresult. Therefore, banks should construct an information system to enable all officers of
the institution to use common “know-how.” Whether regional financial institutions canuse information technology better or not in terms of loan creation is critical.

THE STEADY PROGRESS OF NEW INFORMATION TECHNOLOGY IN
FINANCIAL INSTITUTIONS
After the burst of the bubble economy, Japanese financial institutions became10preoccupied with the disposal of bad loans. As Figure 2 shows, banks’ capital investments
were considerably curtailed and the amounts of investments in 2002 were below the 60%
level of fiscal year 1995. However, this decrease of capital investments of Japanese banks
does not necessarily mean that there were no forward-looking investments. In this regard,
it is notable that many banks sold off real estate, such as branch offices and employees
apartments. As these restructuring sales were regarded as negative capital investments,
the total capital investments in the late 1990s tended to be small or even negative.
We would like to emphasize the fact that banks’ mechanization investments, which arealmost the same thing as IT investments nowadays, remained unchanged until the fiscal
year 1999 and significantly increased after the fiscal year 1999. For example, theFinancial Information System Center (2003) studied the implementation circumstances interms of Internet banking services. According to the Financial Information System Center(2003), only 11.1% of surveyed financial institutions as of March 2002 reported that they
had already provided Internet banking services to business customers, while as of March
2003, 36.8% of them reported either that they had already provided Internet banking
services to business customers or that they were planning to start the services in 2003, and40.0% of them reported that the matter was “under study.” That is, the introduction ofInternet banking for business customers has been proceeding smoothly. However, thefollowing issues must be considered.
First, the IT implementation rates for corporate businesses vary substantially acrossbank categories. For example, while the IT implementation rate for city banks, which are
the largest banks and play an important role in the Japanese Keiretsu, is 100%, that of thefirst regional banks is 18.3%, that of the second-tier regional banks is 6.5%, and that of
the Shinkin banks is 9.6%. It is generally said that many regional financial institutions

11

start Internet-banking services for corporate businesses not because regional banks wantto curtail expenditures by using Internet banking, but because they are afraid that majorcommercial banks and pure-Internet-play banks could deprive regional banks ofsettlement services (Nikkei Kinyu Shimbun, December 12, 2003). Financial institutions
that cannot introduce these minimum IT services will find themselves in increasingly
tight spots.
Second, IT implementation in financial industries for corporate customers is far behindthat in other industries. The Ministry of Economy, Trade and Industry (METI) conducteda research survey on the market size of electronic commerce. According to the METI’s
report, the size of the e-commerce market, which is defined by how many businessenterprises purchase raw materials and partly-finished goods through the Internet, namely
the so-called electronic B2B market (business enterprises to business enterprises),
increased to 43.6 trillion yen for the fiscal year 2002. In contrast, the size of electronic
B2B financial transactions (including insurance) was only 4 billion yen. The electronictransaction rate in B2B financial transactions has stayed at just 0.01%, while theelectronic transaction rate of the entire Japanese economy is 6.99%. It is apparent that IT
implementation in financial industries lags far behind that in other industries.
Third, while banks have invested substantial funds into information technology inorder to reduce expenditures, future IT investments should be used to enhance the loancreation ability, which is the raison d'etre of regional financial institutions. For example,
the report of the Council on Financial Services mentioned above demands that every
financial institution set interest rates on loans at the level reflecting the borrower’s true
credit risk. Financial institutions have to prepare a reliable statistical database and then set
the interest rates on loans at the level that is derived from the data analysis. If financial

