ISSN oo75-6407

BUSINESS
28th

REPORT
ANNUAL<ms""2'"-,e

RESEARCH INSTITUTE FOR ECONOMICSAND BUSINESS ADMINISTRATIONKOBE UNIVERSII'Y
1982

KOBE
ECONOMIC & BUSINESSREVIEW
28th

ANNUAL REPORT<$'II,]ERESEARCH INSTITUTE FOR ECONOMICSAND BUSINESS ADMINISTRATIONKOBE UNIVERSITY

1982

CONTENTS
Page
The Internationalization ofJapanese Commercial Banking-Experiences in the 70's- ..........................................

...Masahiro FuJITA
1
Kenichi IsHIGAKIA Synthesis of Simultaneous Equations Estimators ...........

.HiroshiSADAMicHi 29

A Database System of Economic Time Series .................

.Hiroshi SADAMICHI

43
Yasuo NuNoKAMI

THE INTERNATIONALIZATION OF JAPANESECOMMERCIAL BANKING-Experiences in the 70'sMasahiro FuJITA

AND
Kenichi IsHIGAKII Introduction

During 1977 and 1978, our research groupi) conducted a survey of the internationalization of Japanese banking. Bankers were asked to respond to a questionnaire and be interviewed. Ten of the twelve city banks, all three of the long-term
credit banks, one specialised foreign exchange bank and one regional bank participatedin the survey2>. Although some other banks, such as trust banks, are also internation-

alizing their business, we limited our concern to city banks, long-term credit banks
and specialised foreign exchange banks, since they represent virtually all the Japanesebanks which are currently international. They account for 900/, of the foreign exchange asset balance, 94 O/. of all overseas branches of Japanese banks, 95 % of over-seas representatives' oMces, and 92 % of local finance company subsidiaries of banks.
It thus seems reasonable that this survey will provide a fairly accurate assessment of

the internationalization of Japanese banking.3)
With the objective of clarifying the current situation as regards the internation-

alization of Japanese banking and examining the points at issue, the questionnaire
was divided into seven sections:

1. The purpose and motives of the internationalization of banking
2. The establishing of branches, oMces and local banks
3. International banking operations
4. The present situation and performance ofthe internationalizationl) Main members of our research group besides us are as follows; Professor Y. Noritake (Kobe
University), Professor R. Mikitani (Kobe University), Professor N. Miyata (Kagawa University). Associate Professor N. Niwa (Toyama University). If this paper has some merits, we must share themwith these professors. However, we alone have responsibility for errors which may exist in this paper.
Mr. B. Piper and Miss Robin Fletcher assisted us with translation into English. We appreciate thisasslstance.

2) The following banks co-operated in our research. City banks; Dai-ichi Kangyo, Daiwa, Fuji,
Hokkaido Takushoku, Mitsubishi, Mitsui, Sanwa, Sumitomo, Taiyo Kobe, Tokai. Long-term credit
banks; Nihon Choki Shinyo, Nihon Kogyo, Nihon Saiken Shinyo. Specialized foreign exchange bank ;Bank of Tokyo. Regional bank; Hokuriku. We would Iike to express our appreciation for their cooperatlon.
3) Our research group is now conducting a survey of other internationalizing banks and financial
institutions, such as trust banks, local banks, and stock companies.

MASAHIRO FUJITA, KENICHI ISHIGAKI

2

5. The diMculties and limitations in the promotion ofinternationalization of Japanesebanking
6. The administration and regulation ofinternationalization of banking
7. Present and future problems.
Generally speaking, the internationalization of finance has three aspects. Firstly,

it involves the internationalization of domestic currency-that is, domestic currency

becomes also an international vehicle currency and reserve currency. Secondly, it
involves the internationalization of banks and other financial institutions-financial

institutions transact either with non-residents through both domestic and foreign
currency, or with residents through foreign currency. Thirdly, it involves the inter-nationalization of the money and capital market-that is, both short-term and longterm funds move freely into and out of the markets, and market interest rates aredertermined by market forces.
These three aspects are closely inter-related. The internationalization ofa curren-

cy and of the money and capital markets promotes the internationalization of banking

business. Conversely, the development of the latter may contribute to the promotionof the former. It would therefore seem to be necessary to approach the issue of theinternationalization of banking in the light of these considerations. However, as will

be discussed in more detail later, one of the features of the internationalization ofJapanese banking is that it has developed without significant corresponding developments in the other two aspects. This paper will concentrate on the examination of theinternationalization of Japanese banking, with the other aspects being noted for theireffects on the internationalization.

The paper is not intended to be merely a report of the results of the survey. It will

depict the internationalization of Japanese banks against the background of theJapanese economy and discuss the problems and limitations of internationalization
as perceived through the data collected through our research and from other sources4) .

The subsequent sections deal with the internationalization of the Japanese economy

and Japanese banking, the aims and motives of internationalization, the present
situation in overseas bases and the performance of internationalization. The paper
wi11 also draw out the major issues and note the limitations ofinternationalization as
they emerge from the data collected in the survey.

II The Deyelopment of the Internationalization of the Japanese

Economy and of Japanese Banking
Since the Second World War, there has been a gradual shift from a closed to an4) Kinyu Mondai Kenkyu kai (Research group in Ministry of Finance), Kokusaika ni tomonau
wagakuni no kinyukikan no arikata, 1979 is critically important for researching the internationalization of financial institutions. We made use of the many data attached to this report. Other papers which
deal with related problems are as follows. E. W. Hayden, Internationalizing Japan 's Financial System,
Stanford University, December 1980. James Horne, The Internationalization ofJapan Finance : A Preliminary Assessment, Research Paper No. 69. Australia-Japan Research Centre, ANU 1980.

3
THE INTERNATIONALIZATION OF JAPANESE COMMERCIAL BANK[ING

open Japanese economy. GHQ (General Headquarters) controlled Japanese foreign
trade immediately after the war, but some private foreign trade eventually resumed,
and in 1949 the single exchange rate of"1 dollar == 360 yen" was determined. In 1960,

the Program of Liberalization of Trade and Foreign Exchange was initiated to promote liveralization of trade transactions and increase the percentage of liberalized
trade categories to some 80 or 90 per cent. The Program resulted in an increase from

420/. in 1960 to 93% in 1964. In 1960 the National Income Doubling Plan was introduced, coinciding with the period of high economic growth in Japan. In 1964
Japan accepted the obligations of Article VIII of the IMF Agreement and became amember of the OECD. This meant that Japan accepted the prohibition of exchange
controls on both visible and invisible trade without the approval of the IMF, andagreed in principle not to restrict invisible trade transactions and long-term capital

movement. This shift from a closed to an open system indicates that a certain degree
ofliberalization of foreign trade had been reached by 1964. In that year Japan's shareof world trade was 4.1 O/..

Liberalization of capital transactions, especially direct investment in Japan,
followed the liberalization of foreign trade. The fundamental policy for the liberaliza-tion of direct investment in Japan was determined in 1967, and proceeded in fourstages. Due to the policy, the number of liberalized business categories increased to527. Still, in 1969, the level of liberalization of Japanese capital movements was notas high as that of other advanced countries. However, at the beginning of the 1970s
the Japanese balance ofpayments surplus, especially the current balance, increased.
It remained at a high level, so the Japanese authorities actively promoted the liberali-zation of trade and capital transactions. The proportion of import trade categories
which had been liberalized reached 970/., with only 32 goods, such as beef, flour,
leather and computers, remaining unliberalized. During this same period an acrossthe board reduction of 20 0/. on tariffs on mining and manufactured products andprocessed agricultural products was implemented. With this, Japan's tariff levels
reached the international level. The liberalization of capital transactions also proceeded during this period, with four stages finally leading to 1oo O/. Iiberalization inprinciple by 1973. Japanese direct investment overseas was automatically permitted
in principle from 1972.
The process of the liberalization of trade and capital transactions is really also

the process of the internationalization of the Japanese economy. Table 1 shows
Japan's share of world foreign trade. Japanese exports and imports accounted for
3.2 O/.-3.3 O/. in 1960, reaching 6.4 O/. in 1975. Table 2 shows the level of flow and stockof direct overseas investment of Japan, USA and West Germany. It indicates thatJapanese overseas investment increased rapidly during the late 1960s and the 1970s,
especially in 1972. It also shows that although the level of both stock and flow ofJapanese overseas investment in the late 1970s was considerably lower than that of
the USA, Japan's stock levels were about the same as those of West Germany, while
its flow level was higher.

MASAHIRO FUJITA, KENICHI ISHIGAKI

4

Table 1. The Position of Japan in World Trade (million U.S. dollars)

1960

1965

1970

1975

1979

World

Exportsa
Importsb

127,7oo
134,8oo

186,4oo
197,4oo

311,8oo
327,3oo

873,779
905,906

16 270 302
16 792 250

Japan

Exportsa
Importsb

4,055
4,491

8,452
8,170

19,31918,88355,75457,865

110,672

ShareofJapan Exportsa

3.2

4.5

6.2

6.4

6.3

O/. Importsb

3.3

4.1

5.8

6.4

6.6

)!
}s103,045

Source: U.N. Yearbook of rnternational Trade Statistics, 1979.

a. F.O.B.
b. C. I. F.

Table 2. Direct Investment Overseas by Japan, U.S.A. and West Germany (million U.S. dollars)

Japan

West Germany

U.S.A.

Total TheRatioto Total TheRaitoto Total
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977

The Ratio toDomestic Private Domestic Private

Domestic Pnvate

Investment Investment

Investment

275
557
665
904
858
2,338
3,494
2,396
3,280
3,462
2,806

1.2

2.0
1.9

2.2
2.0
4.3
4.3
3.1

4.7
4.5

32

4,791
5,372
6,246

5.8

7,255
7,577
7,434
11,4358,859
14,04013,032
11,538

7.2

6.0
6.3
7.3

6.4

516
573
886
958
816
880

3.5
3.7

4.2
3.6

2.4
2.5
4.8

5.9

2,086
1,880

9.4

1,993

4.5

8.0

2,140
2,420

4.0

8.4

6.1

4.1

3.7

Cumulative
Total

22,211

148,782

22,458Source: Kinyu Mondai Kenkyukai, Kokusaika no shinten ni tomonau wagakuni kinyukikan no

arikata.

The internationalization of the Japanese economy, that is, the development of
an interdependent relationship between the Japanese and world economies together
with the increasing importance of Japan's position in the world economy, obviously
has effects on the activities of various large banks, such as city banks, which haveplayed a major role in the financial activities of Japan. However, it should be notedthat the internationalization of the Japanese economy has not been accompanied by asuMcient internationalization of currency (yen) and of the rnoney and capital market.
Table 3 and Table 4 show the relatiye positions of currencies such as the US dollar,
the mark and the yen in international trade and financial transactions. Clearly, theposition of the yen is overwhelmingly low in comparison with the US dollar and islower than the mark in both transaction categories. With regard to the internationalization of the money and capital market, there has been little improvement in the

5
THE INTERNATIONALIZATION OF JAPANESE COMMERCIAL BANK[[NG

Table 3. Percentage of International Trade Transactions in DomestiÅë Currency*

ImportExportJapan
West Gerrnany
EnglandFranceNetherlands

18.8%

1.2%

86.9

42.0
40.0

73.0
68.3

31.5

50.2

31.4

Austria

54.7

24.7

Belgium

Denmark

47.7
54.0

25.4
23.0

Sweden66.1

25.8*Figures for Japan are for 1977; others are for1976.

Source: Kinyu Mondai Kenkyu Kai, op. cit.
Table 4. The Percentage of Money-Capital Transaction in Each Currency

(2)

(1)
Syndicate Loan(1)+(2)

Issue of Secutities

1977

1978

1977

1978

1977

1978

U.S. Dollar

93.70/.

89.6e/.

51.10/.

38.60/.

76.oo/.

D. Mark

3.8

2.8

O.9

32

24.6
12.4

10.7

Japan Yen

20.3
5.1

7520/.
9.0

Swiss Franc
Netherlands Guilder Florin
Saudi Arabia Riyal
British Pound

O.4

O.3
1.1

15.5

16.0

O.3

1.3

O.4

O.9

2.2
O.2
O.7
O.5

2.8
O.3

Others

O.3

O.3

O.4
3.8

O.9
1.7
O.5
O.7
1.3

Total

1oo

1oo

1oo

1oo

02

Kuwait Dinar
French Franc
Luxembourg Franc

O.2

2.7
6.7
O.9
O.3
o.s

5.8
4.7
1.6

O.2
1.8

1.0
O.9
O.6
O.3
O.2
O.6

1oo

1oo

02

Source: Kinyu Mondai Kenkyu Kai, op. cit.

internationalization of the short-term money market, although there has been a
recent improvement in long-term e.apital transactions such as the issue of foreign

yen-denominated bonds in the JaDanese market.
On the other hand, the internationalization of the Japanese economy does seemto have promoted the internationalization of some Japanese banks. Generally speaking, this means the increase oftransactions with non-residents in yen or foreign currencies and of transactions with residents in foreign currency as a ratio oftransactions

with residents in yen. More concretely, these operations include dealing in foreign exchange and trade credit, Joans activities to non-residents, merchant-banking activities
and dollar fund raising. Jt is natural, therefore, thet dealing in foreign exchange andtrade credit and loans to Japanese companies overseas increases with the increasein the volume of Japanpse trade and the greater inroads made by bank's customers
into overseas marketg.

MASAHIRO FUJITA, KENICHI ISHIGAKI

6

It follows from our discussion so far that one of the features of the internation-

alization of Japanese banking is that it has been promoted by the internationalization ofthe Japanese economy, but has not been accompanied by the internationalization ofthe yen or the Japanese money and capital market. It should be noted, however,that Japanese banks have thernselves initiated internationalization of some aspectsof their operations against the background of the development of international financemarkets, such as tbe Euro-dollar market. These factors will be explored in the next.
sectlon.

III The purpose and Motiyes of the Internationalization of Japanese Banking

The main long-term purpose of the internationalization of Japanese banking
must be the acquisition of profit, although various shorter-term objectives are subsumed in this, In this section we will first clarify the target for the proportion of totalbank profits which will come from international business, and then consider the shortterm objectives apart from the making of profits.

