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The Financial and EconomicFutures of Japan and the U.S.May 14, 2009 in Tokyo, Japan

Japanese translation inside

Welcoming Remarks Hugh Patrick, Director, Center on Japanese Economy

and Business, Columbia Business School

Panel One: Executive Roundtable: A CorporatePerspective on the Global Economy

ModeratorHugh Patrick

PanelistsRichard Folsom, Representative Partner,

Advantage Partners, LLPSusumu Kato, President and CEO, Sumitomo CorporationCharles Lake II, Chairman, Aflac JapanYuzaburo Mogi, Chairman and CEO, Kikkoman CorporationKatsuhiro Nakagawa, Vice Chairman and Representative

Director, Toyota Motor Corporation

Panel Two: What New Regulatory Arrangements AreNecessary?

ModeratorMerit E. Janow, Professor of International Economic Law

and International Affairs, Columbia University

PanelistsCharles Calomiris, Henry Kaufman Professor of Financial

Institutions, Columbia Business School

Louis Forster, President, Cerberus Japan K.K.Atsushi Saito, President and CEO, Tokyo Stock Exchange

Group, Inc.Takafumi Sato, Commissioner, Financial Services Agency Kazuo Ueda, Professor, The University of Tokyo

Panel Three: What Is the Future for AlternativeInvestments?

ModeratorAlicia Ogawa, Senior Advisor, Center on Japanese

Economy and Business, Columbia Business School

PanelistsKats Ashizawa, CEO, GCM InvestmentsF. T. Chong, Managing Director, AIG Investments Akio Kawamura, Counsel, Nishimura & AsahiTakashi Oyama, Advisor for Global Strategy of the

Norinchukin Group, The Norinchukin Research InstituteChristopher Wells, Partner, White & Case LLP

Concluding RemarksDavid Weinstein, Carl S. Shoup Professor of Japanese

Economy, Columbia University

Center on Japanese Economy and BusinessPROGRAM ON ALTERNATIVE INVESTMENTS

2 The Financial and Economic Futures of Japan and the U.S.

The Financial and Economic Futures of Japan and the U.S.May 14, 2009

Professor Hugh Patrick began the conference by

describing its context and overarching purpose. Amid

persistent global economic and financial difficulties, he

said, the conference’s three sessions will offer a range of

future-oriented, comparative perspectives on the short-

and medium-term financial and economic futures of Japan

and the United States.

Panel One: Executive Roundtable: A Corporate Perspective on the Global EconomyModerated by Professor Patrick, a panel of senior-level,

Japan-based business leaders from various industries

explained their personal views about the difficult eco-

nomic environment and the challenges and opportunities

it presents for their respective companies and industries.

Susumu Kato, president and CEO of Sumitomo

Corporation, began by noting the disastrous impact of the

global recession on Japan’s export market, which has led

to the country’s downward economic spiral despite its

relatively sound financial system. Sumitomo’s export fig-

ures, for the second half of fiscal year 2008, for instance,

declined 25 percent in value and 30 percent in quantity.

Mr. Kato praised the Japanese government’s attempts

to stimulate domestic demand and said he expects it to be

targeted at the few potential growth sectors: products and

services for seniors; the media industry; and alternative

energy. Sumitomo itself is focusing on these three sectors

domestically. It initiated a very successful Japanese TV

shopping channel that focuses on seniors, and it is also

entering into the business of supermarket shopping via the

Internet, which is aimed at senior citizens and housewives.

Mr. Kato added that, ultimately, external demand is

critical for Japan to grow, and in the long term the greatest

export growth frontier is Asia, where Japanese technology

is increasingly needed. For instance, Sumitomo is actively

engaged in business development in Asia and in the devel-

opment of renewable energy projects globally.

Richard Folsom, representative partner at Advantage

Partners, explained the changing landscape of the merger

and acquisition market in Japan and, particularly, the role

for private equity. After a decade of tremendous growth in

the overall M&A market, as well as in the number of deals

sponsored by private equity, current conditions have

caused the number of private equity transactions to

decrease from 2008.

