Harvard Law School Program on International Financial Systems
International House of Japan

Symposium on Building the
Financial System of the 21st Century:
An Agenda for Japan and the United States
Virtual | November 5-6, 2020

Final Report

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2020 Symposium on Building the Financial System of the 21stCentury: An Agenda for Japan and the United States
The twenty-third Japan-U.S. Symposium on Building the Financial System of the 21st Century
was held via Zoom on November 5-6 and 17 (small groups), 2020. Sessions addressed theimplications of the U.S. elections on the international financial system, the effects of post-global
financial crisis financial regulatory reforms on the performance of the financial sector during the
COVID-19 crisis, and implications of the COVID-19 crisis for international business andfinance.

PIFS Japan-U.S. Symposium 2020, p.

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Topic 1: Implications of the U.S. Election on theInternational Financial System
For Topic 1, participants discussed the implications of the U.S. election on the international
financial system. While vote counts had yet to be finalized, participants anticipated a victory for
Joe Biden in the presidential race and a close contest in the Senate that raised the likelihood of
divided government. It was also noted that Japan had also seen a turnover of leadership from
Prime Minister Shinzō Abe to Yoshihide Suga, although without a general election. With thoseoutcomes in mind, they considered the effects on macroeconomic policies, management of the
COVID-19 pandemic, financial regulation and supervision, and U.S.-China relations.

Macroeconomic Policy
Most participants agreed that the effects of the election would be greatest on fiscal policy. While
the Trump administration had put in place large-scale, business-friendly tax cuts and hadpresided over historically high budget deficits, the Biden campaign had called for a partial
rollback of the Trump tax cuts, tax hikes on high-income households, and ambitious new social
spending plans. Participants predicted that the closely divided Senate, with a possible Republican
majority, would likely thwart Biden’s tax and spending plans. Several argued that this was idealfrom a business standpoint.
In addition to longer-term fiscal policy consequences to the election, there was also discussion of
the more immediate issue of spending to address the COVID-19 pandemic. Many participantspredicted that the legislative logjam would end after the election, allowing for a renewal of key
elements of the CARES Act, including the Paycheck Protection Program (PPP), which they saw
as a positive for economic recovery and for preventing further dislocations due to bankruptcies
and evictions. While some felt that the shape of the pandemic relief legislation would differ
depending on whether Biden or Trump prevailed, many felt that Biden would have little room formaneuver with a Republican Senate and so the package would likely focus on widely-agreed
policies such as PPP. It was also noted that hundreds of billions of dollars of potential spending
from earlier pandemic relief legislation remained unspent or uncommitted, most notably withrespect to the Fed’s Main Street Lending Program. Several participants also pointed out thatfederal support to states and localities remained controversial, and raised concerns that state andlocal fiscal shortfalls would lead to large-scale layoffs and hamper public health initiatives,
including distribution of vaccines.
Participants expected continuity in monetary policy. They noted that a low-inflation environment
had prevailed among advanced economies, including Japan and the U.S., for at least 25 years.
Low inflation had been accompanied by low interest rates, constraining central banks’ monetary
policy options. Led by Japan, central banks throughout the developed world had come to rely on
quantitative easing as a key instrument of monetary policy. Most participants agreed that slow
growth and lack of inflationary pressure would continue to indicate the need for quantitativeeasing and low or negative interest rates for the being, regardless of the final results of thepresidential and Senate elections. A major concern for some participants was whether it would
PIFS Japan-U.S. Symposium 2020, p. 2