12

institutions set interest rates on loans without a satisfactory explanation and a statisticalbase, customers will not be convinced that the interest rate is fair.
Finally, small and medium-sized enterprises (SME) want a rapid decision to be madeon their loan applications. According to “The special questionnaire on functions and rolesof financial institutions that industrial firms expect,” conducted and released by the
Nagoya branch of the Bank of Japan in December 2003, SME regarded ‘the expeditious
offer of money’ as the third most important service and function of financial institutions,while a “lower borrowing rate of interest” and a “stable supply of money” were the firstand second. If financial institutions can speed up loan screening by developing an IT
system, they can accurately accommodate these SME’s needs. Moreover, if a loan
contract is computerized, borrowers do not have to pay the documentary stamp tax.
Actually, UFJ Bank is already making use of this fact, and is using it as an advertising tool
to attract new customers (Nikkei Kinyu Shimbun, October 28, 2003).
Regarding banking services for individuals, convenient access is particularly important.
The Postal Services Research Institute, a division of Japan Post, has been conducting “asurvey on the way households use financial institutions” every two years since 1989. The
June 2004 result shows that 21.0% of surveyed persons (multiple answers allowed)
answered, “Internet banking is convenient because we can use it for 24 hours,” and 20.4%of them answered, “We can enjoy the services without visiting branch offices.”
Information technology surely enhances the convenience for individuals in terms of using
financial services.
However, we should recognize that 52.8% of persons answered that they do not needInternet banking services, 25.6% answered that they were worried about settlement only
through the Internet, and 22.0% answered that they were worried about Internet security.

13

Therefore, to encourage the spread of Internet banking services for individuals, banks
should make efforts not only to make their services safer, but also to convince individual
customers that they are well protected when they use Internet banking services.

Figure 2
Trend of Capital Investment and IT Investment of Banks
200

Capitalinvestments
Mechanization
investments

150
100
50
0
FY1995

FY1997

FY1999FY2001

FY2003(Note) The figure is based on the Bank of Japan’s “short term economic
observation.(Tankan in Japanese).” In Tankan, the amounts of investments of financial
institutions are reported. We drew up this figure by setting the fiscal year 1995 as the baseyear, and using annual rates of change to calculate each year’s relative level. All values
except for fiscal year 2003 were actual ones, but we had to use a planned value for fiscal
year 2003 because the questionnaire was changed after 2004.

INTERNET BANKING
Pure-Internet-play Banks
Although almost no banks except foreign subsidiary banks were established in Japanafter the Second World War, several new banks recently began operation due toderegulation. Even though these new banks do not necessarily specialize in providing
settlement services on the Internet, they share common management attributes. For
example, they do not have physical branch offices, but offer the same kinds of services as

14existing banks through the Internet 4 . In the following paragraphs, we will compare
existing banks with these new banks.
Table 1 summarizes the basic management figures of new entry banks at the end of
March 2004. The Financial Services Agency (FSA) required these banks to obtain net
profits within three years from their establishment. March 2004 was the time limit for thisrequirement for these four new banks. However, as shown in Table 1, the only bank out of
the four to achieve net profits was the IY Bank. Despite the fact that the other three banks
failed to fulfill the requirement, the FSA did not take any actions against them because
they significantly reduced deficits for this fiscal year, which indicates that they willobtain profits in the near future.
The IY Bank’s main service is its settlement operation through the ATM network that is
installed in affiliated convenience stores (i.e., Seven-Eleven Japan). Seven-Eleven is thelargest convenience store chain and an owner of IY Bank. The number of IY Bank ATMs
has increased by 49% compared to the previous year, and these ATMs have substantiallycontributed to IY’s black-ink balance. The others are pure-Internet-play banks, and thenumber of accounts at these banks has been increasing steadily. This shows that pureInternet banks have become popular, and Internet banking services are widespreadamong individual customers.
Here, we further scrutinize the details of each pure-Internet-play bank, because eachbank has business attributes that are significantly different from the others, even though
4