Given that the private equity market was already a

small percentage of the overall M&A market in Japan, the

critical task remains to develop the private equity market

by demonstrating success stories. Mr. Folsom was opti-

mistic, noting that history has shown that the two to three

years following major financial crises have produced some

of the best opportunities for private equity investments. In

particular, the imperative for large corporate divestitures

of noncore businesses is stronger today than ever before,

and because the current public market is very difficult, he

anticipated that an increasing number of companies would

seek to go private through a friendly, cooperative sponsor

that could take their businesses to the next stage.

He added that because Japanese financial institutions

have fared relatively well despite the financial crisis, there

is still ample financing in the Japanese private equity

market. But because exit opportunities are currently very

limited, a big challenge for Advantage Partners is to prove

that it can hold companies for a longer period and position

them to be more competitive and profitable when economic

recovery does take place in the future.

Katsuhiro Nakagawa, vice chairman and representative

director of Toyota Motor Corporation, discussed the

impact of the global financial crisis and economic recession

on Toyota’s near-term strategy, as well as the longer-term

outlook for the auto industry. Mr. Nakagawa said the

severe shrinkage of the global auto market has caused

Toyota to cut production dramatically, so its major concern

is securing employment while weathering the difficult

times. It is trying to cushion the effect of production

decreases by taking various measures that effectively

reduce the salaries of blue-collar and white-collar regular

employees without reducing jobs and employment.

Mr. Nakagawa was optimistic that the stimulus meas-

ures taken by the Obama administration would help the

U.S. economy recover early, which would then increase

demand for automobiles. While he didn’t expect the

American auto market to rebound to its previous levels,

he did believe that the government’s “scrap incentives”

Center on Japanese Economy and Business May 14, 2009 3

(the cash-for-clunkers program) to buy new, fuel-efficient

cars would help the auto market recover soon to a level

that would make Toyota’s short-term production adjust-

ments feasible. The long-term future of the auto industry

remains bright given the high market growth potential in

developing countries, he concluded.

Charles Lake II, chairman of Aflac Japan, discussed

the impact of the economic downturn on Japan’s insurance

market. He noted that Japan’s economy has suffered the

worst of all of the major economies, and while the govern-

ment has responded aggressively with fiscal stimuli, this

will exacerbate the public debt, which already stands at

173 percent of GDP. In this context, the structural chal-

lenges that Japan has with respect to its aging population

and declining birth rate have become even more daunting,

particularly in terms of financing social security and the

public health care system.

Nonetheless, Aflac’s position remains strong. The

Japanese public’s consternation about the inadequacies

of public health care creates a major growth opportunity

for Aflac’s products, which aim to cover many health care

expenses not covered by the public system. Aflac is com-

mitted to its core business of supplemental health and life

insurance products and is well positioned to introduce new

products as demand continues to change within the context

of the economy and the government’s finances.

Yuzaburo Mogi, chairman and CEO of Kikkoman

Corporation, gave his views on the recovery of the

Japanese economy, as well as the future challenges for

Kikkoman. He said that with the collapse of Japan’s

exports, the government has been correct to attempt to

stimulate domestic demand through fiscal expansion. He

argued that a longer-term economic strategy will require a

reemphasis on deregulation, so that the market economy

will become further embedded in Japan and the shift will

continue from public to private sectors.

Mr. Mogi also stated the Japanese political system

needed administrative reform. Politicians should be less

populist and better focused on specifying policies that

solve the country’s problems. To achieve this, he suggested

a switch to the UK style of parliamentary democracy in which

parties have policy manifestos.

Mr. Mogi outlined the challenges to Kikkoman, and the

food industry more broadly, posed by Japan’s demographic

trends. Older people consume less food, exacerbating a

domestic market that is shrinking along with the population.

To address this challenge, Kikkoman must offer value-

added food and increase the percentage of its overseas

business.