ever be possible for central banks to exit quantitative easing without disrupting markets. What,they asked, were the long-term implications of central banks being major holders of assets inmany economies?
Participants also discussed two other roles of central banks: providing liquidity to financial
markets and providing credit to the real economy. Both the Fed and Bank of Japan had
proactively provided liquidity to financial markets in March 2020, with the Fed working tostabilize Treasuries and corporate bonds and the BOJ working with the Fed to ensure sufficientdollar funding for Japanese financial institutions. Participants agreed that these actions had been
crucial in minimizing financial shocks, and in enabling financial institutions to provide the credit
needed for the economy. There were, however, some concerns about whether it would bepossible for the Fed to withdraw support from corporate bond markets without sparking a newround of illiquidity (subsequent to the Symposium, the Treasury decided to close this facility asof the end of the year). Also, some participants raised concerns that the Fed’s intervention incorporate bond markets might open the door to new types of monetary policy actions in US, suchas purchasing ETFs, that could lead to growing levels of direct Fed ownership of private debts,
or as one participant put it, “further socialization of credit in the U.S.”
Participants also discussed direct lending programs to address the economic effects of thepandemic. They focused in particular on the Fed’s Main Street Lending Program, which wasseen by many participants as a disappointment. The program was meant to support bank lending
to small and medium-sized enterprises in order to support payrolls and maintain employment, butby the time of the Symposium less than $4 billion of the authorized maximum of $600 billion
had actually been lent. Several participants attributed this to the fact that lenders were required tohold 5% of the loan. In contrast, they argued, successful SME loan guarantee programs in Japanand Europe had guaranteed the entirety of the loan. This 5% retention made banks much morewary of utilizing the Main Street facilities. The effects of the poor performance of the Main
Street program were seen by a number of participants as significant—they argued that it had
contributed directly to the widespread failures of SMEs in the U.S., which would make economic
recovery far more difficult.
A final issue regarding macroeconomic policy was what many observers had termed the“fiscalization of monetary policy.” Participants questioned where the line should be drawn
between fiscal and monetary policy in the era of quantitative easing, in which central banks wereincreasingly financing government spending. While some participants worried about thepotential inflationary effects of monetizing debt, a greater concern for more participants was theways in which central banks were being drawn into quasi-fiscal activities—in particular, taking
risks on their own balance sheets, as in the case of the Fed’s corporate bond market intervention
and the Main Street program. In contrast, Japan’s guaranteed loan programs for SMEs were
provided through the budget process.

Financial Regulation and Supervision
Participants also discussed the implications of the election on financial regulation andsupervision. Most participants predicted relatively moderate changes. They argued that the
Trump deregulation agenda had been rather limited and incremental in nature. Moreover, they
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saw Biden as not particularly focused on financial regulation. In addition, the likelihood of a
Republican-majority, or at least evenly-split, Senate also made it unlikely that there would besignificant legislative changes in financial regulation.
With little likelihood of quick or ambitious legislative action on financial regulation, participants
agreed that the biggest changes were likely to come from personnel shifts in regulatory andprudential agencies. While it was recognized that some potential appointees had strong positions
in favor of re-regulation, participants predicted that a Biden administration would refrain from
appointing the most activist candidates due to the challenges of Senate confirmation. Several
participants also predicted that there would be bigger changes in supervision than in regulation,
largely because of the time and processes involved in regulatory rulemaking.

U.S.-China Relations
Finally, participants discussed at length the likely impact of the presidential election on U.S.China relations. This was seen to be of crucial importance not only to the U.S. and China, butalso to Japan and to global governance in general.
Participants agreed that bilateral relations were especially challenging going into 2021. President
Trump had already targeted China over trade, territorial aggression, and human rights since
taking office, and in 2020 had repeatedly blamed China for having triggered the globalization of
the COVID-19 pandemic. Perhaps surprisingly, most participants expected more continuity in
China policy than a sharp break, arguing that elite opinion in the U.S. had fundamentally shiftedfrom a preference for accommodation to active mistrust of China. While they predicted that a
Biden administration would make less use of unilateral tariffs and sanctions and would
significantly tone down hostile rhetoric, they expected that it would seek to pressure China
through multilateral forums and in cooperation with allies. Some participants also expected that a
Biden administration would be more selective about the disputes on which it would focus,
seeking opportunities for cooperation as well as confrontation and competition. One question
mark was whether the Biden administration would be more open to Chinese investment in the
U.S. It was noted that the Trump administration had been much stricter than previous
administrations in the operation of the Committee on Foreign Investment in the U.S. (CFIUS).
Some participants predicted that a Biden administration would be more open to Chinese
investment in general; however, they expected the administration to continue to restrict
investments that might give Chinese companies access to sensitive technologies or data
For Japan and other economies in Asia, U.S.-China confrontation was seen to create severe
dilemmas. They had become highly dependent on China as supplier and customer, and especiallyin the context of manufacturing supply chains. These would be painful to sever, and participants
agreed that Asian economies were fearful of calls for decoupling, as they did not want to have tochoose. However, it was also noted that Japanese public opinion had shifted considerably against
China over the last decade, and several participants indicated that Japan welcomed a tough lineby the U.S., as long as it was done in cooperation with allies. It was also noted that the Japanese
government had already started providing incentives for Japanese firms to reduce their relianceon China in their supply chains, albeit with limited effects to date. Japan had also recently
introduced changes to its own laws on inward foreign investment to allow the government to
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restrict investments that could affect national security, including technology andpharmaceuticals. Another matter of particular concern was the lack of transparency overemerging economies’ debt exposure to China. It was noted that China was not a member of theParis Club and that major state-owned Chinese creditors such as the China Development Bank
were not subject to the G20’s Debt Service Suspension Initiative (DSSI).

