Hirohide Yamaguchi: Strengthening growth potential, role of the market,
and "production of information"
Remarks by Mr Hirohide Yamaguchi, Deputy Governor of the Bank of Japan, at the
Securities Analysts Association of Japan Annual Conference commemorating its
50th anniversary, Tokyo 15 October 2012.
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Introduction
Thank you for having me at the annual conference jointly hosted by the Securities Analysts
Association of Japan (SAAJ) and Asian Securities and Investments Federation (ASIF). All the
participants here have been striving for the development of securities markets, and,
through such efforts, have been contributing to the sound development of Japan's economy.
On behalf of the Bank of Japan, I will pay great respect to your efforts.
Today, under the title "Strengthening Growth Potential, Role of the Market, and 'Production
of Information'," I will talk about my views on the importance of the financial function that
supports economic growth and how securities markets should be, and then I will send
cheers to securities analysts while referring to their expected roles.
I. Japan's economy and securities markets
50 years ago, in 1962 when the SAAJ was established, Japan's economy was in the midst of
a high growth period. Japan's economy grew by an annual average of 9.7 percent from
1956 up to 1970. It made a transition to stable growth, triggered by the oil shocks, but was on
a constant growth path until a bubble burst at the beginning of the 1990s. After the burst
of a bubble, things changed completely and the average growth rate declined substantially to
around 1.5 percent in the 1990s and around 0.5 percent in the 2000s.
The history of securities markets developed in tandem with such a long-term trend in the
real economy. During the high growth period, firms' buoyant fund demand was mainly
supported by indirect finance. However, even during such period, the securities markets
gradually came close to people as the phrase "goodbye banks, hello securities firms" began
to be heard in the early 1960s when investment trust started to spread among people.
Subsequently, the markets continued to grow by weathering trials, including securities
markets' slump after the Tokyo Olympics and, in the 1980s, both the stocks market and the
corporate bonds market got into full swing amid financial liberalization and globalization.
While equity finance by convertible bonds and warrant bonds rapidly increased during the
bubble period on the back of strong expectations for a rise in stock prices, market expansion
based on excessive expectations did not last long after all. Since the 1990s, a variety of
reforms have taken place mainly to address various events that surfaced in accordance with
the emergence and the burst of a bubble, and the markets have steadily improved. However,
amid the continued low economic growth, the environment surrounding securities markets
has been severe and there has recently been concern over a decline in the competitiveness
of Japanese securities markets compared with those overseas.
II. Finance, which holds the key to strengthening growth potential
I have been mentioning repeatedly on various occasions the fundamental background to a
declining trend in the growth potential of Japan's economy. Put it simply, the economy has
not sufficiently adapted to major changes of the demographic vortex and globalization.
Therefore, to strengthen growth potential, it is essential to tap new potential demand
associated with progress in aging and to incorporate expanding global demand, mainly that
of Asian economies. To that end, firms' attempts and an improvement in the environment
that supports such attempts are required.
Given that new attempts are always associated with risks, it is not too much to say that the
power of finance that evaluates and shoulders such risks will be a key to strengthening the
growth potential of Japan's economy. Encouraging firms' attempts and unlocking their
growth potential will promote business fixed investment and research and development,
expand employment, raise wages, and, through an increase in interest and dividend as well
as capital gain, strengthen households' income and asset formation.
In the 2000s, Japan's economy experienced an economic expansion of six years and
one month, which was longer than the Izanagi boom during the high growth period, and
the Nikkei Stock Average once rose to about 18,000 yen. However, corporate behavior
to achieve an improvement in business performance through cutting wages and costs
was retained strongly during that period. And, to start with, the economic recovery
relied heavily on exports on the back of financial bubbles in the United States and
Europe. Therefore, while the economic expansion continued for a long time on the surface, it
did not become a sustainable economic recovery backed by an autonomous mechanism.
Given such recent experience, it is not an easy task to bring out many firms' incentives to
take on the challenge of tapping potential demand and thereby strengthening growth
potential amid further progressing aging. However, that is why there are high expectations
for the role of financial and capital markets, in which growth money is created. Of course,
among eventual fund providers in the financial and capital markets, there are those who
want to invest their funds safely by making deposits and there are those who want to
increase their investment profits by taking certain risks. It is necessary to enhance the
capability of financial and capital markets as a whole to convert a variety of fund
management needs into economic growth, while utilizing each characteristic of indirect and
direct finance.
III. Three conditions required for securities markets
Based on what I have said, now, I will focus on the securities markets in which analysts are
directly involved, and from the viewpoint of strengthening power that creates economic
growth and developing securities markets themselves, I will mention three conditions for a
desirable form of markets.