Panel Two: What New Regulatory ArrangementsAre Necessary?Merit E. Janow, Professor of International Economic

Law and International Affairs at Columbia’s School of

International and Public Affairs and Law School, moder-

ated a panel of leading experts on financial regulation in

Japan and the United States. Professor Janow began the

session by noting that, in Japan, the Financial Services

Agency provides a centralized regulatory framework

within which new regulatory adjustments can be contem-

plated in light of the recent crisis. Just as the United

States considers major regulatory reforms to address the

main causes of its financial crisis, Professor Janow said

serious thought is being given to similar centralization in

Japan. While there are a number of proposals in the United

States for strong domestic reform and greater international

cooperation, there is no appetite for any type of global

regulatory authority, she noted.

Louis Forster, president of Cerberus Japan K.K., said

the main cause of the U.S. financial crisis was that certain

classes of financial assets were issued without collateral

requirement, which allowed large financial institutions

such as Lehman Brothers and AIG to incur tremendous

amounts of leverage off their balance sheets without

adequate collateral against their financial obligations. This

posed a systemic risk that regulators failed to address;

preventing another such systemic risk should be the regu-

lators’ primary concern. While many experts point to other

causes of the U.S. financial crisis and make arguments for

how the U.S. regulatory system must be designed to per-

form better in those respects, he warned against tasking

regulators with ensuring model behavior from financial

institutions at the expense of focusing on the large risks that

can destroy the system.

Kazuo Ueda, professor at The University of Tokyo out-

lined the “mixed blessing” that the global financial crisis

has been for Japanese financial institutions. The reason

these institutions suffered very little compared with their

European and U.S. counterparts is because they failed in

their efforts to develop American-style business models and

credit markets. Nevertheless, the Japanese financial system

and, in particular, the real economy still have been

affected by the global crisis. Despite this, he praised the


Japanese government and the Bank of Japan for taking

measures that averted the worst-case outcomes.

If the Japanese stock market and real economy remain

weak, there will be severe consequences for Japanese

financial institutions, Professor Ueda said. While there

seems to be a global regulatory trend toward disciplining

banks through higher Tier 1 capital requirements, as Mr.

Forster suggested, other options proposed by academics

such as reverse convertible bonds and capital insurance

should also be considered. While Professor Ueda declined

to recommend a particular regulatory approach, he

pointed out that global regulation in the direction of higher

Tier 1 capital requirements would cause Japanese banks

serious difficulty since they currently have very low Tier 1

capital ratios, and it is still unclear whether efforts to

reduce their massive equity holdings will be successful.

Takafumi Sato, commissioner of the Financial Services

Agency, said that the FSA, like regulators in other coun-

tries, is dealing with short-term crisis management issues

and medium-term regulatory reforms aimed at preventing

the recurrence of similar financial crises. He noted that

regulators must strike a careful balance between the two

objectives to avoid causing moral hazards and exacerbating

the current crisis.

Short-term policies include capital injection schemes

and the supervisory review of bank lending practices, both

of which are necessary to maintain the financial intermedi-

ation that supports the real economy and keeps it from

deteriorating further. Over the medium term, the FSA

has strengthened requirements for firms to disclose their

exposure to the securitization market, and the Diet is work-

ing on a bill to regulate credit rating agencies, consistent

with steps taken in the United States and Europe.

He added that the FSA has also established collegial

supervisory panels for systemically important firms in

Japan, and the FSA also serves on supervisory panels for

foreign firms that wield significant influence in the Japanese

market. Finally, the FSA is working on other policies, such

as the Better Market Initiative and Better Regulation

Initiative, both aimed at increasing the competitiveness of

Japan’s financial and capital markets, as well as improving

regulatory effectiveness, efficiency, consistency, and

transparency.

Atsushi Saito, president and CEO of the Tokyo Stock

Exchange Group, Inc., began by remarking that, while

most of Japan’s financial regulations have been relaxed,

the Japanese market has yet to become globally competi-

tive. Establishing Japan as a global financial center and

tapping into the growth potential throughout Asia are criti-

cal to transitioning the Japanese economy away from its

reliance on export-driven growth and achieving sustain-

able growth through a balance of foreign and domestic

demand.