PIFS Japan-U.S. Symposium 2020, p.

5Topic 2: How has the post-2008 financial crisis regulatory
regime affected the ability of the financial sector to support
the real economy during the COVID-19 crisis?
For Topic 2, participants discussed the effects of post-2008 financial regulatory reforms on thefinancial sector. There was a strong consensus that banks had become much more safe andresilient as a result of the reforms. Participants also discussed the impact of reforms on nonbanks and financial markets, where there was less agreement. In addition, there was considerable
discussion of how effectively the financial sector was supporting the real economy during the
COVID-19 crisis.

Regulatory Reform and Financial Resilience
Participants agreed that banks weathered the COVID-19 crisis well. Unlike in the global
financial crisis, banks held ample capital and liquidity to continue operations uninterrupted andindeed to expand lending to borrowers in need. They also enjoyed more stable funding, rather
than relying on the short-term borrowing that had contributed to financial institution failuresduring the global crisis. Given the sheer scale of the economic crisis, it appeared that banking
reforms had served the financial system well in the face of what some participants termed a fullscale “stress test” of financial regulatory reforms.
The picture was seen to be more mixed outside of the banking sector. While financial
infrastructures such as exchanges and clearinghouses had continued to function largely without
disruption, liquidity issues in March 2020 in a variety of financial markets including corporate
bonds, corporate paper, and even government bonds had required assertive central bankintervention, especially in the U.S. and Europe. Of particular concern to many participants was
the disruption in the market for U.S. Treasuries, the classic safe-haven security. There was somedebate over the reasons for the liquidity issues in the Treasury market. Some participants argued
that there was so much debt that dealers could not fully absorb it on their own. Some suggested
that hedge fund withdrawals from the Treasury market due to unwinding of trades was also a
concern. Others pointed to the money market funds as being particular drivers of illiquidity.
Others suggested that the withdrawal of banks from their traditional role as market-makers wasimportant, fueled in part by leverage regulation, margin requirements and the Volcker Rule.

Supporting the Real Economy
Overall, participants felt that the financial system had been a pillar of stability in the midst of an
unprecedented economic slowdown, helping to buffer the economy from crisis, rather than acting
as an accelerant. Banks in particular were given high marks for their capacity and willingness tolend into the crisis. Several participants noted that some non-banks had also been active inproviding needed funds, including private equity groups.

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Some participants expressed concern that banks might be lowering their lending standards
excessively, although many felt that prudential standards were being maintained. Banks not only
lent on their own accounts, but proved to be the necessary conduits to deliver the funds frommassive government credit programs to the borrowers that needed them, especially SMEs. This
was the case in many countries, including the U.S. and Japan.
One question mark in this story was the extent to which bank lending relied on government
support, whether through direct funding or credit guarantees. Several participants noted that themost successful official lending programs were those in which the government or central banktook 100% of the risk of new loans. Thus, they argued that banks were not important in and ofthemselves, but just as agents for governments. They worried that the banks would have a hardtime adjusting as governments withdrew credit support, potentially leading to future credit
crunches or to prolonged government involvement in credit provision.