Our research indicates that the long-term target which city banks and long-term

credit banks consider feasible is between 11 % and 30%. The upper-rank group ofcity banks gives a figure of 20-300/., while the middle and lower ranks, except the
specialized foreign bank, and the long-term credit banks give figures of between 1 1 O/.
and 20 O/.. The specialized foicign exchange bank has a very high target5). It is inter-esting that the higher target figure of the upper-ranking banks (30O/.) is similar to

the actual figure of three internationalized German banks (Deutsche Bank, Dresdner

Bank, Commerzbank) whose internationalization is a little more advanced thanJapan's banks. These banks' figures were 35%, 30 % and 30 %. respectively in 1977.
Besides profit earning, Japanese banks consider the following objectives importantin attaining the long•-term targettnlarging the number of customers <twelve banks)
and accumulating techniques and `know-how' in international banking (nine banks).
Other objectives include collection of overseas information and the maintenance ofbanks' prestige in the face ofcompetition. The upper rank group tends to emphasise

as important the enlargement of numbers of customers and the accumulation ofknowledge, while some middle and lower groups give more weight to the maintaining
ofprestige.

We will now examine the motives and methods ofinternationalization of Japanese banking in the past. There are two main ways in which internationalization ofbanking can develop-firstly, banks may internationalize in accordance with theinternationalization of their customers; secondly, they may initiate the internation-

alization themselves. According to our research, more than half the banks (seven of5) The grouping of banks is as follows-upper rank group (Dai-ichi, Fuji, Mitsubishi, Sanwa,

Sumitomo); middle and lower rank group (Daiwa, Hokkaido Takushoku, Mitsui, Taiyo-Kobe,
Tokyo); long-term group (Nihon Choki Shinyo, Nihon Kogyo, Nihon Saiken Shinyo). It should be
noted that the Bank ofTokyo is grouped in the middle and lower rank group.

7
TIHE INIIiRNATIONALIZATrON OF JAPANESE COMMERCIAL BANKING

Figure 1. Movement of Japanese Direct Investment Overseas and the Establishment of New Branches

and Local Banks
Miltion Dollars

4598

4000

Number

40

3800

38

3600

36

34

3400
Directlnvestment

3200

32

Overseas-..b.

30

3000
2800

28

2600

26

tUsescaleonleft)

2400

'

2200

24

,

22

'

2000

`

20

Numberof

Newly Established

1800

18

and

BranchesiLocalBanks

l600

16

'

1400

N 14

,

l200

12

1000

10

t

(Usesca!e

800
'

600

400

.-

.

onRight)
1

'

8
6

'

.

200

4
2

1964 65 66 67 68 69 70 71 72 73 74 75 76 77 78

8

MASAHIRO FUJITA, KENICHI ISHIGAKI

thirteen) think the first way is more significant, three of the thirteen think the second
is more significant, while the remaining three stated that their internationalization had

paralleled that of their customers. It would seem, therefore, that internationalizationin Japanese banking has been primarily motivated by, and proceeded together with,
the internationalization of their Japanese customers. That is, the liberalization of
trade and capital transactions and the increased overseas activities of Japanese companies have resulted in an increased demand for various foreign exchange and financedealings on behalf of the banks. Figure 1, which shows the relationship between
Japanese companies' direct overseas investment and the increase in the number ofoverseas branches and local banks, confirms this. It indicates that the latter increased
with t,he increase ofdirect overseas investment.
However, this is not to say that self-initiated internationalization is an insignifi-

cant aspect of the internationali'zation of banking. For example, the specialized
foreign exchange bank proceeded on its own initiative, competing with foreign banks
jn various aspects of banking business well before the internationalization of Japa-

nese companies. In the case of other banks, too, there are examples of this type ofinternationalization-for instance, Japanese banks often help customers with theirinternationalization, especially where the customer is a small or medium-sized enterprise without enough knowledge of overseas conditions to proceed alone. In addition,in the early 1970s, when finance market conditions eased due to excessive domestic
liquidity and it seemed that the demand for investment funds was going to slacken in
the long term, banks actively sought new business in the international finance market.
Similarly, the easing of the regulation of foreign exchange transactions after 1972 by

Japanese monetary authorities helped Japanese banks develop international business.

In summary, then, the fundamental reason for the Japanese banks' promotion
ofinternationalization has been the quest for Iarger profits. They have been assisted
in this by the background of liberalization of trade and capital transactions against
which it has been carried out. However, self-initiated internationalization has also

been a feature, although a secondary one, ofJapanese banking, and, as will be discussed later, indications are that it will become increasingly important.

IV Establishing Branches, OMces and Local Banks6)In order to commence international banking business in Japan, banks need toobtain an authorization from the monetary authorities to deal in foreign exchange.

They then need to establjsh foreign exchange sections wjthin domestjc banks andenter into correspondent bank contacts with foreign banks overseas. At the end of
March 1979, there were 119 authorized foreign exchange banks. However, the establishing of overseas branches, representative ofiices and local banks is the main way
international banking is advanced. As will be discussed further later, the overseas

6) Overseas financial aMliates with equity links with Japanese banks.

9
THE INTERNATIONALIZATION OF JAPANESE COMMERCIAL BANKING

operations of Japanese banks, especially fund-raising and accomodation of funds,
are conducted in foreign currency, usually U.S. dollars, so the internationalization of

the yen and of the Japanese money and capital market has not progressed far. In
these circumstances, the establishing of overseas branches and aMliates is criticallyimportant for banks. At the end of March 1979, the situation as regards overseas
branches, offices and local banks was as follows. Twenty-three banks had a totalof 123 overseas branches, 25 banks had a total of 150 representative oMces, apd 20
banks had a total of 66 local banks (above 50 O/, ownership).

Table 5 and Figure 2 show the number and geographical distribution of overseas branches, othces, local banks and Japanese staff. In terms of the geographicaldistribution of overseas branches, North American has 38%, Europe 33 O/. and Asia
25 %-in total, these three areas account for over 95 O/. of branches. Forty-three percent of Japanese staff are located in North America, 38 O/. in Europe and 16 O/. in Asia.

Representative oMces are more scattered, with 220/. in America, 22% in Asia, 140/.
in Central and South America, 13% in Europe, l2% in Oceania, 12O/. in the Middle
and Near East and 3 O/. in Africa. The distribution in terms of staff is similar to theabove. Thirty per cent of local banks are in Europe, 30 O/. in Asia, 17O/, in North

America, 11 O/. in Central and South America, 4 O/. in the Middle and Near East and40/. in Oceania. The distribution of Japanese staff, however, is very different-55 O/.

in North America, 20% in Europe and 14OA in Asia. This indicates that local banks
in North America are considerably larger than those in other countries.

The geographical distribution of overseas branches, oMces and local banks
differ considerably from each other, and, as will be discussed later, they have different

but complementary functions in advancing the internationalization of Japanesebanks. The local distribution of Japanese staff through these three kinds of overseas
bases will also be discussed, in order to make it clear which areas are most importantfor overseas banking operations. Column (4) of Table 5 shows North Arnerica as
43 O/., Europe as 31 %, Asia as 17%, Central and South America 5 %, Oceania 2 O/. andthe Middle and Near East as 2 O/,. The first three areas together account for over 90 O/.,and can thus be considered important areas.

Figure 3 shows the relationship of the geographical distribution of overseas
bases of banks, trade, and direct investment overseas. According to Figure 3, thefirst is quite different from the other two. In the case of North America and Europe,
the figure for geographical distribution is considerably higher than those for tradeand d{rect investment, while in the case of the Middle and Near East and other areas,
it is considerably lower. This may mean that even if the internationalization of Japa-

nese banks began in response to the internationalization of their customers, banks'internationalization has now taken a different direction from that of their customers.

North America and Europe, in particular New York and London, are the two majorinternational finance markets in which almost all fund raising and a lot of loan accommodation are conducted. It is interesting to note that the geographical distributionof representative oMces, whose main function is collecting information rather than

5

Table 5.

Geographical Distribution of Overseas Branches, Representative OMces, Local Banks and Japanese Staff

(2)

(1)

Branches

I II

III

Branches Japanese

Employees(A) North America

Employeesof LocalNationality

(3)

(4)

Representative

Local

Total

omces

Banks

II III

I
I
Representa- Japanese Employees Local

tive

Employees of Local

OMces

Banks

Nationality

II III

Japanese Employees Total
Employees of Local
Nationality

Japanese

Emp}oyees

36%

43O/.

25O/.

22O/.

19%

130/.

17%

55O/.

390/.

43O/.

3
33

2
38

7
27

14

15
14

16
10

11

51

5

32

9
20

3

31

o

o
ro

11

9

4

1

24
13

37

29

14

4
o
4

1

o
o

o
6
o
o
o

2

o

12
22
12

1oo

1oo

1oo

13

(D) Middle andNear East(E) Asia25o16(M Ooeania(G) Africa(H) Others

o
o
o

o
o

3

o

2
o

7
6
o

Total

o
o
o

1oo

100

1oo

1oo

1oo

1oo

?
ij

(B) Central andSouth America(C) Europe

K

17

2
o
o
1oo

2
g
->'1

:
z
8
en:

g
k

11
THE INTERNATIONALIZATION OF JAPANESE COMMERCIAL BANKIING

Figure 2. Geographical Composition of Overseas Bases
ora

80
70
60
5P

eS
ks""

seKnycy:b9;

40

fu""4th

e"Nny

NseA

eÅë-

ëgseSo
dyS9

3b

tS)

stst

sts

t'

20

-:--

s"x

--b-

10

".-..t

ss

-

ssttv
orth
mericaentraliddle andsia

nd Southmericauropes`;.--

---.D

frica

ceaniaear East

igure 3. Geographieal Distribution of Overseas Bases of Banks, Trade, and Direct investment
elo

OO

0
0
b-"

0

ëijo

k

0

brss
Fv
te"

0

s

e

Sg4x"

figb

4ft

0

g-af

ca

0

et

0

ss

0

stt'
t:

rth
erica

Southeast Asia
West Asia

ntral

d South
erica

/•"
-

'ob,....'.

ia Middle andNear EastN-A- -sV- -.-d-.

de
-

rope

rica

-eaniaMASAHIRO FUJITA, KENICHI ISHIGAKI

12

conducting fund raising and loans accommodation, is sjmilar to figures for trade anddirect investment overseas. It should be noted, however, that the present pattern ofgeographical distribution of bases reflects the decisions of banks within the frq, me-work of regulations and guidelines issued by authorities in Japan and overseas. It isquite likely that the present distribution may change with the progress of internation-

alization. Our research shows that all Japanese banks want to establish new branches
in the near future in North America, half of the banks want to establish branches in

Europe and Asia, and a few want to establish branches in Central and South America,
and the Middle and Near East. It seems, there,fore, that North America will continue

to be the most important area, with Asia, the Middle and Near East, and Central andSouth America gaining in importance, and Europe possibly becoming less importantin this regard. This would mean that the distribution of branches would more closely

parallel the distribution of trade and overseas direct inyestment. ' 'These conclusions are based only on predictions of the future distribution of
branches of Japanese banks which are already internationalized, or in the process ofinternationalizing. They do not take into account other banks, especially largg region-

al banks and mutual loan and savings banks, which may establish overseas branches
in the future. If they want to establish branches in the international finance markets,particularly in New York and London, the future distribution of branches of Japanese banks will not change as much as indicated earlier7). Our research suggests thatthe establishing of new representative othces will not differ greatly from the present
pattern. This would reflect the fact that the function of these oMces is not to conduct
financial business themselyes, but to collect local information on the region in which
they: are established.

In the case of the establishing of local banks, Japanese banks must consider theadvantages and disadvantages of establishing a local bank as opposed to a branch,
because both bases conduct similar business. They also need to consider the problemof finance regulation both in Japan and in the country where the base is to be estab-lished. Our research indicates that the main advantage of local banks as comparedwith overseas branches js that they are able to conduct various financial dealings inaccordance with local regulations and economic conditions, independent of official
Japanese control. The main disadvantage is that local banks cannot benefit directlyfrom economies of scale and the credit power of the parent bank because, legally,

local banks must be independent of the parent bank. In fact, however, because ofcontrols imposed on financial activities by both Japanese and overseas authorities,
there is gften no alternative but to establish a local bank. For example, Japanese banks

are not permitted to engage in securities business both domestically and overseas,so it is necessary to establish local banks abroad to carry out this business. Similarly,

regulations prevent the establishing of new branches of forejgn banks in Australia,

7) According to the Report of Kinyu Mondai Kenkyukai, local banks seem to want to establish
branches or representative oMces in the international financial market.

13
THE INTERNATIONALIZATION OF JAPANESE COMMERCIAL BANKING

so foreign banks are compelled to establish non-bank financial companies (merchantbanks, finance companies) instead. Whether they are established because of a purely
economic decision or because it is the only aiternative, the functions of local banks

and overseas branches are complementary, and valuable in helpirig banks meet thediverse needs of their customers under a variety of regulations and economic conditions. Therefore,provided there is no radical change in the present regulations govern-

ing the establishing of branches and local banks in various countries, or in general
economic and financial conditions, there will be little change in the distribution of
local banks.

In the next section, the content ofJapanese international banking business in theoverseas bases will be discussed.

V The Operation of international Banking

There are several phases in the process of the internationalization of banking.
Table 6 defines the content of each phase in terms of the internationalization of cus-

tomer companies, international banking operations, method of internationalizationand the customers in the international operation.
In the first phase, the initial step is internationalization of customers. Here, thecustomers are mainly engaged in import and export dealings with foreign companies,
so the most important aspects of international banking are foreign exchange operations connected with foreign trade. Capital transactions with customers are limited
to short-term finance (trade finance). In this phase, the main method of internationalization is to enter into correspondence contracts with foreign banks. In the second
phase, as direct investment overseas increases, banks raise the level of loans to Japa-

nese aMliated companies compared with foreign exchange business. Medium and longterm capital transactions increase correspondingly. Banks aim to internationalize
their business by building up a network of overseas branches and representative
offices. In the third phase, the multinationalization of big business develops, andforeign as well as Japanese companies become bank customers. International businessextends to non-banking fringe activities, such as merchant banking and 1easing, throughthe strengthening of branches and offices, capital participation, business aMliations
and the establishing ofnon-bank fringe business firms. Banks seek the most profitableways of fund raising and lending. In the fourth phase, retail banking is conducted
while at the same time the content of international operations and the methods ofinternationalization advance and become more complex. The aspect of the fourthphase which distinguishes it from the third phase is the declining importance of the
exploitation ofnew businesses and methods, and the concentration instead on deepen-

ing and strengthening the activities commenced in the third phase. This may bemeasured in terms of the increasing ratio of international business to all banking
business.