An exception regarding existing banks is Orix Trust and Banking, which has been

operating through Internet transactions without a branch office network. Orix Trust andBanking was established by purchasing stocks of the now-defunct Yamaichi Trust andBanking.
15

they are all pure-Internet-play banks. As Table 1 shows, Japan Net Bank and Sony Bank
actively engage in extending loans and eBank specializes in settlement operations overthe Internet. In particular, Sony Bank positions the offer of asset management services toindividuals as its main business, and Sony Bank holds home mortgages of 60.4 billion
yen in its portfolio, which corresponds to 95% of its loan portfolios. However, SonyBank’s deposit-loan ratio is just 16.6%, far lower than the average of all banks in the same
year (i.e., 73.4%). With regards to asset management, Japan Net Bank and Sony Bank
commonly invest substantial funds into marketable securities. The deposit-security ratios
for Japan Net Bank and Sony Bank are 99.2% and 88.2%, respectively. However, thedeposit-loan ratios for IY Bank and eBank are 17.9% and 6.3%, respectively. These twobanks have been operating with a focus on settlement services. Therefore, they hold mostassets in cash and deposits, because they need their assets to be safe and liquid5. In
summary, a big difference between the “Japan Net Bank and Sony Bank” and the “IYBank and eBank” can be seen.
Compared with traditional banks, we find that the labor productivity of new entry
banks is extremely high. Even though deposits per bank clerk at the IY Bank, which
employs over 100 persons, is 840 million yen, those of the other three banks are morethan 2 billion yen, which are comparable to those of seven city banks in the same year.
With respect to the first regional banks and the second-tier regional banks, only the Bankof Yokohama records deposits per bank clerk of over 20 billion yen (i.e., 26.6 billion yen)
and all other regional banks are lower than the three new banks in terms of deposits perbank clerk.
5

For instance, IY Bank’s cash and deposits paid are 203.7 billion yen in total, which is

53.7% of IY Bank deposits received.
16

New banks can absorb huge deposits by paying higher interest rates and charging lower
commission fees to their customers6 . They can pay higher interest rates on deposits
because they do not have expensive branches. With respect to the settlement operations, alarger number of accounts and large balances in those accounts naturally lead to larger
commission incomes, resulting in higher profit performance. Thus, it is natural for these
new banks to actively attract new customers by paying higher interest rates on deposits
and charging lower commission fees to customers.

Table1 Basic Figures of New Banks (for fiscal year 2003)
Inaugural dateJapan Net Bank
October, 2000

IY Bank
May, 2001

Sony Bank
June, 2001

eBank
July, 2001

Current income (billion yen)

6.8（4.0） 29.1（11.5）

7.4（4.0）

Profits and losses for this term(billion yen)

-1.7（-2.7）-2.2（-4.4） -2.9（-4.2）

5.0（-8.1）

2.8（0.6）

The number of accounts（thousand accounts）

840（650） 160（100）260（190）710（480）

The number of workers

63（65） 145（140）78（72）

70（72）

Operating cost (billion yen)

4.5（4.7） 23.0（18.4）

5.8（5.3）

4.1（4.6）

Deposit（billion yen）

153.4（119.3） 122.4（75.9） 378.8 (248.7）
0.0（0.0）

158.0（11.6）

Loaned money（billion yen）

16.2（17.4）

63.0（22.4）

0.0（0.0）

Marketable securities（billionyen）

152.3（94.8） 22.0（22.6） 333.4（211.5）

10.0（0.0）

Total assets（billion yen）

203.7（169.7） 259.6（159.9） 489.4（320.4） 169.4（15.5）(Note) Figures in the parentheses indicate figures for the previous year.

6

For example, the interest rates on large denominated time deposits for one year for

eBank, Sony Bank, and the Japan Net Bank were 0.35%, 0.22% and 0.10%, respectively,
while all city banks offered the same deposits with interest rates of 0.03%.
17