Lessons and Potential Gaps
Although participants generally saw the effects of post-2008 financial regulatory reform as
having been successful both in making the financial system safer and in ensuring that funds were
supplied to the real economy, some felt that COVID-19 had also shined a light on some gaps andweaknesses of financial regulation and supervision.
The biggest concern among participants was over the March liquidity issues, which had required
assertive central bank action to prevent a seizing up of crucial debt markets in Europe and the
U.S. If left unaddressed, the effects could have reverberated throughout the financial system,
adding financial fragility to the pandemic-induced economic crisis. Participants offered differinginterpretations of the crisis and appropriate policy responses. Some argued that the problem wasthat financial regulatory reform had not been properly extended to non-bank financial institutions
such as MMFs
Other participants were not convinced. They worried that enhanced prudential supervision ofnon-banks would blur the distinction between banks and non-banks, reducing the choices
available to investors and to borrowers, and potentially lowering growth potential as fewer
market actors would be willing to provide risk capital. They argued instead that, given the sheer
scale and uncertainty of the crisis, it was completely reasonable that central banks had fulfilled
their roles as financial backstops by ensuring sufficient liquidity. In this interpretation, central
bank intervention was primarily about reducing uncertainty and restoring trust in counterparties
and trading platforms; as evidence, they noted that the actual amounts of corporate bonds held by
the Fed was only about $28 billion, which they saw as a drop in the ocean, and certainly notenough to distort markets. They felt that the lesson to be drawn from the liquidity freezes wasthat central banks should take a leading role in stabilizing markets at times of crisis. Their mainconcern was that the Fed and other central banks should retain the ability to carry out suchinterventions as needed. In the U.S., section 13(3) of the Federal Reserve Act, as amended by the2010 Dodd-Frank Act, required authorization from the Treasury Secretary for certain emergency
liquidity operations; while Secretary Mnuchin had supported the Fed’s actions in March 2020,
there was some concern that future Treasury Secretaries might block emergency action in futureliquidity crises. Some participants drew a different lesson from the success of the Fed’s actions.
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They argued that financial market participants could now be confident that the Fed would step into fix any liquidity problems that might arise in financial markets, thus reducing their own
responsibility and creating considerable moral hazard. They predicted that Fed intervention
would never be fully withdrawn, even when positions were small, as in corporate bonds.
Another lesson that some participants drew from the performance of financial institutions,central banks, and supervisors over the course of the (continuing) COVID-19 crisis was theimportance of coordination both within and across borders. Dollar funding had been assured due
to cooperation among central banks, particularly through the Fed’s swap lines, reducing
pressures on corporations around the world. In the U.S. and Japan, the cooperation between thecentral bank and the government had allowed for effective fiscal stimulus and quantitativeeasing. Supervisors too had worked together to manage the trade-offs between prudential andmacroprudential concerns.
Finally, many participants noted that the crisis was not yet over. While the financial system, andin particular banks in major countries, had performed admirably to provide credit to the real
economy where it was needed while also adhering to prudential rules regarding capital andliquidity (adjusted where necessary), the large expansion of debt could easily lead to big
increases in non-performing loans if the crisis were to persist long enough. This was particularly
true among certain classes of especially hard-hit borrowers, including SMEs and companies inthe transportation and hospitality sectors. In other words, they cautioned, the pandemic would
likely have the last word as to the long-term health of the financial sector and its ability lend.

PIFS Japan-U.S. Symposium 2020, p.

8Topic 3: Implications of the COVID-19 Crisis forInternational Business and Finance
For Topic 3, participants discussed the implications of the COVID-19 crisis for the future ofinternational business and finance. While generally complimentary of the way in whichgovernments, central banks, and financial institutions had managed the economic fallout fromthe pandemic, they expressed concern about longer-term issues, including the possibility ofwidespread insolvencies, the need for structural reforms, and distributive effects. Many saw achanged role of the public sector in developed economies, including Japan and the U.S. They
also noted that the crisis was occurring in the context of several other important trends that could
affect international business and finance. These included digitalization of finance, long-term low
interest rate environment, growing concerns about environmental issues, and U.S.-China
tensions.

Viewing the Pandemic from Japan and the U.S.
While the COVID-19 pandemic’s negative effects were global in nature, participants noted thatthey varied greatly among countries. In the U.S., inconsistent policies among states, along with
political and social resistance to public health measures such as mask mandates and contact
tracing, had allowed the pandemic to spread widely. By the time of the Symposium, new daily
infections in the U.S. had surpassed their July peak by 70%, although death rates weresignificantly lower than in the early days of the pandemic, due both to better treatment and toinfection of healthier populations. Most states that had loosened restrictions over the summer
chose not to reimpose them despite the increased rates of infection around the country. However,participants also noted several bright spots. One was apparent progress on vaccines, seen by
many participants as an essential element in ending the pandemic. Participants also noted that the
U.S. economy had recovered surprisingly well from the fastest, deepest recession since the1930s. Following the record unemployment and widespread business closings of the late spring,
employment and economic growth had rebounded considerably, helped largely by proactive
fiscal policies and official lending programs. While some sectors, such as transportation andhospitality, remained in dire straits, other segments of the economy were relatively resilient.
Japan’s experience with the pandemic was quite different. Despite its proximity to China andlarge elderly population, Japan had seen consistently low numbers of infections and deaths. It
had eschewed mandatory lockdowns and mask-wearing, but had achieved high compliance withgovernment directives, while focusing on contact tracing and containment rather than on mass
testing. Participants also predicted that the Japanese people would be much more willing toaccept vaccinations than Americans, many of whom had become vaccine skeptics or justdistrustful of the government. Japan’s economy, though negatively affected by the pandemic,
had done well relative to the U.S. and Europe, partly because infection rates remained low andpartly due to proactive government policies and credit provision. As in the U.S., economic
effects of the pandemic were not evenly distributed. In addition to transportation and hospitality,
other labor-intensive service industries faced particular challenges. Although Japanese labor
practices discouraged spikes in unemployment, it was evident to many participants that structural
PIFS Japan-U.S. Symposium 2020, p.