While the Tokyo Stock Exchange has strong competitors

in Asia, he expressed his confidence that by improving the

security taxation system and increasing the public’s finan-

cial literacy, Japan can become the central destination for

the flow of capital in Asia. He praised the recent revision

to the tax system that allows foreign investors to avoid

capital gains taxes if they invest through a fund managed in

Japan and meet other requirements, such as not attempting

to influence the fund’s investment decisions. He suggested

that further aggressive actions should be taken to reduce

the cost of trading in the Japanese market.

Mr. Saito also noted that despite the fact that Western

corporate governance failed to prevent the U.S. financial

crisis, Japanese companies must not use this as an

excuse to avoid making changes to the Japanese corpo-

rate governance system. Globalization demands that

Japanese companies meet minimum standards of corpo-

rate governance that are globally accepted, such as

having outside directors. However, he cautioned against

excessive government regulation of such standards and

suggested there be common understanding of shared

goals between corporations and the government.

Charles Calomiris, Henry Kaufman Professor of

Financial Institutions at Columbia Business School,

asserted that the current massive financial crisis presents

an opportunity to address the past 30 years of regulation

failure, during which there have been 140 banking crises

globally. There is conclusive evidence that the cause of

these crises stems from the extensive degree to which

governments protect banks, he said, absent commensu-

rate restriction of banks’ abuse of the protection.

Professor Calomiris listed three key measures that

should be taken to improve prudential regulation. First, at

the micro level, there needs to be a credible measurement

of risk to discipline banks and supervisors. Second, at the

macro level, when regulatory authorities believe there is a

bubble, they should increase capital and liquidity require-

ments for banks in order to deflate the bubble quickly.

Third, there must be a way of resolving the problem of large,

complex, insolvent financial institutions without either

offering complete protection of managers and stockholders


or causing a systemic crisis. Since the heart of the problem

is the ex post facto allocation of the losses across national

borders, there should be advance agreements about loss

allocations specified by the financial institutions and

approved by the relevant regulators. These suggestions

are not new, and the major impediment has been, and

remains, a lack of political will, he noted.

Panel Three: What Is the Future for AlternativeInvestments?Alicia Ogawa, the senior advisor at the Center on Japanese

Economy and Business at Columbia Business School

and adjunct associate professor at Columbia’s School

of International and Public Affairs, conducted a Socratic

dialogue with a panel of experts in the field of alternative

investments. She began by asking the panelists to address

the role of hedge funds in the recent financial turmoil.

F. T. Chong, managing director, AIG Investments,

and managing partner, AIG Vantage Capital, New York,

responded first by saying that while it is tempting to single

out a particular group for blame, all of the participants in

the market bear responsibility, including hedge funds,

investment banks, proprietary desks, regulators, and rating

agencies. He said the mistake that initiated the crisis was

the use of 10 years rather than 20 years of data to make

the projections for mortgage-backed securities.

Kats Ashizawa, CEO of GCM Investments, said there

is a common misunderstanding that hedge funds were

highly leveraged. It was actually the investment banks that

were often leveraged 30 times or even greater, and he

attributed the tremendous growth of assets on American

investment banks’ balance sheets to the Gramm-Leach-

Bliley Act of 1999.

Takashi Oyama, advisor for global strategy of the

Norinchukin Group at the Norinchukin Research Institute,

added that many prominent hedge funds internalized the

management lessons of the Long-Term Capital Management

crisis. In addition, as a result of the LTCM crisis, banks

began to monitor the hedge funds that they dealt with,

and this external force also helped discipline hedge fund

management.

Christopher Wells, partner at White & Case LLP, said

that there were dramatic winners and losers among hedge

funds. Too few hedge funds understood that the market

trends would soon come to an end, but those that did

made a lot of money. He identified regulators and policy-

makers as deserving of blame for the financial crisis.