Internet Banking Services Provided by Existing Banks
Of course, not only pure-Internet-play banks but almost all banks are offering banking
services through the Internet. Actually, the emergence of new banks into the market has
spurred existing financial institutions to increase capital investments in IT. An article
published in the Kinzai Institute for Financial Affairs (December 13, 2004) says that thebasic services offered via Internet banking in Japan are various reference services, such asconfirming deposit balances and withdrawal history, and money transfer. In addition,customers of some advanced banks can buy fixed-period deposits, foreign currency
deposits, and mutual funds over the Internet. While city banks offer wide kinds ofservices through the Internet, most regional banks offer only basic services such as
remittance and money transfer.
It is notable that there are many differences in commission services, interest rates andbusiness hours among different banks. We have to take these differences into accountwhen comparing the quality and prices of services that different banks offer. For example,
as of December 2004, the Bank of Tokyo-Mitsubishi, UFJ Bank and Resona Bank set
their commission fees on money transfers through the Internet at lower levels than those
applied to ATM card transfers, while Mizuho Bank and Sumitomo Mitsui Banking
Corporation set Internet transfer and ATM transfer commission fees at the same level.
Almost all city banks offer Internet banking services without any accounting
management charges, while more than half of regional banks offer Internet banking
services with some charges. Moreover, even regional banks that offer only basic banking
services such as remittance and money transfer charge management fees for Internet
banking. Regional banks are inactive in offering Internet banking services, partiallybecause most regional banks, except those in metropolitan areas, do not have a large18

potential demand for Internet banking services, while the costs involved in offeringvarious services through the Internet are not negligible for these banks.

The Future of Internet Banks and Internet Banking in Japan
As mentioned above, Internet banking services have become increasingly common,and pure-Internet-play banks has grown. In this sub-section, we would like to point out
several remaining issues that have to be overcome in order to make Internet banking
services more convenient and reliable.
First, in terms of settlement operations, it is expected that if new entry banks obtain an
additional number of accounts, the competition between traditional banks and new entry
banks will accelerate. Some observers point out that the number of accounts at
pure-Internet-play banks will exponentially increase because many firms offering
electronic commerce to consumers (B2C) select these pure-Internet-play banks as
settlement service providers. However, we expect that new entry banks that have no, or atbest a very weak, relationship with commercial firms will face difficulties once megabanks that have strong relationship with commercial firms through loans and stock
holdings actively offer Internet settlement services to these firms. If this occurs, the highgrowth trend for new entry banks might be slowed. In this regard, the strategy of megabanks for consumer loans markets is suggestive. That is, mega banks do not provide
consumer loans by themselves, but purchase consumer finance companies. Likewise,
mega banks may not expand their own Internet banking services, but instead purchasenew entry banks or establish a subsidiary bank to strengthen the Internet services in theirfinancial group7.
7

The largest shareholder of Japan Net Bank has been Sumitomo Mitsui Banking
19Second, we do not know how fast and how much the cashless society will progress.
Above all, new entry banks will not offer all settlement services that are necessary fordaily life. For example, the installation of IY Bank’s ATMs depends on local
circumstances and therefore varies significantly across regions8. It is conceivable that
regional financial institutions will keep their dominant role in a regional society,especially in areas in which Internet banking will not be important in the future. It might
be said that pure-Internet-play banks play an important role only in urban areas, eventhough Internet transaction is referred to as a borderless service. Thus, this difference
between metropolitan areas and rural areas will remain.

GOVERNMENT EFFORTS: E-JAPAN STRATEGY
As we mentioned above, it is essential for financial institutions to put IT into practice tosurvive. Financial institutions may introduce and improve IT because of their own
self-interests. However, as IT accompanies significant externality, it often happens thatthe effort of only one financial institution will not contribute to the improvement of its
operating effectiveness as a whole. That is, the private market may fail. In this case,governmental efforts are desirable and necessary.
In fact, the Japanese government set up a “Strategic Headquarters Forming Advanced
Information and Communications Network Society,” and has been developing an“e-Japan Strategy” to make Japan the world's most advanced IT nation. The “e-Japan
Corporation from its establishment. In addition, Sumitomo Mitsui Banking Corporation
also has substantial shares of Sony Bank.
8IY Bank, which is installing ATMs in convenience stores, does not necessarily installATMs in all affiliated convenience stores.
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Priority Policy Program” published in August 2003 clearly declared that the use of IT
should be widespread, especially in such fields as healthcare, food, daily life, small
business financing, knowledge, employment/labor and administrative services.
In this chapter, we will focus on small business financing as e-Japan policy objectives.
The above government document maintains that diversifying credit sources andstreamlining procedures improve financing environments for small and medium-sizedenterprises (SMEs), and also reduces the risks of collecting trade credits. The government
expects that a society in which SMEs actively operate their businesses will emerge as aresult. That is, the government believes that information technology is a promising tool toimprove SMEs’ financing environment.
The following aims are specified in the e-Japan program.