9changes were likely to be accelerated by the pandemic and its economic effects, as described
below.

A Tale of Three Crises
In discussing the economic effects of the pandemic, participants talked about three types ofcrises that could occur: liquidity, insolvency, and structural. The timing of these challenges
ranged from short- to long-term.
Participants agreed that a serious liquidity crisis had been averted, despite the severe economic
blow caused by the pandemic. One reason identified by many of them was the post-global
financial crisis regulatory reforms, which had left banks and many other financial institutions
better capitalized, more stable, and more resilient than in 2008, allowing them to be part of thesolution rather than the cause (or accelerant) of the problem. Both the U.S and Japan had largely
implemented Basel III and other internationally-agreed standards and had also implemented
effective macroprudential supervision. A second reason was the proactive measures by the Fed,Bank of Japan, and other major central banks to ensure financial market liquidity in the spring aswell as continued massive provision of credit through quantitative easing.
While a liquidity crisis had been averted, participants worried about the potential for insolvency
crises. Although they lauded the contribution of banks to keeping businesses afloat throughlending, they recognized that if economic weakness were to persist, it could lead to widespread
non-performing loans and bankruptcies. This was seen as particularly true of loans to hard-hit
sectors and regions. Some participants were relatively optimistic, predicting that the pandemic
would be contained by mid-2021, when they expected vaccines to be widely available. Others
worried that might be too late for many businesses—particularly in the U.S., where the Main
Street Lending Program had largely failed to support SMEs and PPP had not been renewed.
These participants feared that a widespread failure of small businesses would make it difficult torebuild the private-sector economy. Japan was seen by many participants to have been more
successful in preventing SME insolvencies, both because per capita COVID-19 infections werethirty times lower than in the U.S. and because the Japanese government had moved swiftly toactivate existing SME support programs.
Longer-term, a number of participants argued that developed countries, especially Japan, faced
structural crises over the allocation of capital and labor. A familiar structural challenge for Japanwas its aging society and declining population, which was weakening regional economies
outside of Tokyo. Another challenge was the overemployment in labor-intensive service sectors.
Although stable employment practices had prevented sharp shifts in employment in service
sectors such as finance, the pandemic was seen as accelerating the trend toward digitization andaway from high-touch service. In terms of its distributive effects, the pandemic weakened sectors
such as hospitality, transportation, and retail and offered new opportunities to tech firms andmajor financial institutions, while also advantaging knowledge workers over others. For many
participants, this confluence of trends called for a large-scale reallocation of capital and labor to
the places where they could be most productive. While the challenges were common todeveloped economies, Japan was seen as facing particular obstacles to such structural changes,
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due to its stable labor system and long-term relationships that advantaged established firms andfinancial institutions.
Many participants noted that these crises also faced emerging markets, which had fewer
resources with which to manage them. Liquidity and insolvency concerns were of particularconcern, since emerging market governments faced constraints in borrowing, particularly indollars. While this point was not discussed at length, participants agreed that this could be amajor concern for the global economy and for international organizations going forward.