Regulators are tasked with preventing crises, but if the

aftermath of the Japanese banking crisis of the late

1990s serves as a guide, regulators in the United States

will not be held accountable for their failures. He criticized

Congress for being caught up in an old regulatory paradigm

and for lacking the ability to think conceptually about

contemporary regulatory challenges.

Akio Kawamura, counsel at Nishimura & Asahi, added

that, in a situation like a financial crisis, people usually

blame the short-selling of hedge funds for pushing down

stock prices. But in Japan there was no evidence of this,

and, moreover, rules enacted in December actually curbed

the practice, he stated.

Professor Ogawa next asked, “What is the outlook for

alternative investments in an environment where leverage

is difficult to obtain?” The panelists all agreed that a lack

of leverage will not be a major concern for alternative

investments funds.

Mr. Oyama said that alternative investments will

inevitably become less reliant on debt financing, which

means that fund managers will need to be able to make

direct returns on the core investment, rather than on

the ability to use leverage. With banks’ ability to lend

constrained in the current environment, alternative invest-

ment funds may actually become an important source of

credit and liquidity in the near future.

Mr. Ashizawa said hedge funds can achieve similar,

double-digit returns without leverage.

Mr. Chong emphasized that there are various ways

financial instruments can be created to provide leverage,

with the exchange-traded fund market as one example.

As long as there is a demand for higher yields, there will

be people who design instruments to satisfy the demand,

and this presents a significant opportunity for alternative

investment funds and a major challenge for regulators.

Mr. Wells said the main concern of hedge fund man-

agers with whom he works is capital, not leverage. But he

was also bullish about the future of alternative invest-

ments, since people who have money are unlikely to invest

it with banks, which they view as run by governments and

unable to take advantage of creative strategies.

In light of the Bernard Madoff scandal in the United

States, the Alan Sanford scandal in the United Kingdom,

and the Stephen Tsui scandal in Taiwan, Professor Ogawa

then asked what the effects have been on investor

sentiment toward the fund-of-hedge-funds sector.


Mr. Ashizawa said that the Madoff scandal has had a sig-

nificant impact in the amount of redemptions sought by

wealthy investors in his fund. However, he argued there

needs to be an even greater role for funds of funds, point-

ing out that his fund decided not to invest in Madoff’s fund

because of the nature of the investment and operational

due diligence they conducted. In this way a large, estab-

lished fund of funds can protect individual investors from

such Ponzi schemes.

Mr. Kawamura agreed that the Madoff scheme and

similar ones have provided real tests that separated well-

managed and poorly managed funds of funds. Mr. Wells

anticipated that the legacy of the Madoff scandal will be

to shift away investors’ reliance on such funds as primary

gatekeepers.

Professor Ogawa concluded by asking the panelists to

address the recent regulatory trend in Japan with respect

to alternative investments, as well as the impact in Japan

of Lehman’s failure—particularly the extent to which

current laws helped the panelists’ clients in the wake of

Lehman’s bankruptcy.

Mr. Kuwamura said the main regulatory issues with

respect to Lehman were in the United States. Both the

Financial Instruments and Exchange Law in Japan as well

as the new tax-exempt policy for overseas investors

investing in Japanese management companies with

Japanese assets have fostered a more favorable environ-

ment for alternative investments in Japan. This deregulation

is not a result of the Lehman shock, he said, but it does

encourage more alternative investments, particularly

through hedge funds.

Mr. Wells argued that the Lehman shock has had a

major impact on Japanese intermediaries, since no one

in the Japanese market was prepared for the bankruptcy.

In particular, it was a wakeup call to many of Lehman’s

trading partners, who had previously assumed that Lehman

was probably too big to fail, and that there would now be

systems in place to handle the aftermath if another Lehman

were to fail.