a) Computerized Credit Accommodation
Loan and guarantee contracts and other credit-related services (e.g., computerized
bill services) can be processed electrically through the Internet. By developing thiscomputerized credit accommodation, the clerical burden on SMEs for providing
financial contracts will be substantially reduced.
b) Establishing Procedures regarding Credit Guarantees Online
In Japan, many small and medium-sized enterprises obtain credit guarantees frompublic credit guarantee corporations. According to the National Federation of Credit
Guarantee Corporations, approximately 2 million SMEs, or about half of all existing
SMEs in Japan, used public credit guarantees in 2003. Small firms can ask the Credit
Guarantee Corporation to guarantee their borrowings by paying insurance premiums9.
9

Maximum guaranteed amount of standard program is 280 million yen.
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Currently, the basic premium rate is 1.25% for no-collateral loans and 1.35% forcollateral loans. Although this public guarantee scheme alleviates the economic
difficulties experienced by SMEs, many SMEs complain that the procedures involved
are burdensome. The government has found it necessary to reduce the procedures
required for financing. The government plans to make it possible for the application
for public credit guarantee to be processed online by 2005.
c) Standardized and Computerized Credit Information regarding SMEs
The government plans to develop an infrastructure for standardizing andcomputerizing credit information, contract information, and monitoring informationfor SMEs. Standardized and computerized credit information will enable financial
institutions to make the right decisions about whether they should lend or not basedon appropriate and accurate information.
d) Establishment of Electronic Receivable Market
The government will establish a new market where receivables can be sold andpurchased online. Small and medium-sized enterprises and financial institutions willobtain necessary funds through the electronic receivable market.

After the e-Japan Priority Policy Program was released, several related advisory bodiesof the Ministry of Economy, Trade and Industry advanced various efforts to materialize
this program. The financial industry is also engaging in several activities to support thisprogram. For example, Shinkin Central Bank actually began offering online payment
services in January 2004. In summary, the infrastructure for e-Japan has been steadily
developing under the government’s initiatives.

22CONCLUSION
Now, financial institutions have to change the out-of-date business model in whichbanks collect money as deposits and lend it to large industrial firms, even though thisbusiness model worked very well during the rapid growth period. Only a bank that
efficiently collects and processes soft and hard information can gain prosperity. In otherwords, nowadays the financial industry can be considered one branch of the informationindustry. However, financial institutions do not necessarily have a comparative advantage
as an information industry. Other industries can deprive financial institutions of the roles
they have played, if the financial institutions do not make immediate changes. In fact,
general trading companies (Sogo-Shyosha in Japanese) and leasing companies haveactively entered this field.
Of course, the authors believe that it is highly probable that financial institutions thathave accumulated customer information and experiences regarding financial technology
can survive. As we have reiterated in this chapter, the immediate key condition is whether
banks can successfully take measures to achieve progress in making use of information
technology.
Finally, we should note that if the use of information technology becomes widespread,then a competitive advantage can only be obtained through those services that cannot becomputerized, namely, relationship banking functions. Therefore, although financial
institutions should advance the use of IT, fostering personnel who can produce valuablesoft information is vital for making regional financial institutions strong.
ACKNOWLEDGEMENT
The authors appreciate Professor Kurihara for his valuable comments. Yamori also
appreciates Japan Society of the Promotion of Science for its financial supports(Grant-in-Aid for Scientific Research).
23

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