Role of Public Sector
Participants agreed that government and central bank action in Japan, the U.S., and elsewhere
had been instrumental in blunting the worst economic consequences of the pandemic, eventhough they had mixed appraisals of particular policies. For example, while participants agreed
that policies such as the CARES Act, Fed liquidity actions, and regulatory relief for banks had
been highly effective, many criticized U.S. authorities for their handling of public health issues,
their failure to pass a third COVID-19 relief bill, and the shortcomings of the Main Street
Lending Program.
Shifting perspective from the short-term effects of pandemic responses, many participants agreed
that the long-term effects would likely be profound. One aspect, as noted under Topic 1, was thelikelihood that macroeconomic policy support for developed economies was seen as likely tocontinue for many years. Not only would this include quantitative easing and low or negativeinterest rates, but also continued fiscal support. Some participants were not deeply concerned
about the likelihood of continued high budget deficits, arguing they would be sustainable. Others
worried that fiscal irresponsibility and monetization of debt would ensue. One concern was that
this would lead to inflation, but a larger concern was that government intervention in theeconomy would be pervasive, distorting prices, capital allocation, and incentives—andultimately reducing productivity and income growth.
A particular concern is whether and how it would be possible to withdraw government andcentral bank support in the form of fiscal spending, quantitative easing, and liquidity injections
from the economy once they had been put in place. Several participants worried that, in theabsence of consumer and producer price inflation, monetary policy’s main effects were in
inflating asset prices. If the Fed and BOJ sought to consolidate their balance sheets, they
predicted that asset prices would drop, leading to the prospect of a new financial crisis. Thus,
central banks would be perpetually locked into quantitative easing. Another area of particularconcern was how governments would be able to discontinue the massive loan guarantee
programs they had put in place during the pandemic. Some participants also worried thatgovernment intervention would extend ever further into the economy, and that it would bepolitically difficult to shift risk back to the private sector.

Financial Systems
Although participants generally agreed that financial systems had done well during the
pandemic, thanks to post-global financial crisis reforms and proactive central bank liquidity
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injections, many predicted that major changes were in store for the financial systems of Japanand the U.S. Some trends, like digitization and an increased attention to environmental, social,and governance (ESG) factors, were seen as occurring at a global level. Others were moreparticular, such as an expected transformation of Japan’s regional banks.
Participants agreed that Japan’s regional banks had long been facing serious challenges, due todeclining rural populations, the pervasive low interest rate environment that led to fewer good
lending opportunities, and a surfeit of branches and employees. In response to those challenges, anumber of participants argued that regional banks had chosen to increase the riskiness of theirportfolio, in particular through accumulating foreign debt that seemed to take them far from theirexpertise in local businesses. Ironically, the pandemic offered a temporary lifeline to the regionalbanks, as government-guaranteed loan programs offered them safe and profitable new lending
opportunities. However, few participants believed that this would last beyond a couple of years.
At that point, the regional banks would again be confronted with the challenges of declining
local economies and low margins.
Participants discussed two not mutually exclusive alternatives for the future of Japan’s regionalbanks. They noted that the new Suga government had decided soon after taking office to actively
support consolidation of the regional banks, breaking from previous hands-off approaches. By
offering financial and regulatory support for consolidation, there was an expectation thatrationalization of the regional banks would happen in an orderly manner. While recognizing that
consolidation and rationalization would be the likely fate for many regional banks, someparticipants also suggested the possibility of a more hopeful future. They noted that several
major financial institutions, including Nomura and SoftBank, had recently acquired regionalbanks—not primarily for their traditional lending business, but as a means of distributing otherfinancial products through dedicated customer bases and strong reputations. One way or another,
however, most participants predicted significant changes in the number of banks and in theirbusiness models.
One long-term trend that was discussed at length was digitization of the financial sector. While
this trend was already well-established, many participants argued that the pandemic wasaccelerating the transformation of traditional banking—particularly in Japan, where personalistic
service had survived in banking much longer than in the U.S. or elsewhere. With reduced
capacity and usage of branches due to COVID-19, banks were accelerating their shift to online
services. Participants noted some important differences in the ways in which various countries’
financial systems were adapting to digitization. In contrast to China and the U.S., where banks
were facing considerable competition from fintechs or other non-bank financial institutions (e.g.,
online brokerages or payments platforms), it was argued that in Japan the larger, establishedfinancial institutions continued to hold an advantage over non-traditional entrants. This mightslow adoption of digital financial services, but it also would allow incumbents to continue toprofit based on their strong reputations and weight in the economy.
There was also considerable discussion of ESG. A number of participants argued that the postCOVID-19 recovery should be a green recovery. They noted a growing enthusiasm in a varietyof countries for applying ESG principles to lending, investing, and infrastructure. While Europe
was the furthest along in mandating ESG and creating formal taxonomies to identify and rate
projects based on their adherence to ESG principles, a number of participants pointed to
PIFS Japan-U.S. Symposium 2020, p. 12