Our research shows that in 1977-78, four banks were in the fourth phase, seven:

Table 6.

PhasesThe lst Phase(National Banking)Export-Import

Internationalizationof Customer Companies
International

Operations in Banking

Phases of Intermationalization of Banking

The 2nd Phase(International Banking)The 3rd Phase (ina broader sense)

The 3rd Phase

The 4th Phase(International fu11-service(World full-servicebanking)banking)

E

Active Direct Overseas

Multinational

Investment

Corporationg

Non banking fringe activities such as merchant-banking,leasing, consulting, and others are conducted.

e-Mainly foreignexchange operations
connected with

Overseas loans andinvestments become

foreign trade.

and longer-run capital

Capital transactions
are mainly

Important.

importantand medium-->ritransactions become.

No retail banking

Retail banking is done

short-terrn ones.

Methods ofCorrespondence

To strengthen own

By strengthening of own branches and oMces,

Internationalization

contracts withoverseas-branches andcapital-participation, athliation in business, establishingforeign bankoMces

' non-bank fringe business firms, the most profitable ways offund-raising and lending are sought on a global basis

Customers in

MainlyMainlyCustomers are ofInternationaldomestic
customers

domestic
customers

various nationalities

Operations

Source: Mitsubishi Bank,"

Chosa", September 1974.

5

:
z
n
s
a
N
a
ac
-

15
THE INTERNATIONALIZATION OF JAPANESE COMMERCIAL BANKING

in the third and three in the second-in other words, it seems that, on average, banks
have reached the third phase of internationalization. This result is fairly consistent

with the results of investigations into international banking business, as examinedlater in this section. Our research also confirmed that the internationalization ofJapanese banking advanced slowly prior to the 1970s and rapidly in the first half ofthe 1970s, before slowing down again in the late seventies.

What is the attraction, from the banks' viewpoint, of international business ascompared with domestic business? Our research indicates that the major attractionsare (i) diversification of banking business and customers (ii) high profitability (iii) highpotential for growth and (iv) the existence ofa large, flexible and free international

finance market. Points (i) and (iii) are consistent with the short-term objective ofenlarging the number of customers, while points (ii) and (iv) are consistent withbanks proceeding to internationalize in order to attain high profitability in the freeinternational market as opposed to the sluggish domestic financial market and theexistence ofvarious controls on domestic banking business. It should be noted, however, that risks which are absent in domestic business, such as exchange risk, country
risk and availability risk, are present in international banking business. In addition,competition is much more severe in the free international market, and there are nocontrol or safeguard institutions.

As mentioned previously, Japanese banks have branches in various countries tocarry out their international business. We will now examine the relative importanceof banking business at the New York, London and `others' branches (Table 7).
At the New York branch, trade finance is most important (nine of twelve banks),with loans to Japanese aMliated cornpanies taking second place. Fund raising is a lessimportant activity. At the London branch, fund raising is by far the most important
activity (all banks), with trade finance and loans to non-Japanese companies being

next important and loans to Japanese aMliated companies being last. It should be
noted that four of the twelve banks listed loans to non-Japanese companies (not toJapanese afiiliated companies) as the second most important activity at the London
branch. This suggests that some Japanese banks have already developed various kinds
ofinternational banking operations in the international finance market. At the otherbranches, the ranking of activities is similar to that of the New York branch, withtrading finance being the most important, followed by loans to Japanese araliatedcompanies, fund raising and loans to non-Japanese companies.

Table 7. The Order of Business in each Branch

New York Branch (1) Trade Finance (2) Loans to Japanese aMliated companies (3) Fund raising(4) Loans to other companies (5) Fringe business

London Branch(1) Fund raising (2) Trade Finance, Loans to other companies (4) Loans to

Other Branches(1) Trade Finance (2) Loans to Japanese aMIiated companies (3) Fund raising(4) Loans to other companies (5) Fringe businessJapanese affiliated companies (5) Fringe businessMASAHIRO FUJITA, KENICHI ISHIGAKI

16

Typically, then, the relationship between the international operations at thevarious branches is that banks raise funds at London branches and make use of thefunds for trading finance, loans to Japanese afiiliated companies and non-Japanesecompanies through New York and other branches.
Table 8 shows the geographical distribution of fund raising for overseas operations. Almost all funds for overseas operations are raised by overseas branches, withvery few being supplied by head oMce. Japanese banks raise 51 O/. of funds in Europe,
35 O/. in America, 9 O/. jn other regions and 6 O/. in head oMces. This is consistent withthe description of London branch activities given above.
Table 9 shows the maturity structure of the raised funds. About 80 %. of all funds

are short-term (within 12 months), with 20 O/. being long-term. In the case of upperrank banks, the latter figure is less than 10 O/,. Table 10 shows the ratio of assets andliabilities in foreign currency to all foreign assets and liabilities. The ratio of short--

Table 8. Sources of Funds for Overseas Operations

Overseas

Head OMce

NorthAmerica Europe

Other

Total

Grand Total

5.85O/.

3s.o2e/.

50.55 %

8.75%

94.15%

1ooO/.

8.20

29.60

53.93

8.26

91.80

1oo

5.00

37.52

46.31

11.16

95.oo

1oo

3.oo

41.08

50.75

4.83

96.67

1oo

Total

Upper Rank

Group
Middle andLower Group
Long-term

Group

Table 9. Maturity Structure of Raised Funds and Loans
Maturity Structure of Raised Funds

Maturity Structure of Loans

Short-termLong-term

Short-termLong-term

Whole

77.7%

22.3O/.

47.4%

52.7%

Upper Rank Group

90.0

10.0

51.0

49.0

73.0
65.0

27.0
35.0

57.8

42.3
78.3

Middle and Lower

Group
Long-terrn Group

21.7

Table 10. Percentage of Foreign Assets and Liabilities in Foreign Currency

Short-term Assets

1973*
1974
1975
1976
1977
1978

Long-term Loans*

Short-term Liabillities

98.40/.

1oo.O%

91.3%

94.4
93.2

992

96.4
95.8

92.3
91.3

96.0
92.6
80.0

89.6

98.1

Source: Bank of Japan; Tokei Nenpo, MOF; Kokusai Kinyu Nenpo.
*Long-term loan figures tire for the end of the fiscal year, while the other figures are for the end of
the calendar year.

93.3
94.1
78.5

17
THIE rNTERNATIONALIZATION OF JAPANESE COMMERCIAL BANK[[NGterm liability in foreign currencies in 1978 was 90O/.. We can therefore characterizefund raising for overseas operations by stating that almost all funds for overseas
activities are raised in foreign currency in Europe and North America, and the funds
are mainly short-term.

Turning to the use of funds for international business, we note that the mainbanking business related to the use of funds is dealing in foreign exchange, trading

finance, loans to non-residents and merchant banking. The first is growing steadily
with the growth of the Japanese economy and foreign trade, and as the stability andcertainly of these dealings is very high, it constitutes the fundamental operation ofinternational banking business. However, its relative importance has been decreasing
due to the rapid increase in loans activities. The ratio of the trade bill in foreign assetsof all banks was about 80 O/. in September 1970; this fell to about 35 O/. by September

1978. This was due to the growing importance of loans to non-residents.

Table 11 shows the distribution of loans among developed, developing andsocialist countries. The developed countries' share js 51 %, that of developing countries is 42 O/. and socialist countries 7 O/.. It should be noted that the combined total ofloans to developing and socialist countries is approximately half of all loans. Accord-

ing to our research, four out of ten banks want to increase the volume and share ofloans to deve!oping countries, and three want to increase the volume without changing the share. It can be said, therefore, that Japanese banks generally have a positive
attitude towards extending loans to developing countries, despite the greater risk that
may often be associated with such loans. These risks are both individual (the customer

may have dithculty in repaying the loan) and country (due to political or economic
jnstability) risks. It is interesting to note that banks which lend about 50 O/. of theirloan funds to developing countries do not, according to our research, wish to increase
the share of developing countries. This presumably reflects the associated risks.

Table 11 shows that the share of loans to Japanese aMliated companies and to
non-Japanese companies is 45 % and 55 % respectively. This confirms that the internationalization of Japanese banks has already reached the third phase. Whilst almost
all Japanese banks place considerable importance on existing relations with Japanesecustomers when accommodating loans to Japanese araliated companies overseas, they
do not always insist on an existing record of domestic transactions in Japan before
granting loans to such aMliates. Therefore, Japanese banks aim to acquire new cus-

Table 11. Destination of Loans

Advanced Developing

Socialist

Japanese OtherCountries Countries

Countries

Athliated Companies

39.58%

6.67%

44.59 %e55.41 O/.

36.00

3.75

44.25

55.75

42.40
45.00

9oo

47.70
37.50

52.30
62.50

Companies
Total

52.41 %

Upper Rank Group 60.25
Middle and Lower

Rank Group
Long-term Group

48.60
48.33

6.67

MASAHIRO FUJITA, KENICHI ISHIGAKI

18

Figure 4.

Comparison of Target and Actual Profits of International Sections

O-10% 11-15% 16-20% 21-25 O/.

26-3oo/.

31--4oo/.

51O/e-

41-50 0/,Upper Rank Group

+
+

(1)
(2)
(3)
(4)
(5)

*
*

+

*
*

Middle and Lower Rank

Group
(6)
(7)
(8)
(9)
(10)
(11)
Long-term Group

(12)
(13)
(14)

+

+

*

*

+

*

*+

+

*

+

*

+

*
*

Total"

o

3

3

3

2

o

o

1

Total+

(3)

(5)

(1)

(o)

(o)

(o)

(o)

(1)

*

Target for the proportion of profits from international business to all profits.

+ Actual proportion of profits from international business to all profits.
tomers through internationalization as well as maintain existing ones.

The percentages of short-term and long-term loans are 47 O/. and 53 O/,. Table 9
indicates that Japanese banks carry out "maturity transformations", that is, short-term borrowing and long-term lending. According to our research, Japanese banks
accept this transaction as one ofthe functions of banks but remain rather wary ofit.
It should be noted that this maturity structure relates only to loans, not all assets.

Complete data was not available, but we were able to ascertain the maturity structureof all assets and liabilities of the Japanese branches in London. According to theeuarterly Bulletin (Bank of England), long-term assets and long-term liabilities as apercentage of all assets and liabilities in 1978 was about 15 O/. and 27 O/. respectively.

We may therefore conclude that Japanese banks carry out a moderate number ofmaturity transformations.
We were unable to discover the proportion of loans to non-residents in foreign
currency to total loans to non-residents. However, as Table 10 indicates, 80 O/. of all
long-term loans to non-residents are in foreign currency, and about 90 O/. of all shortterm assets are in foreign currency. It is therefore reasonable to assume that the pro-portion ofboth short and long-term loans to non-residents in foreign currency to allloans to non-residents is over 80%.
All banks are interested not only in trade finance and loans to non-residents but
also in other related business, such as merchant banking, securities business, leasing,credit cards and so on. Among these, securities business and merchant banking are

19
THE INTERNATIONALIZATION OF JAPANESE COMMERCIAL BANKING

particularly important. Almost all banks express a strong interest in securities business, due not only to its inherent attractiveness, but also to a disadvantage (namely,

Japanese financial Iaw which prevents Japanese banks from carrying out securities
business other than by owing affiliated local banks) which Japanese banks have incomparison with other banks in internationalizing their business. In addition, as

complicated business such as syndicate loans and project finance becomes more
important, so too do the knowledge and know-how of merchant banking. Japanesebanks want not only to provide funds for syndicate loans, but also to initiate, arrange

and manage loans projects.
We now turn to some issues related to international banking business. As mentioned previously, the Euro-dollar market is very important to international banking,especially for fund raising. It is sometimes asserted that the market should be con-trolled by an authorized body, whose function would be to ensure stability. This
reflects the fact that the Euro-dollar market has no lender who can be turned to in
the last resort, and at times the market faces the risk of the collapse of market confi-

dence. Almost all banks, however, are against this idea, believing that the main advantage ofthe Euro-dollar market is its freedom from control by monetary authorities,

which promotes the rapid development of the market. Some banks, however, thinkthat some international institution, or the monetary authorities of each country,

should regulate and control banks so that an orderly market can be maintained if
credit crises occur.

The adjustable peg system was changed to the managed float system in 1972.
Did the change affect the internationalization of banking? Our research indicates that
all Japanese banks either think the managed float system is preferabie, or feel that thesystems do not differ greatly. Many banks believe that the managed fioat system
helps avoid drastic changes in exchange rates and helps establish stable exchange
rates in accordance with market conditions. Two thirds of banks believe that, undersome circumstances, it is not necessary to maintain a `square' exchange position,
while one third believe it is essential that it be maintained. It seems, therefore, that

there is some flexibility in banks' attitude toward the exchange position.

To summarise the typical features of Japanese international banking which wehave discussed so far,
1. Almost all funds for overseas operations are in foreign currencies, and are raisedin Europe, especjally London, and North America. Funds are mostly short-term.
2. Trading finance used to be overwhelmingly important in the accommodation of
credit, but, as Japanese companies and banks internationalize, loans to nonresidents are becoming increasingly important.
3. Japanese banks make about 50 O/. of their loans to developed countries, 40 0/. todeveloping countries and 10O/, to socialist countries. Although some banks havereservations due to the associated risks, on the whole, banks have a positive attitude

towards developing countries.
4. Loans to non-Japanese companies slightly outweigh those to Japanese aMliatedMASAHIRO FUJITA, KENICHI ISHIGAKI

20

companies. Although, in principle, Japanese banks consider domestic transactions
rnore important, they also want to acquire new customers through internationaliza-tion.
5. The ratio of long-term Ioans in the maturity structure is about 50%. Japanesebanks engage in maturity transformations, that is, short•-term borrowing and long-term lending, and almost all the foreign assets of banks are in foreign currency.
Combining this with the factors listed in 1, we may say that Japanese banks conduct their international business by using foreign currencies.