First, a high degree of efficiency and fairness. Securities markets can function efficiently
only after proper pricing for risks and returns is made. Therefore, it is deemed desirable
that many investors who have a variety of evaluation criteria should participate and that the
markets should be highly liquid. To that end, first of all, offers of versatile solutions for
each fund raiser and fund investor as well as securities trading in the secondary markets
have to be made at low costs, namely, the markets need to be a place of efficient financial
transactions. In addition, in order for the markets to be a place in which many investors
feel safe in participating, the fairness of transactions based on proper governance and high
ethical standards has to be guaranteed. In Japanese securities markets, especially after the
burst of a bubble, various kinds of system reform have been made in order mainly to
achieve a sound competitive environment. However, securities markets have recently been
exposed to harsh global competition. In order to maintain the international competitiveness
of Japanese securities markets, it is critical to unflaggingly implement efforts to enhance
the markets' efficiency and fairness in the future. In that regard, a move to establish Asia's
number one stock exchange by merging the Tokyo Stock Exchange and the Osaka
Securities Exchange is highly expected as a new start of Japanese securities markets.
Second, the existence of investors who aim at increasing their medium- to long-term returns.
Of course, I do not deny that aiming at short-term trading profits is one of investment
strategies or that it enhances market dynamism and liquidity. However, not only to chase
short-term profits but, for example, for investment institutions, including pension funds and
insurance companies, to make utmost efforts to raise medium- to long-term returns will
enhance securities markets' function of selecting promising firms and projects and eventually
contribute to achieving sustainable growth of Japan's economy. In that regard, it is also
important that households, which are the eventual fund providers, become highly interested
in their own asset management. Given that most of households' financial assets of
1,500 trillion yen have still been in cash or deposits even though long time has passed
since "savings to investment" was called for, there seems to be plenty of room for improving
the environment which gets growth money out of sleep. For example, to promote initiatives
to raise interest in asset management, including the enhancement of financial education
that fits each age-group, could encourage investment institutions, which receive households'
long-term funds, to compete at a higher level.
Third, the markets need to be a place in which high quality information is created to steadily
support investment judgment. What is important, first of all, is disclosure of fund raisers and
investors relations. While it goes without saying that honest and fair disclosure is
required, in addition to that, it is critical that firms strive to actively and convincingly
explain their own management strategies. Firms' information will be analyzed and evaluated
from various angles by market participants, and utilized for investors' decision making. In
financial theory, a situation in which fund providers do not have sufficient information of
fund-raisers is called "information asymmetry" and, if the asymmetry is substantial, even
growth of firms with great potential will be constrained from the funding side. Therefore, it
is considered that the resolution of "information asymmetry" is the intrinsic function of
finance and added-value that finance contributes to economic activity. Added-value is
created through "production of information." While the "production of information" is
somewhat an abstract expression, simply put its specific meaning, it is nothing less than
high-quality analysis and evaluation of the investment asset class. And, those who play an
important role in that regard are securities analysts.
IV. "Production of Information" and expectations for securities analysts
Now let me offer three specific expectations for securities analysts.
First, neutral information transmission based on accurate analysis. The standpoint of
securities analysts varies according to organizations they belong to, such as the sell-side, the
buy-side, and the rating agency. However, for the information they transmit to be trusted
and influential, the accuracy of analysis as well as a fair and neutral perspective will be
inevitable elements. As for a specific angle of analysis and message to be emphasized,
individual securities analysts should devise ways by fully utilizing their respective expertise
and knowledge. With securities analysts stimulating each other from different perspectives,
"production of information" in the markets as a whole will be elevated both in terms of quality
and quantity. What I especially expect is the "production of information" that contributes to
exploring growing companies. Although the growth potential of Japan's economy has been
declining, if looked at individually, there are many firms with high profits and growth, and
there will be further more potentially growing firms. Finding out such promising investment
opportunities one by one and nurturing them, while it seems a roundabout approach, will
offer a potent breakthrough for eventually increasing growth potential of Japan's economy.
Second, maintaining full communication with firms. While the role of securities analysts is
basically to provide investors with analysis on firms, cherishing connection with firms that
are the subject of analysis eventually means that securities analysts will ask those firms their
unique questions. Namely, securities analysts can contribute to the process, in which firms
constantly develop their business strategies while incorporating investors' perspectives. In
other words, securities analysts play a valuable role as an interactive connecting point
between firms and investors.
Third, playing an active role as global human resources. While currently a slowdown in
emerging economies has become somewhat protracted, those economies have high
growth potential in the medium to long term and, on the financial front, it is likely that
especially Asian securities markets will expand substantially. Just like today's conference,
information exchange and interaction of people at a global level will become increasingly
active in the future. In order to improve the attractiveness of Japan's securities markets
and attract overseas investors, and also to utilize expanding overseas investment
opportunities in the asset formation of Japanese households, I expect securities analysts to
play an active role with the key words "Asia" or "global."
Concluding remarks
From the perspective of strengthening growth potential of Japan's economy, today I have
talked about the importance of the role securities markets and securities analysts play. I
think the aforementioned term "production of information" illustrates how financial business is
a knowledge-intensive industry. In Japan's economy, in which the labor force has been
declining in association with aging, increasing the growth rate of added-value per capita is
a necessary condition for economic growth. If the typical knowledge-intensive industry of
financial business enhances the ability of creating added-value and grows, it will itself
contribute to strengthening the growth potential of Japan's economy. I have high hopes
that securities analysts, while holding their strong intellectual curiosity and sensibility to read
the times, will make a valuable contribution to the development of Japan's securities
markets and eventually to the development of Japan and Asia.