Mr. Wells said the main issue has been rehypothecation,

with all of the trade contracts taking a long time to be set-

tled. Ultimately, this will lead to concentration within the

industry, since many Japanese counterparties are very

conservative and need to be assured the other side is

well capitalized. As Japanese counterparties move away

from prime brokerage to highly capitalized custodians,

Mr. Wells said the introduction of a third party will offer

technological and legal challenges that are just now being

broached.

ConclusionDavid E. Weinstein, Carl S. Shoup Professor of the

Japanese Economy, Columbia University, and associate

director for research at the Center on Japanese Economy

and Business, gave concluding remarks in which he

reflected on the context of the conference and some of its

major insights. After the shocking events of the last year

in Japan and the United States, many ideas that recently

prevailed about the structure of the global economy are

now dead. There can no longer be any doubt that the real

economy and trade are highly dependent on the global

financial system and that national economies are deeply

interrelated. For instance, countries’ business cycles are

linked, and it was through the export channel that the

global financial crisis was principally transmitted.

Just as financial systems and economies are increas-

ingly integrated, so too must regulation be internationally

coordinated, he said. Beyond calls for “better regulators,”

fresh ideas about how to identify troubled institutions to

mitigate the frequency and severity of crises and protect

against macroeconomic risk are needed. Professor

Weinstein said that achieving this in a time of increasingly

complex financial instruments makes this challenge even

more difficult—in Japan, the United States, and, indeed,

globally.

This was the final year of the Center’s successful Program

on Alternative Investments, launched in 2002. At the time,

many Japanese were unfamiliar with alternative investments

in the United States and elsewhere, and non-Japanese

knew little about the state of alternative investments in

Japan. CJEB could play a useful role in educating the

public. Having successfully achieved this goal, and with

alternative investments having entered mainstream

finance, the Center decided to bring the program to a

close with this May 14, 2009, conference in Tokyo.

The Center is especially grateful to Nomura Holdings,

Inc., Daido Life Insurance Company, and Advantage Partners,

LLP for their support of our Program on Alternative

Investments. Without their strong support and encourage-

ment, this Program would not have been possible.


Panel One (from left to right): Susumu Kato, Katsuhiro Nakagawa, Hugh Patrick, Yuzaburo Mogi, Charles Lake II, and Richard Folsom

Panel Two (from left to right): Atsushi Saito, Charles Calomiris, Merit E. Janow, Louis Forster, Takafumi Sato, and Kazuo Ueda

Panel Three (from left to right): Christopher Wells, Takashi Oyama, Alicia Ogawa, Akio Kawamura, Kats Ashizawa, and F. T. Chong


Center on Japanese Economy and BusinessColumbia Business School

321 Uris Hall, 3022 Broadway

New York, NY 10027

Phone: 212-854-3976

Fax: 212-678-6958

Email: [email protected]

http://www.gsb.columbia.edu/cjeb

Sponsors of the Program on Alternative Investments

Lead Corporate SponsorsDaido Life Insurance Company

Nomura Holdings, Inc.

Corporate SponsorsAdvantage Partners, LLP

Sponsors of the Center on Japanese Economy and Business

Lead Corporate SponsorsSumitomo Corporation of America

Senior Corporate SponsorsDaiwa Securities America Inc.

Major Corporate SponsorsKikkoman Corporation

RISA Partners, Inc.Saga Investment Co., Inc.

Takata CorporationTsuchiya Co., Ltd.

Corporate SponsorsAFLAC Japan

Caxton Associates, LLCJapanese Chamber of Commerce & Industry of New York, Inc.

Mitsubishi International CorporationMitsubishi UFJ Trust and Banking Corporation

Mitsui Sumitomo Insurance Company, Ltd.Mitsui USA FoundationMori Building Co., Ltd.

Pacific Investment Management Company (PIMCO)The Tokyo Electric Power Company, Inc.

Yaskawa Electric Corporation

Individual SponsorsRobert Alan Feldman

Shigeru Masuda, M.B.A. ’74, CEO, ZERON Group

Friends of the CenterJohn and Miyoko Davey

Sumitomo Chemical CorporationSadao Taura

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