6. Japanese banks are interested in fringe business, such as securities business andmerchant banking, as well as in banking itself.
7. Japanese banks establish overseas bases in order to conduct various international

business. Europe, especially the London branch, is the centre of fund-raisingbusiness, with New York and other branches conducting mainly trading financeand Ioans operations.
8. From the features listed above, we can estimate that in the late 1970s, Japanesebanking had reached the third phase of internationalization.
9. A description of the activities of a typical Japanese international operation would

be that short-term funds in foreign currency are raised through the London branch-es, while credit in the form of short-term trading finance and long-term loans inforeign currency to non-Japanese as well as Japanese aMliate companies are ac-commodated through the other branches.

VI The Performance of internationalization

In this section, we examine the performance of internationalization in Japanesebanking. Figure 4 shows the actual proportion of total bank profits which comesfrom international business. Five banks give a figure of 11-15%, three banks O-10%,
one bank 16-20 % and one bank above 51 %. On average, the proportion seems to be
10-15%. This figure is about equal to the proportion of staff in the international
section to total bank staff. Comparing this actual figure with the feasible targets forprofits shown in Figure 4, the feasible target exceeds the current figure by 5-100/..

The difference between the actual and feasible value of upper rank banks is higher
than that for middle and lower rank banks (10 O/. as opposed to 5 O/.). This may suggestthat the upper rank banks are more willing to internationalize.

As discussed in the previous section, Japanese banks are currently in the third
phase of internationalization. We will now compare this with other advanced countries' foreign banks. The proportion of profits from the international section to all

profits of ten major American banks was 50.9% in 1979 and 45.70/. in 1978. The
figures for City-corp were 82.20/. and 71.8S>(. respectively. The figures for 1977 forrepresentative British banks (Barclays, National Westminster and Lloyds) were 38 O/.,

300/. and 22% respectively. Those for Deutsche, Dresdner and Commerz in West
Germany were 35%, 300/. and 33% respectively in 1977. It will be noted that, with

21
THE INTERNATIONALIZATION OF JAPANESE COMMERCIAL BANKING

Table 12. Foreign Banks in Major Markets
1. Foreign Banks in Japan
Representative

Banks

Branches

U.S.A.

22

32

13

U.K.

7
6

9

10

7

8

5

5

5

4

4

o

Korea

3

4

7

Switrcrland
Others
Total

3

3

4

11

17

42

61

81

89

2. Foreign Banks inWest Germany

FranceWest (}ermany
SingaporeBanks

Branches

U.S.A.

13

Japan
France

10

27
12
16

OMces

Representative
14

5

o
o

U.K.

4

11

8
5
7

Others
Total

21

27
93

90
124

4

52

Local Banks

OMces

2

2
9

3. Foreign Banks in New York
Representative

Banks

Branches

Agencies

Japan

24

Italy

14

West Germany

11

16
6
9

France
Spain

11
11

UK

6

2

Canada98o6Others
Total

73
161

16
59

30

9

8

52

29

26

omces

Local Banks

6

2

4

o
o

8

1

2

6

o

4

o

8

3

o
4
o

1

4

o

5

4. Foreign Banks in London

Banks

U.SA
Japan
Italy

FranceSpain
Switzerland
Australia

65
23
18
15
14
11
11

West Germany

10

Others
Total

101

268

Branches

Representative

OMces

Local Banks

41

22

22

1

1

4
6
6
9
9
8

14

o

62
167

Source : Kinku Mondai Kenkyu Kai, op. cit.

14

6

3

6

2

1

1

2

o

2

o

38
92

24

3

MASAHIRO FUJITA, KENICHI ISHIGAKI

22

one exception, the figure for Japanese banks is considerably lower than that for thesebanks.
Our research shows that almost all Japanese banks are aware of their relatively
less developed internationalization. The main ways in which Japanese banks regard
themselves as less developed are the network of overseas bases, the ability to collectinformation and accumulate `know-how', and the ability to raise funds, to diversify
international business such as securities business, to localise banking business and to

employ suMcient competent staff.
However, too much emphasis should not be given to the less developed natureof internationalization of Japanese banks because, if the degree of development ismeasured in terms of the number of branches or the volume of loans, rather than theratio of international to total profits, Japanese banks are not much less advanced
than other banks, with the exception of the major American banks. Table 12 shows
the number of overseas bases that banks from various countries have in New York,
London, West Germany and Japan. As a whole, Japanese banks are second only to
American banks in number of overseas branches. Table 13 lists the fifty banks whichfall into the category of`lead managers', in terms of international syndicate loans andthe issue of bonds in the international finance market. Column I of the table shows
the syndicate loans, and Column II shows syndicate loans together with the issue ofbonds. In Column I, it can be seen that Japanese banks as a whole rank higher than
British and West German banks, and individual Japanese banks are not far inferior

to European and Canadian banks, though they are considerably below American
ones. In Column II, on the other hand, West German banks rank higher, and Japan

Table 13. Achievements of Leading Mhnagers of Banks in Terms of Country with Syndicate Loans andIssue of Securities in 1978

Order

Order

Order

Order

1-10

11-25

26--50

1-50

Share of

Achievements of
Leadiig Managers

Ia

IIb Ia

IIb

Ia

IIb

Ia

IIb

Ia

IIb

U.S.A.

6

5

1

3

4

4

11

Canada

1

1

4

3

2

3

42.7
14.9

38.6
12.4

Japan

1

3

4(3)c

3

4(3)c

8(6)

10.9

11.2(9.1)cWest Germany
U.K.

1

o
2

7
7

12
7

2

1

2

1

5

4

12.6

1

1

1

1

3

3

5

5

4

4

4

8.3
8.7
3.5
2.1
2.1

7.9
3.7
2.5
3.4

FranceNetherlands

1

1

1

1

4
2

Switrcrland

1

1

1

1

1

1

1

1

1

1

2

1

5

3

7

5

O.5
6.2

O.7
6.9

10

15

15

25

25

50

50

1OO

1oo

Belgium

Consosium
Total

10

2
2

a Achievements of leading managers with syndicate loansb Achievements of leading managers with syndicate loans and issue of securities
c The figure in the bracket means figure of banks except securities companies
Source: Kinyu Mondai Kenkyu Kai, op. cit.

23
THE INTERNATIONALIZATION OF JAPANESE COMMERCIAL BANKING

follows the USA, West Germany and Canada, with a figure of 10.90/.. This figuretakes account of the activities of Japanese securities companies, however. If theseare excluded, the figure for the six Japanese banks falls to 9.1 O/., while West Germa-

ny's 12.40/. is achieved by only four banks. This relative rise of West German andfall of Japanese banks compared with that of foreign banks may be described as follows.

1. In terms of the degree of internationalization measured by the proportion of total
profits obtained from international dealings, Japanese banks are considerably lessdeveloped than major American banks and other advanced countries' banks.
2. Japanese banks are less developed than major American banks, in general andindividually, in all the areas described above-number of branches, volume ofloans, and proportion of total profits obtained from international profits.

3. In comparison with West German and other advanced banks, Japanese banks,
both individually and as a whole, are not so inferior in terms of loans activities andnumber of branches. However, because Japanese banks cannot conduct securities
business, they are not competing with West German banks in this area. This may
be a reflection of the less developed degree of internationalization in Japanesebanking.

Vll DiMculties and Limitations in the internationalization of Japanese Banking

We have examined the internationalization of Japanese banking, especially withregard to city banks, long-term credit banks and a specialized foreign exchange bank,in terms of aims and motives, the establishing of overseas bases, overseas banking
business and the performance of internationalization. We have made it clear that thelevel of internationalization of Japanese banking is lower than that of American andEuropean banks. In this section, we will examine the diMculties and limitations in theprocess of internationalization, and discuss some of the problems in promoting it
further.

There are two types of limitations in the process of internationalization of bank-ing-internal and external. Internal limitations are basically management problems
while external limitations arise from general economic conditions and various regula-tions imposed on banks. According to our research, the main internal limitations asperceived by the banks are, in order of priority, the shortage of staff competent tocarry out internationalization, the inability to collect adequate information and know-

how and the lack of an adequate system of operations for internationalized banking
business.

The shortage of competent staff causes bankers greatest concern. As mentioned
earlier, as internationalization progresses, the content of the international banking

operation becomes more complicated, moving from mainly foreign exchange andtrade finance business to loans to non-residents and to syndicated loans business. For

example, in any project involving the development of resources, finance is extremely

24

MASAHIRO FUJITA, KENICHI ISHIGAKI

important, and banks rnust play an important role. This extends from the funding of
the project through to playing a role in its formation, promotion and programing, as
well as supervising its progress. It is thus necessary for banks to have staff competentin the fields of economics, finance, tax, law, information collection, research andinvestigation, and business administration. Many banks feel that acquiring staff withexpertise in these areas is a matter of urgency.

As is generally known, a system of `life-time' employment prevails in Japan. It isthus quite diMcult for banks to acquire competent staff from `outside', with the exception of some senior staff from monetary authorities. Consequently, it is unavoida-

ble for most banks to train their own staff by sponsoring their study at overseas
universities, training them in overseas banks or providing in-house training. It takes
considerable time, therefore, for a bank to acquire staff with a high level of expertisein international banking. Although this may put Japanese banks at a disadvantage
in terms of promoting rapid internationalization, it is possibly to their long•-term advantage because the trained staff are likely to remain with the bank and contribute toits international activities over many years.

Information and know-how on international business are extremely importantin terms ofthe development ofinternational banking operations and in assessing andavoiding associated risks. The perceived lack of such knowledge within their opera-

tions is causing banks concern. As mentioned earlier, Japanese banks make use offoreign currency in their international operations. This gives rise to, inter alia, exchange risk and availability risk. In addition, with the increase of non-Japanese firms(including foreign governments) as customers, the rising loans to developing countries and the increase of long-term and large-scale loans to resource dvelopers, it has

become increasingly necessary for banks to collect information and analyse both theindividual risk associated with the business and the risk of the country concerned. It

is therefore necessary for banks to have a current, comprehensive collection of information on the politics and economy of each country as well as on the individual
customers. It may be necessary to organize small research groups to study the country
risk objectively, separately from the private banks. In any event, prediction of the
future is a most diMcult problem, and is seen as one of the main current limitations

on the future development of internationalization.

The third internal limitation perceived by banks was the lack of an adequate
system of operation for internationalized banking business. Japanese banks intend to

overcome this problem through localization of the banking operation-that is, ensuring that the operation conforms with the culture, national character, economic
practices and law of each country, and providing clear-cut definitions and the assignment ofbroad powers to the local staff in charge.

There are also three external limitations on the internationalization of banking,according to our research-namely, general world economic conditions which arereflected in the economic growth rate, price Ievel, exchange rate, interest rate and soon of individual countries and the international market; the Japanese economic

25
THE INTERNATIONALIZATION OF JAPANESE COMMERCIAL BANKING

situation, which is reflected in the position of the Japanese economy in the world
economy; and the regulations and administrative guidelines from Japanese and overseas authorities on international banking operations.

In the 1970s when the internationalization of Japanese banking was increasing
rapidly, the world economic situation was not as good as it had been in the 1960s.
It was characterized by turbulence of the international monetary system, the introduction of the floating exchange rate system, the oil crisis and sky-rocketing oil prices,
unrest in the financial system due to the bankruptcy of the Herstatt Bank, high interest

rates and the co-existence of high inflation rates and increased unemployment. The
general economic situation had effects on both developed and developing countries,
especially the latter, with countries like North Korea, Turkey and Peru having difficulties with debt repayment. .The prospect for the 1980s is not particularly optimistic,

which may be disadvantageous for the internationalization of finance activities, witheconomic depression making it more difficult to measure country risk.

Japan was no exception in experiencing the diMculties of the world economy.
The oil crisis at the end of 1973 and the failure ofeconomic management caused theJapanese economy to get into diMculties, negative economic growth and skyrocketing
prices. However, the Japanese economy fared reasonably well in the 1970s, comparedwith other developed countries, with her ranking based on GNP, trade and capital
exports rising. As mentioned earlier, the internationalization of Japanese banking
was promoted by the internationalization of the Japanese economy. However, it is
not certain whether this pattern can continue in the 1980s. The growthof the Japanese

economy in the midst ofthe stagnation of the world economy, which formed the back-ground for the internationalization of Japanese banking, depended on overseas
rather than domestjc demand. For this reason, it js said that Japan's pattern of eco-nomic growth and the so-called `closed market' have produced considerable friction
between Japan and other developed countries. If the Japanese economy must in future
depend much more on the domestic market and less on overseas markets, the incentive

for internationalization of Japanese banking from the economy will weaken. However, it may be that the problem of friction over trading issues will be settled throughthe increase of overseas investment, and that the incentive will continue to work.
Even so, it will be necessary for Japanese banks to find ways of diversifying theirbusiness with non-Japanese firms in order to develop the internationalization.

Besides the economic conditions surrounding Japanese banks, financial conditions, especially the internationalization of the yen, are very important in considering

the internationalization of Japanese banking. As mentioned previously, one of thefeatures of the internationalization is that Japanese banks have promoted it throughmaking use of foreign currency, without any significant internationalization of the yen.

This pattern of internationalization places Japan at a disadvantage compared with
American banks, in that the latter can use its domestic currency as international cur-rency, which is not possible for Japan. According to our research, almost all bankers
think the internationalization of the yen, and thus the internationalization of theMASAHIRO FUJITA, KENICHI ISHIGAKI

26

money and capital market, is extremely important as it will enable them to enjoy thesame advantages <easiness, stability and eMciency in the use and raising of funds) as

the American banks. It should be noted, however, that some banks (for example thespecialized foreign exchange bank) have attained a similar level ofinternationalizationas American banks without the internationalization of the yen, demonstrating that it
cannot be regarded as a pre-requisite for the international'

ization of Japanese banking.