increased interest in Japan as well. They noted that the Tokyo government had recently issued agreen bond and that there was increased attention to ESG and the UN’s Sustainable Development
Goals in the Japanese asset management industry. There remained more ambivalence ingovernment ministries—although several were studying the EU taxonomies and actively
discussing what ESG standards ought to look like for Japan and how they could be incorporated
into regulation, they were still reluctant to go beyond voluntary standards. Participants identified
some similarities to the U.S. as well. They pointed to growing popularity of ESG (especiallyenvironmental) among investors, as well as green bonds and green infrastructure initiatives insome states, but conceded that there had been no support for ESG at the federal level, althoughthat could change under the Biden Administration. Participants did not expect that the U.S.
would go the EU route of mandatory rules—which could potentially lead to frictions between the
two jurisdictions—but did anticipate growing investor appetite for ESG-compliant financial
products.

U.S.-China relations
A final area in which participants discussed the possibility of major long-term changes was theeffects of rising tensions between the U.S. and China. Like other trends discussed in Topic 3,
rising U.S.-China tensions was not a new phenomenon, but the pandemic seemed to accelerate
trends that had already been accelerated under the Trump administration and Xi Jinping’s
consolidation of power in recent years.
Participants offered a somewhat pessimistic picture of the impact of worsening U.S.-China
relations on East Asia and on the world economy. Several participants argued that China hadtaken advantage of the Trump administration’s suspicion of international organizations and law
to step into what they saw as a void in international governance created by U.S. withdrawals
from some international agreements (e.g., World Health Organization, Paris Agreement) andrejection of rules-based trade agreements such as the World Trade Organization and the TransPacific Partnership. A number of participants spoke to increasing uneasiness in Japan andelsewhere in East Asia about China’s aggressive actions toward its neighbors over territory andother issues, and made the case that Japanese people strongly preferred more U.S. support andinvolvement in the region. Many expected that a Biden administration would be less antagonistic
toward China while also being more effective at building coalitions to positively shape Chinese
behavior, but they also expected that U.S.-China relations would remain tense, due to long-term
clashes of interests. They expected that the biggest change would be a reversion tomultilateralism and support for transparent international rules and agreements.
Participants discussed two other possible long-term outcomes of U.S.-China tensions. One was
the reshaping of supply chains. Few expected decoupling, which Asian economies strongly
opposed. But a number of participants argued that there was already considerable rethinking of
supply chains, shifting from emphasizing efficiency to resilience, especially for products related
to national security (including pharmaceuticals and medical supplies, thanks to the pandemic).
Already, some U.S. and Japanese firms were seeking to diversify their supply chains in order torely less on China, and the Japanese government had put in place incentives for reshoringproduction from China to Japan or other countries. A number of participants also predicted that
this could have potential implications for financial and investment links, as already seen, for
PIFS Japan-U.S. Symposium 2020, p. 13

example, in the strengthening of CFIUS and of Japanese regulation of technology-related inward
investments. They warned that investors should be aware of the possibility of more serious
disruptions as well.
Finally, there was some discussion of central bank digital currencies, driven by Chinese moves
toward creating a digital RMB. Several participants argued that Japan and the U.S. should beseriously considering creating their own digital currencies, and encouraged the Fed, BOJ, andregulators to work together to create international standards for them. Some were concerned that
China may have first-mover advantage, and worried that this would create a possibility todisplace the global role of the dollar. Many participants were skeptical of that possibility, but
took seriously the possibility that China was either seeking to create an RMB zone or hedging its
bets in case the U.S. increased the use of financial sanctions against Chinese enterprises or thegovernment. It was also suggested that China was seeking to digitize the RMB as one moremethod of increasing control over its residents’ personal information, rather than trying to build
global advantage.

PIFS Japan-U.S. Symposium 2020, p. 14

PIFS & I-House Japan:

2020 Symposium on Building the Financial System of the 21st Century

NON-FINANCIAL SPONSOR:

LEAD GLOBAL SPONSOR:GLOBAL SPONSORS:HOST SPONSORS:

LEAD SPONSORS:SPONSORS:

Asian Century Quest

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Program on International Financial Systems (PIFS)
134 Mount Auburn Street, Cambridge, MA 02138
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