In addition, it would be simplistic to discuss the internationalization of the yen solely

in terms of the internationalization of Japanese banking, as the former would havewidespread effects on the balance of payments, monetary conditions and the financial
market, and the management of monetary policy in Japan. Viewed in this light, it ispossible to understand the argument of some banks that the internationalization of
the yen is a different problem from the internationalization of banking. However, ingeneral terms, it seems that, for the reasons mentioned above, the former does promote the latter.

The third external limitation on internationalization is the various regulations
and guidelines imposed on Japanese banks. Almost all banks think that regulations
on foreign exchange operations, the establishing of overseas bases and other international banking operations constitute a significant limitation. In particular, manybanks are greatly concerned at the regulation of the establishing of overseas bases,
because this is the way they have pursued their internationalization.

According to our research, almost all banks (eleven banks) agree that the present
licensing policy of the Japanese monetary authorities regarding the establishing of

new overseas branches (the so-called `one new branch every three years' license)
should be liberalized. One bank regards the present policy as good, while anotherthinks it should be strengthened because of the undue competition between Japanesebanks, which was reflected in the Japan rate in the Euro-dollar market in 1974, and the

low-interest lending rates in the American market in the late 70s. It is natural thatsome banks are concerned about the market disorder brought about by such behaviour, and this illustrates one of the features of Japanese banks' behaviour-yoko-

narabi ishiki, worrying about comparison with other banks. However, even if such
undue competition does exist, it is by no means certain that the cost of competition

exceeds the benefit, or that strengthening controls on establishing branches would
solve the problem. One of the important factors for the development of the international finance market is that it is a `free' market, regulated not by controls, but by

rational and prudent management on the part of the banks themselves.
The second aspect of regulation of internationalization is exchange control. As
mentioned previously, control of foreign exchange was liberalized during the 60s and70s. However, this liberalization was not based on the amendment of the foreignexchange law, whose spirit is `the prohibition ofdealing in foreign exchange in principle', but on the liberalization of the application ofthe law by the monetary authorities. It was thus only a partial liberalization. From the banks' viewpoint, internation-

alization based on their own long-term aims has been hindered by regulations, on

27
THE INTERNATIONALIZATION OF JAPANESE COMMERCIAL BANKING

for example, the exchange position, long-term non-resident loans and the taking inofprivate, untied loans. Many banks are particularly concerned about the control ofthe exchange position (the difference between foreign assets and foreign debts). The
aim of this control is to check speculation in foreign exchange, and to regulate thefiow of funds in yen and foreign currencies. Initially, the authorities demanded thatthe exchange position be in equilibrium; then, with the liberalization of foreign ex-change, a limited overselling was permitted. These regulations prevented Japanesebanks from improving their internationalization, In December 1979, however, theforeign exchange law was revised, leading to `free foreign exchange dealing in princi-

ple.' Although reguiation of the exchange position remains in the amended law,
it permits banks to take in united loans and liberalizes long-term loans to nonresidents. This therefore makes it possible to further promote international banking
operations through its effects on the internationalization ofthe yen and of the money
and capital markets8).
A further guideline relates to securities. The present laws prohibit bankers fromissuing or accepting securities, and this principle is also applied to overseas banking9).

Japanese banks cannot do business except through local finance companies, even if
the monetary authorities in the foreign country ate willing to permit it. Due to thisguideline, Japanese banks are at a disadvantage compared with foreign banks, which
can issue both debentures and syndicate loans, and usually offer customers a choice.
The reason for this guideline is the separation of securities dealing and banking; theapplication of the domestic finance system to the overseas market results in a conflictwith standard international banking procedures. The fact that maintenance of thedomestic financial order has taken precedence over the development ofinternationalbanking is a source of concern to bankers.

VM Some Conclusions
The main points of this paper can be summarized as follows.
1. The internationalization of Japanese banking has developed primarily due to thedevelopment and internationalization of the Japanese economy itself, although
there are some aspects in which the banks have taken the initiative towards inter-nationalization.
2. A feature of the internationalization of Japanese banking is that it has not beenaccompanied by internationalization of the yen or the money and capital market.
3. The development ofinternationalization ofJapanese banks has been based on the8) The features of the New Foreign Exchange Law are explained clearly in the following paper;
Hiroo Fukui, "Gaikoku Kawase oyobi Gaikoku Boeki Kanriho no Kaisei ni Tsuite", Finance, Vol.
15, No. 1 1, February 1980. Kaname Seki, "Atarashii Kawase Kanri no Arikata", Finance, Vol. 16, No.
11, February 1981.
9) However, long-term credit banks and specialised foreign exchange banks are permitted to issuebank bonds.

28

MASAHIRO FUJITA, KENICHI ISHIGAIK:I

establishing of overseas branches, representative oMces and local banks. Generally,
they raise funds in foreign currencies through the international market, especially

London branches, and lend funds to Japanese and non-Japanese firms overseas
through other branches, especially in New York.
4, The present phase of the internationalization of Japanese banking is the third
phase, in which banks enlarge the number of their customers to include both
Japanese and non-Japanese firms, and to diversify their business to include merchant banking etc. By strengthening their branches and representative othces, theyseek to globalize their profits by improving and extending capital participation,business aMliations, fund-raising and so on. The ratio of international business
to total banking business for Japanese banks is considerably lower than that for

major American and European banks, although the size of the international
business carried out by Japanese and major European banks is similar.
5. There have been and will continue to be some limitations and problems facing thedevelopment of the internationalization of Japanese banking. Some of these arelisted below. Firstly, it will be necessary to train competent staff and establish an

operational system to cope with increasingly diverse and complex international
business. Secondly, the economic circumstances which fostered the developmentof the jnternationalization of Japanese banking will change, providing a bleakerenvironment with the prospect ofproblems such as friction over trade issues andincreasing protectionism. Thirdly, despite the liberalising of previous controls oninternational banking which should stimulate the internationalization of the yen,

the Japanese money and capital market and, consequently, Japanese banking,problems may arise as banks have to practise self-regulation. Fourthly, despite
liberalization, there are still some areas (such as the securities business) in which

the domestic finance system takes precedence over standard international banking

practlce.
In summary, Japanese banks will face intense competition in international banking business in an economic environment which is at once more harsh and more liberalized. In order to survive in these conditions, Japanese banks will need to be self-

reliant, which depends on their ability to acquire competent staff and establish aneffective systcm of international operations.

A SYNTHESISOF SIMULTANEOUS EQUATIONSESTIMATORS
Hiroshi SADAMICHIThe derived-form least squares method is defined as the classical leastsquares method applied to such a transform of the model-equation inquestion that the classical least squares assumptions may hold asymptotically. Then it will be shown that most of the available estimation
methods can be synthesized by this method through a proper choice oftransformation matrices. The extended instrumental-variable method andthe generalized instrumental-variable method will be defined and examined.

I Introduction

Quite a number of estimation methods have so far been proposed for estimation
ofthe simultaneous-equation model and several authors provided some very interesting technique of grouping different estimators into a family of estimators. Theil (1958)

proposed the k-class estimators of which the direct least squares, the two stage leastsquares (2SLS) and the limited information maximum likelihood (LIML) estimators
are members. Chow (1964) presented the constrained minimum generalized residual
variance estimators of which the 2SLS, the LIML, the k-class, the three stage leastsquares (3SLS) and the fu11 information maximum likelihood (FIML) estimators are
members. In this paper we wM define the derived-form least squares (DFLS) method
as the classical least squares method applied to such a transform of the model-equa-tion that the classical least squares assumptions may hold asymptotically, and showthat not only the indirect, the two-stage, and the three-stage least squares methods
but also most of the avajlable estimation methods can be synthesized by this derived-form classical least squares principle through a proper choice of transformation
matrices. An identity among various estimators can be established by the same trans-

formation matrix.

n Model and Assumptions
The model (A) is linear, with G equations, and contains as variables yi...yG, zi...
zic, ui...uG, each of which is a column vector of Tcomponents.

(A) Y=(Ytg),
YB-Zr+U
Z=(ztic), B=(Phg), T== (rkg), U=(Uta)
The y's are the jointly dependent variables, the z's are predetermined and linearlyHIROSHI SADAMICHI30

independent, and the u's are the error terms with zero mean. Each component of any
variable is defined as the observed value or its equivalent dividedi) by the square rootof T. The P's and r's are constant parameters. Some of them are specified a priori tobe zero and B is nonsingular. All model-equations are assumed to be identified.

The i-th model-equation (a) contains Hjointly dependent variables and J predetermined varaibles, and may be written as an explicit function of the explained

variable in terms of N explanatory variables, where N = H-1+J.

(a) yi == Xt ai+uix, -= (y, z,), ai -(ell )Yi = (Yi2•••YiH), Zt = (Zii•••ZiJ)
Pi' == (-Pi2•••-PiH), ri' == (rii•••riJ)
Or simply

y.. x.+u, x=(y, z), cr = (e)Rewriting all model-equations in terms of the explained and the explanatory variables
by using the a priori identifying restrictions, we can obtain another expression of themoded, which we shall call the system (A').

(A') y" = X" cv#+uS
y, == (yY,i), x' == (oXi xO.), al =(.a.i)

The reduced-form is given by(B) zY=Zz+V== rB-i, V= UB-i = (v+g)
The i-th reduced-form equation may be written as(b) yi == Zni+vi
Or simply

y= Zn+v
The error terms of the model are contemporaneously dependent and have a positive-definite covariance matrix which is assumed to be the same through time.

(C) Eut ut' = T-'•X
Ut' = (Utl...Utg), Åí =: (aij)
The covariance matrix ofthe error terms ofthe reduced form is given by

E vt vt' = T-iB-i Z B'-i = T-iA
vt' = (vti•••vtg), A == B-i 2] B'-i = (2ij)
Each error term is wholly independent of another except contemporaneously,(D) Eui uj! = T-i'aij• IT, Evi v/ = T-i'RiJ• IT
1) The same treatment of variab]es is done by Basmann (1957).

A SYNTHESIS OF SIMULTANEOUS EQUA'rrONS ESTIMATORS31
where IT is the identity matrix of order T.

In some cases we assume that the error terms are temporally dependent in the sameway.

(d) Eui ui' = T-i'aii9, E vi vi' = T-"2ii9, 9 = (tost)
The z's are predetermined.

(E) Ez,ic ut, ==O sSt; k,gIn some cases we assume that all z's are exogenous.

(e) Ez,k utg =O s, t, k,g
The moment matrix of all predetermined variables is assumed to be well-behaved in
the limit2).

(F) limEZ'Z- •plim Z'Z -: M, IMI AE O
Both limits exist and converge to the same constant nonsingular matrix M which is

independent of T.

M Deriyed-form Least Squares Method
Let us consider a model-equation.

y == Xa+u
where Xis a (Tx N) matrix of rank N. If X is exogenous and u is serially independentand homoskedastic with zero mean, the classical least squares (CLS) estimators are
the best linear unbiased estimators. However the model-equation generally does notsatisfy the CLS assumptions. The derived-form least squares (DFLS) method may be
defined as the CLS method applied to such a transform of the model-equation that
the CLS assumptions may hold asymptotically. Now we find such a transformation
matrix, M" and operate with it on the model-equation to obtain the derived form.

va"'y == W"'Xa+M"'uOry* == X*a+u*
Applying the CLS method to this derived form we can obtain the DFLS estimators ofa.

a* = (X*'X")-iX"'y*
There could be various transformation matrices to be found in correspondence withthe assumptions about X, u, Zl and 9. The properties of any estimator depend on thematrix chosen. A transformation matrix va* is generally constructed as the productof three matrices described below.

va* = W+ WW++nZ+ is either the identity or a diagonalizing matrix of the covariance matrix of the2) See Christ (1966) pp. 354-355.

HIROSHI SADAMICHI

32

error term. In the latter case we can operate with PV" on the model equation so thatthe covariance matrix may be diagonalized (asymptotically).

W+'y === W"Xa+W"uOr

y+ == X+a+u+, Eu+u+' !: T-i•a2I
Wis such a (Tx L) matrix of rank L not less than the rank ofXthat the transformed
explanatory variables may be uncorrelated with the transformed error term in thelimit.

va'y' == W'X"cr+W'u'Or
y++ == X++a+u++
Generally the resulting errors are serially dependent and their covariance matrix may

be expressed as

Eu"+ u++' !!! T-i.a2S2++
M++ is then defined as such a nonsingular matrix thatrv++ = 9'+ -"i/2, E(M++'u++) (M++'u++)' x T"i•a2 I
It is required that any transformation matrix thus constructed should satisfy thefollowing conditions :(1) it be of fu11 rank at least equal to the rank of X,(2) it be pncorrelated with the error term in the limit such thatlim E va'*'u = O and lim TE (PV"'u) (PV"'u)' = a2 I
(3) the transformed explanatory yariables be uncorrelated with the transformed
errors in the limit:

Table 1.

Comparison between Classical Least Squares and Derived Form Least Squares

Methods

Classical Least Squares

Derived Form Least Squares

Model Equationy = Xcr+u

y = Xa+u
W*

Transformation Matrix

I

PV"7 = M" Xa+ ur"' u
Derived Formy = Xa+u

or ln new notatlon

y* = X*a+u*
Eu =:Olim Eu" =O

TEuu' == 62I

lim TEu"u"' == 62I

EX'u == O

plim X'u = O

lim EX"'u" = O
plim X"'u' = O

X: well-behaved in the limit

X": well-behaved in the limit

Estimators

a =- (X'X)-iXt7

a' == (.\*'X*)-IX*'y*

Properties

best unbiased

asymptotically unbiased

conslstentconslstent
asymptotically eMcient

Assumptions

asymptotically eMcientln certaln cases

33
A SYNTHESIS OF SIMULTANEOUS EQUATIONS ESTIMATORS

Table 2. A Family of Derived from Least Squares

Reduced Numberof Temoral DFLS
Form Equations Covariance Transfolmation

Estimation

MethodRemarkor Model
1

2

CLS
GLS

Hannan
4 EIV
3

RF
nv
RF

M
M
6 kÅílassM
7 Sargan IV
M
2SLSM
9 EILS
M
10 ILS
M
11 3SLSM
12 GIVM
13 G2SLSM
14 Durbin 3SLS
M
15 FIML
M
5

IV

8

ONE
ONE
ONE

ONE
ONE
ONE
oma
ONE
ONE

I

I

9
o
9

9-112

FPVd-112
PV(PV'QW)-ii2

I

rv(W'M)-112

I

X(k)(X(k)'X(k))-112

I

var(PV,va)-112

I

I

Z(Z'M-ii2Z(Z'M-ii2Z(Z'M-ii2

ALL

I

A
Z#(Z#'Z#Z#)-1/2
9-"i rv ( PV '9-i PV)-ii2

ONE

9
9
I

2# X#(X#'Z# X#)-ii2
1.. - ---1-2# X#(X#'2# X#)-i12

ALL
ALL

I

I

AAA

X(k) == (Y-kV,nAA

Z#-ZQI

9-iZ(Z'9-IZ)-112

A.IA A A-X-# -2XI

lim E(PV*'X)' (va"'u) == plim (PV"X)' (W"'u) == O
(4) the moment matrix of the transformed explanatory variables be well behaved in
the limit:

lim E(W*'X)'(W"'X) == plim(W*'X)'(W"'X) - M", iM"1 tF O
How the DFLS method is related to the CLS method is summarized in Table I. Table
II shows that most of the available estimators are members of the DFLS estimators
through different choices of PV".

IV Generalized Least Squares Method
We shall consider the reduced-form equation under the assumptions d, e and F.

y ==: Zz+v, Ev v' = T-'i•22 9
If 9 is known or its consistent estimate is available, the DFLS estimators with use of

PV* = 9-i/2 are Aitken estimators. If 9 is not known but v is stationary, Fouriertransformation can change the time-series into the frequency-band model and theresulting error term will have the diagonal covariance matrix in the limit.

Operating with such a matrix that

F= [(2zT)-i/2 eitek], t == 1...T; k == O...(T-1)

eic = 2nklT
we obtain the complex-valued stochastic equation.

F'y == F'Zrr+F'v

HIROSHI SADAMICHI34

The covariance matrix ofF'v is•asymptotically3)

E(F'v) (F'v)' or T-i•a

A=(fVV(09). O i
x o fvv(eT-,)1
wheredenotes the conjugate andfvv(e) is the spectral density of v.

Next, let us examine the moment matrix of the explanatory variables. Since

periodograms and cross-periodograms have some well known drawbacks-serious
leakage and inconsistency, we shall form such a weighting matrix PV that the momentmatrix of va'F'Z may be well behaved and the covariance matrix of W'F'v equal to
T-i•A in the limit4). Choosing as a transforrnation matrix

rv* = FvaA-i/2
the DFLS estimators which minimize (rv"v)' (PV"'v) will be equivalent to Hannanestimators5) and be given asz - [( MZ'F'Z)' A-i (PV'F'Z)]--i (PV'F'Z)' A-i (W'Fty)= [z iz,z,•(ek) •fvv-i(ek)]-i [z 7ziy(eic) •fvv-i(o,)]

ic kA fzizj•(e) are estimates of the cross-spectral densities of zi and zj•.
where

V Extended Instrumental-Variable Method
Consider the model-equation under the assumptions d, E and F.

y= Xa+u; Euu' == T-i•a2S2
We choose a (TxL) instrumental-variable matrix6) of rank L denoted by W, i.e.,
which satisfies (i) plim W'u = lim EW'u = O (ii)plim PV'Xand limEM'Xexist, bothare equal and of full rank N, and (iii) PV'Xis of fu11 rank N, where N is the rank of X.

Operating with it on the model-equation we have

M'y = va'Xa+ rv'u
It will be easily shown froin the definition of va that the transformed equation satisfies

all the CLS assumptions asymptotically except serial independence. Then the extended

instrumental variable (EIV) method may be defined as the generalized least squares
method applied to this transformed equation'). If M contains some lagged dependent
variables the covariance matrix of the transformed error term may be estimated under
the assumption that PV is given. The EIV estimators are therefore given by

3) For the proof see Amemiya and Fuller (1967) pp. 527-528.
4) Mmay be approximated by Bingham-Godfrey-Tukey weights, for instance.

5) Hannan (1963)
6) Any matrix that satisfies these three conditions will be called an instrumental-variable matrix
in the text.

7) if all that matters is consistency only, not eMciency, then we have only to disregard the errorterm and to choose N equations arbitrarily to solve for a.

35
A SYNTHESIS OF SIMULTANEOUS EQUATIONS ESTIMATORS

aEiv == [X'rv(va'2M)-iW'X]-iX'W(W'9PV)-ipv,yThe EIV estimators are consistent provided that plim (W'9va) exists.
Let us examine the peroperties of EIV estimators in detail. In what follows weshall consider those cases where it is assumed that(vi) lim TE(va'u) (rv'u)' == a2 plim(W'9va)
where, plim ( va'9 va) exists and is nonsingular.

[Theorem 5.1] The EIV estimators are instrumental-variable (IV) estimators and are
the best8) among all the instrumental•-variable estimators using the same matrix M.9)

(Proof) The instrumental-variable estimators using Wmay be defined as:

ai7 = (S'X)-iS'y = (C'W'X)--i Ctrvty
where S == WC, S'X is nonsingular, and C is a (LÅ~N) matrix of rank N such thatplim C exists. Take C = (M'9va)-i va'X.
Then the existence ofplim C is shown directly from the assumptions and we haveaEiv = (C'va'X)-i C'W'jv == aiv
Thus the EIV estimators are IV estimators. The asymptotic covariance materices of
aiv and aEiv are given byil (aiv) = Plim [X' WC (C' M'9 urC)-i C' "Z,I]-i

V(aEiv) - plim [I'PV(M'gm)-i vax,x]-i
In order to prove that (fi (aEiv)- fi (aJv)) is seminegative definiteiO) it is suMcient toshow thatR = X'M(W'9W)-i var'X-X' JVC (C' rv'9 WC)-iC'WtX
is semi-positive definite and that each term is positive definite. Since M, JVC are of

fu11 rank and 9 is positive definite, W'9va and C'W'9vaC are positive definite.
Therefore each term is also positive definite because the inverse of a positive-definite
matrix is positive definite and both VV'X and C' PV'Xare full rank. There exists a non-singular matrix e such that e'e == W'9M. Let D= e'-iW'X and E= 2C. Then
R may be expressed as

R = D'D-D'E (E'E)-iE'D = D' [I-E(E'E)-iE'] D = P'P
where P == [I-E(E'E)-iE'] D. Thus R is semi-positive definite, which completes theproof.
[Corollary 5.1] The EIV estimators are Sargan estimatorsi') when M is predeter-

A eo is the best if, for any contstant vector 2, the asymptotic variance of8) A consistent estimator
2'0ois not greater than that of 2'e, where e is any other consistent estimator,i.e.,the difference betweenAA

the asymptotic covariance matrices of 0o and e is seminegative definite.

9) Z is shown to be an instrumental-variable rnatrix under the assumptions D, E and F. ff we take
PV === Z, the EIV estiamtors are the 2SLS estimators, which are the best among all the instrumentalvariable estimators using Z.

10) Goldberger(1964) p. 38.
11) Sargan (1958) p. 399.

36

HIROSHI SADAMICHI

mined'2) and u is serially independent and homoskedastic.
(ProoO Under the stated assurnptions the asymptotic covariance matrix is given bylim TE(W'u)(W'u)' == a2 plim W'M
Using the estimated covariance rnatrix T-i•a2W' JV, we obtain the EIV estimators

a = [I'va(va'rv)-iPV'X]-iX'W(W'W)-iM'ywhich are Sargan estimators.

As an example of EIV estimators let us take va == Z(Z'Z)-i. It can be shown
below that W satisfies the properties of instrumental-variables matrices under theassumptions D, Eand F. Noting that EZ'u : O and plim Z'u == O

lim E W'u = plim (Z'Z)-i • lim EZ'u = O
plim va'u = plim (Z'Z)-'i • plim Z'u = O

plim PV'X = plim (z'z)-i z'(Y, Z)- plim [fi,, (Io' )]= [ni, (Io' )]where Ti is the (k Å~ (H- 1)) matrix of the coeMcients of the reduced-form equations

corresponding to Y and fi is the least squares estimates of zi. The model-equation
to be estimated is identified, so that the last expression is of fu11 rank. Thus we haveshown that W is an instrumental-variable matrix. The asymptotic covariance matrixof PV'u is then given bylim TE(W'u) (W'u)' - a2 plim (Z'Z)-i
Using the estimated covariance matrix T-i•a2(Z'Z)-i, we have the EIV estimators.

a - [(1,, (ioJ))' (z'z) (fi,, (ioJ))]-i (it. (IoJ))'(z'z) it,
where iti is the (Kx1) vector ofthe least squares estimates of the reduced-form coeMcients for y. We shall call them the extended indjrect least squares (EILS) estima-

tors. However these are the same as the 2SLS estimators. When W'I is nonsingular
the EIV estimators may be simply written as
ft -= (va"X)-irv'] -= [it,, (Io')]-' z",
These are identical with the indirect least squares (ILS) estimators.

[Theorem 5.2] Suppose we have two instrumental variable matrices, Wi and or2,
such that va2 = vaiF, where Fis of fu11 ranki3). Then EIV estimators using Mi are
more eMcient than those using MZ2. When F is nonsingular two estimators are identical.

(ProoD The asymptotic covariance matrices are12) PVis predetermined in the sense that E wtius = O for t 5 s.
13) For example, or2 consists of some of the principlal cornponents of PVi.

37
A SYNTHESIS OF SIMULTANEOUS EQUATTONS ESTIMATORS

fi(ai) == a2 plim [X'Mi (rz'9vai)-iPVi'X]-ifi (a2) = a2 plim [X'W2 (W2'9va2)-iW2'X]'"i= a2 plim [X'PViF(F'Mi'9PViF)'iF'M'X]-i
In order to prove that ai is more eMcient than a2 we have to showfi (ai)- fi (a2) isseminegative definite. Then proof can be done following the latter half of the proofof Theorem 5.1, where C should be read as F. The identity between two estimators
is derived by noting that (F'Mi'9oriF)Hi = F-i(Wi'9vai)-iF'-i.
[Corollary 5.2] If W2 consits ofa subset ofcolumn vectors of Wi, the EIV estimators
using JVi are more eMcient than those using va2.
(Proof) This is so from the theorem 5.2 because F may be written as (I62 ), where

Mi is (TxLi) and L2 -S Li.
As an example ofthis corollary we consider the following distributed lag model.

y == ax+Py-i+u

u=e-Pe.-i, IPI<1y and x are (Tx 1) vectors of the dependent and the exogenous variables. u and e are(Tx 1) vectors of the error terms such that

Ee =: O, Eee' = T-i 'a,2I
lp O'S-XL - - -Eu = O, Euu' = T-i ' a.2 V, V= p X'x, p-e- xXxXO pl
y-i and emi are one-period lagged vectors of the dependent variable and the error
term respectively. Then the EIV estimators using Wi = (x, x-i, x-2)

( 2- ), = [(x,y-i)'Wi (va,'vw,)-i var,'(x,y-,)]-i(x, y-i)'Wi (PV,'Vvri)-i Wi'y
are more eracienti4) than those using M2 = (x, x-i)

Att 1(S-),=-(li,•. iY,•-,i-,)"(.X-,Y,)As we have just seen in the example, when W'X is nonsingular, the EIV estimators may be simply wrjtten asaEir = (va'x)-i"z'yAwhere the covariance matrix of W'u disappears.
Take W == (Y-kV, Z) for example,
A Vis the least squares estimates ofthe reduced-form disturbances of Y and k is
where14) This was also confirmed in small samples by the monte-carlo experiments, which showed,
however,that the EIV estimators using M3 == (x, x-i,y.2) were better than any of the other two. Notethat the explanatory variables ofy.tt, (x-i, y-2), are chosen as instrurnental variables for y-i and thatE rv3'u == plim PV3'u = O. See Sadamichi (1970), Chapt. VI.

38

HIROSHI SADAMICHI

such a scalar that plim K == 1. Then it can be shown under the assumptions D, E andFthat UZ is an instrumental-variable matrix. In this case the EIV estimators are of asimple form and equivalent to the k-class estimators.

If we define a transformation matrixva" = M(W'9va)-i/2
then we can show from the definition of Wthat the derived form of the model-equation obtained by using this transformation rnatrix satisfied all the classical assump-

tions and that the DFLS estimators are identical with the EIV estimators using M.

VI Generalized instrumental-Variable Method

The covariance matrix of the error term does disappear from EIV estimators
when M'I is nonsingular. This is because we have not specified explicity what M
looks like. There we assumed implicitly that VV did not contain the covariance matrixof the error term and would probably be a function of predetermined variables. How-ever there could be another instrumental-variable matrix such that M = 9-iMo,
where Mo is a matrix of fu11 rank not Iess than the rank of X. The egeneralized instru-

mental-variable (GIV) method may be defined as the EIV method with use of 9-i Wo
as an instrumental-variable matrix. The GIV estimators given by

aGiv = [X'9-'Wo (rvo'S2-" Wo)-' Wo'9-'X]-iX'S2-!W,(vao'9-iuro)-ivao'9-'y
All GIV estimators are DFLS estimators if we takeW* == 9-iWo (Wo'9-iM,)-i/2
In a special case where there are just as many instrumental variables as explanatory

variables the GIV estimators can be simply written asaGiv = (M,'S2-il)-iM,,9-iy
This is the generalization of the conventional instrumental-variables method. Noticethat 9 is present in this case.

Under the assumption d, the good-behavior assumption should be modified insuch a way that(G) plim Z'9-iZ= limEZ'9-iZ=Mo , IMol bFO
where both limits exist and Me is a nonsingular constant matrix. Then a simple choiceof all predetermined variables in the model to form M, leads to the generalized 2SLS
estlmators.

Let us consider a simultaneous estimation of all model-equations under theassumption A', C, D, e and F.

y# = X# a#+u#

Eu# == O, Eu# uS' = T-i• Z#, Z# == Z QI
If we define Z# as the block-diagonal matrix of G Z's

39
A SYNTHESIS OF SIMULTANEOUS EQUATIONS ESTIMATORS

z'=(3')
then Zt --1
and ZS Z# are shown to be instrumental-variable matrices. The EIV estimators using ZS are nothing but the 3SLS estimators, while the GIV estimators given by-1 -1 -1 -1

a# = [xs' xszs (z#' z]#zs)-ize' z#xs]-i xs' z#z#

-1 -1z#ys(ze' ztzs)-iz#'
turn out to be also the same as the 3SLS estimators in this particular case.

DefineA .. .O ) , .i?T, = (9,, z,)2, = (Xl
XO XGI
where 9i are estimates of Yi computed from the reduced form given consistentestimators of aS, say 2SLS AA
estimators B and T'.

AAA
Y==
zrB-i

-1Athat ZSX# satisfies all properties of jnstrumental variables.
Then it will be shown

AA
A =-1
GA
lim EXt' Z]OuS
limE[Zaij Xi' uj] == O
1'=1
A=-1
plim X#' Zt u#
plim GA[Z aij Xi' uj] = O

Noting that lim E Xi'uj = plim Xi'uj = O.

.'.1

where Z-i = (aij). From the assumptions D, e AA
and F, plim Xi'Xj == lim E Xi'Xj.

Therefore-1 =4limEXS'-1 Z#I#
plim X#'AZSX#The covariance matrix may be estimated by

A AA AA AA

Z -(YB-ZI-')'(YB-ZI-') , Z#- Zl (EbI
Thus, the GIV estimators are given by

AzvA-1
at = (x#'xs)-iAxvA-1
zsy#
Ifthe estimation process is iterated successively by using the resulting estimators

as next input, we obtain the fu11 information rnaximum likelihood (FIML) estimators

as the limit value provided that the sequence covergesi5). Let B and I" be the FIML

estimators. Then the FIML estimators may be expressed as- --1Z#Xt)-iXS'- --1 X#y#arl == (XG'
where X" and Z# are computed by using B and I' in place ofB and I".

If l are taken to be the least-squares estimates of computed from the reducedform15) Durbin (1963).

HIROSHI SADAMICHI40

YA== ZT, z = (Z'Z) -• iZ' Y
then the GIV estimators are Durbin's 3SLS (D3SLS) estimators.
tors are DFLS estimators, so are FIML and D3SLS estimators.

Since GIV estima-

Vll Conclusion

In this paper we have concerned ourselves with various estimation methods
proposed for a model-equation which does not satisfy all the classical assumptions
and have shown that, by the derived-form least-squares principle which applies theleast-squares method to the model-equation transformed by such a matrix that theresulting transformed equation may satisfy all the classical assumptions asymptotically, most of the available estimation methods, as listed in Table II, can be synthesized

through a proper choice of DFLS transformation matrices. It has also been notedthat the extended or the generalized instrumental-variable method, which is memberof the DFLS family, provides the best estimators among a class of instrumentalvariable estimators obtained by using a particular set of instrumental variables undercertain conditions.

Reference
Amemiya, T., and W. A. Fuller (1967) A cornparative Study ofAlternative Estimators
jn a Distributed Lag Model, Econometrica, Vol. 35 (July-October), pp. 509-529.

Basmann, R. L., (1957) A Generalized Classical Method of Linear Estimation of
CoeMcients in a Structural Equation, Econometrica, Vol. 25, No. 1 (January),

pp. 77-83.
Bingham, C., Godfrey, M. D., and Tukey, J. W. (1967) Modern Techniques of PowerSpectrum Estimation, IEEE Transactions on Audio and Electroacoustics, Vol.

AU-15, No. 2 (June) pp. 56-66.
Chow, G. C. (1964) A Comparison ofAlternative Estimators for Simultaneous Equations, Eeonometrica, Vol. 32, No. 4 (October), pp. 532-553.
Christ, C. F. (1966) Econometric Models and Methods. New York, Wiley.
Durbin, J. (1963) Maximum-likelihood estimation of the parameters of a system ofsimultaneous regression equations (mimeographed, presented at the Copenhagenmeetings of the Econometric Society).
Fishmen, G. S. (1969) Spectral Methods in Eeonometrics Cambridge, Massachusetts,

Harvard University Press.
Godberger, A. S. (1964) Econometric Theory. New York, Wiley.

Granger, C. W. F. and M. Hatanaka (1964) Spectral Analysis of Economic Time
Series. Princeton, N.J., Princeton University Press.

Hannan, E. J. (1963) Regression for Time Series, In Proceedings of the Symposium on

Time-Series Analysis, Murray Rosenbaltt (editor), New York, Wiley, pp. 17-37.

A SYNTIIESIS OF SIMULTANEOUS EQUATIONS ESTIMATORS 41
Sadamich, H. (1970) A Synthesis of Simultaneous Equations Estimators with an
Application to an Inventory Model. Ph.D Thesis, Baltimore, The Johns Hopkins

University.
Sargan, J. D. (1958) The Estimation of Economic Relationships Using Instrumental
Variables, Econometrica, Vol. 32, No. 3 (July), pp. 393-415.

Theil, H. (1958) and (1961) Economic Forecasts and Policy. (Contributions to
Economic Analysis No. 15) Amsterdam, North-Holland Publishing Co., firstedition, 1958; second edition, 1961.
Zellner, A. and H. Theil (1962) Three-Stage Least Squares: Simultaneous Estimationof Simultaneous Equations, Econometrica, Vol. 30, No. 1 (January), pp. 5tF78.

A DATABASE SYSTEM OF ECONOMIC TIME SERIES
Hiroshi SADAMICHIAND
Yasuo NuNoKAMI

Abstract
Economic time series files are quite different in structure from cross-sectional ones.

Database systems ofthe former are structured in a simple form, each record consisting
ofa single time series being independent ofanother, while those of the 1atter are gener-

ally organized in a complicated form, each record containing a number of tiems being
interrelated with another. However, some complexities exist which are proper to thetime series. Associated with each economic item are 20 time series depending on termsof value (current or constant), unit of time (monthly, quarterly, etc) and seasonal

adjustment.
Though the database systems of economic time series seem to be simple in theirstructure, yet they have to be such as to handle these relationships associated with thetime series. In this paper we present one such database system,which is built in the

STEPS system.
I Introduction

A great deal of research has been made on the database systems of cross-sectional
data such as personnel or questionnaire data and various types of database systems
have so far been developed. Typical examples are IMS in the tree type, TOTAL in the
chain type and ADABAS in the relational type. On the other hand, much attention
has not been paid to the database systems of economic time series data, partly because
they are very simple in structure and do not attract academic interest in the field ofcomputer sclence.
However, time series are not so easy to handle as they seem to be. A single economic item may be expressed in many different ways depending on terms of value, unitof time and seasonal adjustment.
(1) Time series are measured either in current terms or in constant terms. With
each time series in constant terms a specific deflator is associate.

(2) Time series are aggregated over different units oftime-monthly, quarterly,
semiannual, fiscally semiannual, annual or fiscally annual.

(3) Time series are seasonally unadjusted or adjusted. Associated with eacheconomic item are 10 time series in current terms (6 for unadjusted, 4 for adjusted),
10 time series in constant terms and 10 corresponding series ofdeflators. All in all, 30

time series are associated with a simple economic item.

HIROSHI SADAMICHI, YASUO NUNOKAMI

44

We will presest the database system of economic time series, which is built in the

STEPS system, in order to show how it deals with the abovementioned relationships
associated with the time series,

STEPS (Statistical Techniques for Econometric Planning and Simulation) is acomputer software designed for statjstical and econometric analyses of the economic
time series data. It is characteized not only by the computing facility of making a con-tinuous analysis from a simple regression to the final test of nonlinear econometricmodels of several hundreds equations but also by the database management of about

7,OOO SNA (System of National Accounts) and approximately 30,OOO IFS (International Financial Statistics) time series data.

ll Description of Time Series

An item code is assigned to each economic item and various attribute codes are
prefixed to the item code to form the series code which identifies a time series. An item
code is expressed by up to 16 letters beginning with an alphabetical letter other than P,

Q and \. The attribute codes are denoted by P, Q, \ and @, P stands for deflators, Q
for constant terms, \ for fiscal unit oftime and @ for seasonal adjustment. Any combination ofattribute codes are valid. For example, the series code of private consump-tion expenditure seasonally adjusted in constant terms is expressed as either Q@YEI

or @QYEI, where YEI is the item code ofprivate final consumption expenditure.
The series code does not tell anything about the unit of time except fiscal. So, we

have to specify both the series cods and the unit of time in order to retrieve a timeseries. Any time series in the database of STEP'S contain its descriptive information as

well as its data. The content ofthe record ofa time series js shown in Table 1.

M Organization of the Database of the Time Series

The database of the time series consists of an index component and a data component. The index component is made up ofan item table and a series index file. The
item table is that ofcorrespondence between an item and the location of the series
index ofits associated time series. The series index file is the collection of the series in-dices, each ofwhich shows the correspondence table ofall the series associated with anitem and the location of their data in the data componest. The data component is thepool of the time series data shown in Table 1. When a time series does not exist in thedata component its location is shown to be zero in the series index. (See Table 2)

IV Access to the Database

The following

STEPS statements are used to retrieve time series datafrom thedatabase.

DATE ISMONTH/ QUART! HALFI YEAR FROM the date oforigin

A DATABASE SYSTEM OF ECONOMIC TIME SERIES
Table 1.

Content of Time Series

Field

Type

Remarks

Series name
Series name

LiteralFlli name of time series

2

Litera1

Retrieval code

3

Intial date

Integer.

4

Latest date
Unit of time

Integer
Integer

No.
1

5

6

Edit code

7

Decirnal place

8

Number of data

9
10

Data
Data

Integer
Integer
Integer
Integer
IntegerTable 2.
Field no.

1 for yearly, 2 for half yearly

4 for quarterly, 12 for monthly
1 for sum, 2 for average, 4 for end of period

Data for the initial date

Data foir'the second dateContent of Series index (in case of the SNA database)Tirne series

Location of its data in the data component

1

Current annual2
4

Current fiscally annual

Current quarterly

o
o

356

5

Constant annual

6Constant fiscally annual
Constant quarterly
Annual deflator
Fiscally annual deflator
Quarterly deflator
Current adjusted quarterly
Constant adjusted quarterly

o
o
o
o
o

8

9

10
12
13
14

Table 3.

525

414
418

STEPS Program of Using SNA database

START, `RETRIEVE TIME SERIES FROM SNA DATABASE'DATE IS YEAR FROM 1970
PERIOD TS 1970 TO 1978
GET SNA, GNP = `YE5', \CG = `\YE2'
SET SCALAR, BASE - VALUE (\CG, 1975)
COMPUTE, \CGINDEX -= \CGIBASE * 100

PRINT, \CGINDEXPERIOD IS 1971 TO 1978

COMPUTE, GROWTH == (GNPIGNP>-1<-1) ce 100

PLOT, GROWTH

END

45

HIROSHI SADAMICHI, YASUO NUNOKAMI

46

RERIOD IS thej7rstdute oftheperiod TO the lastdate oftheperiod
GET SNAI IFS, Tl == `series code' ... T20 == `series code'
The unit of time for all the time series to be used in STEPS is determined by DATE
statement, which also tells the date of origin for the first elements ofall the time series

variables. In STEPS the time series variables are defined to be one-dimensional arrayswith the common date of origin and the same unit of time. DATE statement is there-

fore used, once and for all, at the top of STEPS program. PERIOD statement indicates the period oftime for tirne series data to be used and anaylzed by the statementsthat follow. GET SNA or GET IFS statements are those of retrieving the time series
data corresponding to the series codes from the SNA or IFS database and storingthem into the respective time series variables denoted by T1, ..., T20.

How to retrieve the desired time series data from the database? A series code is
first decomposed into the attribute code and the item code. Next, the location of theseries index corresponding to the item code is searched for in the item table. The series

index tells us the location of the time series data for the series code in the data component. Finally, the series data are extracted and edited according to the atribute code,
the unit of time and the period of time.

If the item code does not exist in the item table, the search process is terminatedand the appropriate messages are printed. If the item code exists, search is carriedfurther. If the location of the data for the specified series code is missing in the series

index, it is checked whether the data to be desired can edited by using other time series

data. Let us consider a rather complicated case of retrieving the fiscally annual series

in constant terms from the SNA database where no such data exist. First, the location
ofthe data for the fiscal,annual and constant series is looked for. It does not exist.So,
it is checked whether the data for the current, annual series and its deflator both exist.
Ifthey both exist, the fiscal, annual and constant series data are edited. If not, further
check is proceeded to see ifthere exist the constant quarterly series data. If they exist,
the data to be desired are edited according to the edit code. Ifnot, the checking processcontlnuous.
All time series data are stored in integer mode in the database but the data retrieved are all transformed to single-precision floating nurnbers in the STEPS pro-grams.

V Examples of a STEPS Program Using the SNA Database
Let us show one example of the STEPS program to see how time series data are
extracted from the database and transformed in various ways•
Suppose we will extract the current, annual data of Gross National Product andthe current, fiscally annual data of Government Final Consumption Expenditure forthe period from 1970 through 1978, work out the chart of the annual growth rate of
GNP and print the indices (fiscal bases year 1975 = 100) of Government Expenditure.
(See Table 3)

A DATABASE SYSTEM OF ECONOMIC TIME SERIESDATE statement tells that the unit oftime is year but does not tell whether it iscalendar year or fiscal year. Each researcher should distinguish them, for example, byattaching \ to the first letter of the time series variable name to indicate the fiscal

yearly data. In GET SNA statement, GNP is the variable in calendar year and \CGin fiscal year. SET SCALAR statement is that of computing the built-in STEPS function giving a scalar value. BASE is a scalar variable, which is different from the series

variables such as GNP, \CG, etc. VALUE is the name of STEPS function whichpicks up the scalar value for designated data from a time series variable. The value for1975 of' \CG is stored in the scalar variable BASE.

COMPUTE statement is that of computing arithmetic expression and giving
time series data to be stored in a time series variable. Computation is carried out

for the whole period of time indicated by the newest PERIOD statement. In orderto calculate the annual growth of GNP the period of time to be analyzed has to bechanged to that from 1971 through 1978 since the rate for 1970 can not be obtained.
The subscript of a time series variable signifies the time lag of the variable. Thus,

GNP<-1> means one-period lagged GNP.
Print statement gives the printouts and PLOT statement draws the dotted chartsof time series variables.

VI Summary and Conclusion
We have shown a database system of economic time series, which can handle theinterrelationships proper to the time series by introducing the attribute codes into
the retrival codes in the database. In our database all the time series associated witha single economic item, as is shown in Table 2, are treated in such a systematic waythat even a time series not existing in the database may, if possible, be generated
automatically from other time series data.

Reference[1] H. Sadamichi and Y. Nunokami, Econometric Information System (in Japanese),
Research Institute of Economics and Business Administration, Kobe University,

1979.
[2] I. Sugiura, H. Sadamichi and Y. Nunokami, STEPS (in Japanese), Toyokeizai-

shimposha, 1981.

47

& BUSINESSREVIEW
KOBEECONOMIC
CONTENrS
NO. 20 (1973)
An Analysis of the Brazilian
Balance ofPayments: 1960-1972 .............................................Fukuo Kawata

International Money Flow and
the Multinational Corporations .............................................Masahiro FuJ'ita

Estimation of Investment Allocation
RatiosofJapaneseEconomy: 1960-1969 .................................HikojiKatano
Available Jobs and Employment inJapanese Foreign-going Shipping . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Hiromasa Yamamoto

Homomorphism and Business Income Measurement ..........................................Isao Nakano
Assets Choice and Optimal International Reserves. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Kazuhiro Igawa

NO. 21 (1975)
Regional Development Policies of Japan in Recent Quarterof the Twentieth Century .........................................................Minoru Beika

National Income and Expenditure
at Factor Cost in Japan 1955-1970:
A Maero-Aocounting for Growing Economy ..............................Nobuko Nosse
EMciency and Acoeptability in Optimal Growth Path ....................................Hikoji Katano

An Equitable Distribution of the Costs and Benefits of Economic
integration.....................................................................YoshitzkiNishimukai
Japanese Business Abroad : Past, Present and Future . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .,Elideki Yoshihara

NO. 22 (1976)
Pioneering in Australian Direct Trade
Life of F. Kanematsu, 1845-1913 .............................................Tadakatsu Inoue

Productivity Bargaining and the Change of Labour
Management Relations in the Japanese Foreign•-going
Shipping: 1965-1973 ......................................................Hiromasa Yamamoto
On an interpretable Depreciation Method ......................................................Isao Nakano

A New Type of Data Banking System-BEICA System- .........................................................HiroshiSadamichi
Expectation in the Shipping Exchange .........................................................Tetswfi Shimoio

International Capital Movements andReal Capital Aocumulation......................................................Kazuhiro Igawa

Legal System of the Free Movement of Workers and Migration
Trends in the European Economic Commmity .................................Kunio Soh

NO. 23 (1977)
Alternative Approaches to the
Aocounting for Education .........................................................Nobuko Nosse

Personnel Management of Japanese Companies
in Thailand: A Field Paper ........,.......................................Hideki Yoshihara

Evaluation of Performance Using
Multiple Criteria ...........................................,......................Komayuki Itow

Some Bargaining Process Models in
the Shipping Exchange..................,.........................................TetsuJ'i Shimojo

Asset Diversification under the Flexible
Exchange Rate System ...,.....................................................Kazuhiro Igawa

NO. 24 (1978)
The Demand for International
Currencies and Reserves.........................................................Masahiro Ful'ita

Nobuo Miyata
Studies for the Prediction of Shipping Markets-A Survey and their Applications- .......................................TetsuJ'i Shimojo

A Note on the International Transmission of
Policy Effects under Flexible Exchange Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Kazuhiro Igawa

A Control Estimation Approach toTime-varying Parameter Models ................................................Yukio Uchida

NO. 25 (1979)
Redundancy of Seafarers and the PracticeofPermanentEmployment .............................................Hiromasa Yamamoto
Japanese Multinational Enterprises:
AView from Outside .........................................................Hideki Yoshihara
A Comment on the Bayaraa's Algorithm ......................................................Komayuki Itow

Effects of Ship's Size and Cargo Lotson the Ocean Freight Rates ...................................................Tetsnji Shimojo

Direct Foreign Investments and Foreign Exchange Rate:
A Model of Specific Factors and Non-trad able Goods . . . . . . . . . . . . . . . . . . Kazuh iro Iga wa

NO. 26 (1980)
Economic Policies under the FIexible Exchange
Rate Systern: a Stock Approach and a Long-run
Govemment Budget Constraint ...,............................................Kazuhiro Igawa

Estructura de las ventajas comparativas ypolitica comercial-El caso de las exportaciones deproductos industriales en el Brasil .............................................Shoji Nishi]'imaTechnological Progress and Capital Aecumulation ...............................,....Kazuo Shimomura

NO. 27 (1981)
Accounting Systems of Non-Market Oriented Activities ...,.............................Nobuko IVosse

Current Situations of World Economy andGlobalAdjustmentofIndustries ....,..............................................HikojiKatano

Current Cost Accounting and the Conceptof Specific Purchasing Power Capital ............................................,...Isao Nakano

An Input-Output Table for Evaluation of the
Shipping Activities ,....................................................................TetsuJ'i Shimol'o

The Function of Modern Corporate Financial Reportingin a Mass Democratic Society .............,.....................................HTidetoshi Yamoji

26, 1980
REVIEW
KOBEUNIVERSITYECONOMIC
Edited by Faculty of Economics,
Kobe University, Kobe, JapanCONTEMSlhe Underlying Factors of Sucoessfu1 Penetration of the East Asian Countries'
Products into Japanese Market ............................................................Atsushi Murakami

Towards an Alternative International Economics with Economic Power ...............Kiyoshi Ikemoto
The Theory of Labour-Managed Firrns under Uncertainty .................................Mataru Fukuda
Profit Sharing and the Distribution of Income and Wea1th ....................................Reishi Maruya

An Evaluation of the Positive Aspocts of Population Growth to the Economic
DevelopmentofJapan ..................................................................MitoshiYamaguehi

EMciency and Ethical Preferences on the Distribution among Sucoessive
Generations ....................................................................................TetsuyaKishimotolllM",ei,t,iL,,:I[111i,ii,,,,tl'tllllttt,tt,-.,i-tlMtl,,ti,,,ieqltlltlt-1,hgt,tltlllli.t",ttvittllUtptii,,te,"IHILit,e"tilt,SltLllte,"i-,L-elltllt,d"i,,il,ilMllp-k"it,"tlUllt`lt,iiiip'1

THE ANNALS OF THE SCHOOL OF
BUSINESS ADMINISTRATIONKOBE UNIVERSITY 1981
Edited by the School of Business Administration,

Kobe University, Kobe, JapanCONTENTSThe Theory of Minimum Profit Constraint and its Application ..............................Helmut Koch
The Race to Set International Standards for Financial Aecounting
and Reporting .................................................................................Gerhard G. M"eller

Die Entwicklung des Arbeitseinkommens, der gesellschaftlichen

Konsurntionsfonds und die Erth6hung des Lebensniveaus der
Werktatigen in der DDR ........................................................................Ekkehard Sachse

ATaxonomy of Non-Zero Sum Two Person Games .............................................Takashi Iga

The Yen-Dollar Exchange Rate and the Macro-Behavior of
the Japanese Econorny ..........................,....,,..........................................AkihiroAmano

Mechanistic vs. Organic Management Systerns: A Comparative Study of
Adaptive Patterns of U.S. and Japanese Firms ........................Tadao Kagono, Iknjiro Nonaka,

Akihiro Okumura, Kiyonori Sakakibara, Yoichi Komatsu, Akinobu Sakashita
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KOBE UNIVERSITY LAW REVIEWInternational Edition No. 14, 1980
Edited by Faculty of Law
Kobe University, Kobe, JapanCONTENTSDie Rolle des privatrechtlichen Umweltschutzes......,..... ....................................Manfred PVolf

Die Koalitionsfreiheit des Arbeitnehmers nach deutschem
undjapanjschemRecht .........................................•.................................RobertHeuser

Protection of the Policyholders against Unfair Policy Terms in Japan ............Tomonobu Yamashita

RESEARCH INSTITUTE FOR ECONOMICS AND
BUSINESS ADMINISTRATION, KOBE UNIVERSIrTY

HISTORICAL SKETCH
In 1919, a research organization named the Institute for Commerce was foundedin Kobe Higher Commercial School, one ofthe chief predecessors of Kobe University,with a gift made by F. Kanematsu & Company, a leading mercantile firm in Kobe. The
organization was designed to carry on and facilitate integrated research on business andcommerce and to formulate and publish the results of these studies and investigations
in such form as to make them ayailable to the business community.

With the founding of Kobe University of Commerce, successor of Kobe Higher
Commercial School, in 1929, the Institute extended its research activities by adding

several diyisions. One was the famous Latin-American Library, which soon became thecenter of research in this field in Japan. A room for statistics equipped with various

computing machines was established and began publication of Jtiyo- To-kei Keizai
monthly and Sekai Bo-eki To-kei annually. A filing room was prepared to deposit press
clipping files systematically arranged by topics and dates. Another room was designed
to become the center of all possible original records and data having to do with the be-ginning and progress of Japanese business.

On the campus of Kobe University of Commerce, another organization named theInstitute for Business Mechanization was founded in 1941 utilizing business machines
donated by the IBM Corporation and others. With Professor Yasutaro Hirai as its heada broad and forward-looking plan for business mechanization in Japan was developed.

In 1944, Kobe University of Commerce changed its name to Kobe University ofEconomics. After the War, however, the University was consolidated with three othercolleges in Hy6go Prefecture to become Kobe University. With this development, thetwo Institutes were also amalgamated into the Research Institute for Economics andBusiness Administration, Kobe University. At present, the Institute, with its twenty
four fuII-time professional staff members, carries on studies and investigations in inter-national economy, business administration, and information systems in Japan.

LOCATION AND BUILDINGSThe Research Institute for Economics and Business Administration is located on
the campus of Kobe University, Rokko, Kobe. It consists of two three-storied buildings.

One is named the Kanematsu Kinenkan and has a fioor space of about 2,9oo square
meters, which includes a president's room, forty-one oMces, six rooms used as a library,a room for statistics, etc. Another is built in 1964. It has a floor space of about 1,900

square meters, which is chiefly used as the Documentation Center for Business Analysis,

a library and a conference room.

ORGANIZATION
Under the directorship of the president, the Institute operates with two researchgroups. Each research group and its sections are as follows:

A GroupofInternationalEconomy(1) InternationalTrade(2) International Finance(3) MaritimeEconomy(4) Latin-AmericanEconomy(5) OceanianEconomy(6) International Labour Relations

B GroupofBusinessAdministration(1) InternationalManagement(2) Business Administration and Information Systems(3) Accounting(4) Business Statistics
Besides the regular work of the Institute, research committees may be created tocarry on any special work requiring thejoint study of academic and business circles. At
present, there are five standjng research committees, as follows : Experts Group on theWorld Trade Structure, Committee of International Finance, Committee of Information Systems, Committee of Oceanian Economy and Committee ofMaritime Labour.
For convenience and gr'eater efliciency in carrying out its research activities, theInstitute has a general oMce which is responsible for 1) the collection and preservationof a comprehensive collection of books, periodicals, pamphlets, and original records
and data of finance, trade, commerce, industry and business generally; 2) the classificany

tion, cataloguing, indexing arranging, annotation and compilation of these researchmaterials ; and 3) the formulation and publication of the results of the investigations andstudies accomplished by the professional staff members of the Institute.

As an affiliated institute, the Documentation Center for Business Analysis has been
established in 1964. It is the first systematic information facilities in the field of businessadministration in Japan that has been recognized and authorized by the Ministry of
Education. The purpose is to collect and to make intensive control of all kinds of materials on business administration and to make them available to scholars, universities,

governments, and business world with the aid ofmodern documentation techniques.

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RESEARCH INSTITUTE FORECONOMICS & BUSINESS ADMINISTRATIONKOBE UNIVERSITY

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Director t Masahlro FvJITA
Secrctary: Jisaburo TARuMoTO

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GROUP OF INTERNATIONALl
ECONOMIC RESEARCH:,

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1 Seiji SAsAKt ProfessQr of MaritimelEconomicsiDr. of Economicslii Masahiro FvJITA Professor of lnterpationallFinanceiDr. of Economics
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Akira NEG]sHl Professor of Economic

Law
Hikoji KATANo Profcssor of lnternatienal

Trade
Dr. of Economics

Tetsuji SH!MoJo Professor of Maritime

Economlcs

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Management:

Profeseor of Busincss

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FinanceDr. of Business Adminis.

F Nobuko NossE
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Occanian Economy
Shoji N;sHIJtMA Associate Professor of

Regional Study on
Latin America
Kazuo SH[MoMuRA Research Asseciate ofl'i'Professor of Business
Statistics

Dr, of Business Adminis.
tratlonDr, of Business
AdmlnistrationlIntcrnational Managcment

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UNIVERSITY
KOBE JAPAN

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Associate Professor ofl Hiroshi SADAMICHil•:

I Hidcki YosHIHARA

Officc : The Kanernatsu Memorial Hall

KOBE
ROKKO,

Professor of Accounting't:

Oceanian Economylltration-

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Intcrnational Trade

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S Hidetoshi YAMAJt

Kazuhiro lGAwA Associate Professor ofl Kenichi lsHtaAKI Associate Professor of

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Profcstor of Internationalr Akio MomtPh. D. in Statistics

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America

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Economylt: Tadakatsu INOvEli

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Hlrornasa YAMAMoTo Professor of fnternationaliLabour Rclationsili Kojiro NITNo Professer of Polltica!
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I Yoshiakl NlsHIMuKAr Professor of Rcgienal
iStudy on Latin
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GROUP OF BUSINESSADMINISTRATION RESEARCH

Associate Professor of
Business Statistics

Ph. D. in Econometrics
Associate Professor of

Business Administration

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znd Information Systerns
jiResearch Associate of

Aecounting
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