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COLUMBIA BUSINESS SCHOOL Asian Corporate Finance and Business Strategy The Bull and the Bear Market: Merrill Lynch’s Entry into the Japanese Retail Securities Industry Peter Espig MBA ‘03 © 2003 by The Trustees of Columbia University in the City of New York. All rights reserved. CHAZEN WEB JOURNAL OF INTERNATIONAL BUSINESS SPRING 2003 www.gsb.columbia.edu/chazenjournal Background1 As one of the so-called Big Four (Japan’s four largest securities firms), Yamaichi Securities, prior to its collapse, was a massive brokerage with assets of JPY 22 trillion (U.S.$203 billion), nationwide retail capabilities and a brand name that was recognized by all domestic investors and foreign financial institutions operating in Japan. It had expanded into the United Kingdom, Germany, the Netherlands and Switzerland. Like Japanese banks, domestic securities firms were supervised by the Japanese Ministry of Finance (MoF). Their levels of financial risk were monitored by the Bank of Japan (BoJ), which tracked information pertaining to the daily business transactions of Yamaichi and other major firms and frequently conducted on-site examinations. Unlike banks, however, securities firms are not required to maintain the required Basel I 8 percent Capital Adequacy Reserve for sufficient protection in the event of unexpected financial losses. This lack of a liquid reserve was instrumental in the fall of Yamaichi Securities when it was struck with JPY 200 billion (U.S.$1.8 billion) in off-the-book losses. Had the Japanese economy not been stricken by a decade-long recession, Fuji Bank, as Yamaichi’s main creditor, would have come to the aid of the failing financial institution. Unfortunately, Fuji Bank itself was struggling with core capital levels that had fallen far below reserve requirements, rendering it incapable of offering any form of financial rescue. On November 24, 1997, Yamaichi Securities held a multimedia press conference (soon to be the norm for financial distress announcements) in which the chairman tearfully begged for investor forgiveness and, along with other board members, accepted responsibility for being forced to suspend the firm from engaging in new contracts. The announcement sent shockwaves throughout the nation, and people immediately began to camp outside Yamaichi’s branches to retrieve their investments. Unlike Sanyo Securities, which had declared bankruptcy (U.S.$25 billion) two weeks earlier, Yamaichi maintained an extremely broad client base, with most investors having saved a major portion of their finances at the firm (BIS Papers, Oct. 2001). In a show of security unprecedented for Japan, riot police were stationed outside the entrances of Yamaichi’s branch offices, while anxious individuals waited nervously to retrieve their money. Another significant difference between the two bankruptcies was that Sanyo Securities ceased its operations immediately upon making its announcement, whereas Yamaichi Securities was allowed to continue its business in order to settle outstanding contracts. On the first day of business following the announcement, investors pulled an estimated JPY 800 billion (U.S.$7.4 billion) out of the firm. The immense size of the bankruptcy undoubtedly had immediate major repercussions in Japan and throughout Asia. Furthermore, intense media scrutiny not only magnified the situation but also left lasting impressions on Japanese savers concerning the risks of securities investments. 1. Merrill Lynch, 1999 Merrill Lynch is one of the strongest franchises in the global financial markets. It maintains a broad diversification of client groups, product lines and geographic areas, which gives the firm a 1 This is a Columbia Business School Case prepared by Peter Espig, under the supervision of Robert Fallon and Lee Branstetter. Peter Espig is a former employee of Merrill Lynch and prepared this paper based on personal experience and publicly available materials. SPRING 2003 CHAZEN WEB JOURNAL OF INTERNATIONAL BUSINESS 1 powerful engine for future growth. Particularly in the equity field, Merrill possesses one of the world’s most powerful brand names and business platforms. In 1998, it had made deep inroads into the European markets, had seen its share price hit U.S.$100 and, finally, after more than 35 years, had begun to reap rewards from its Japanese experience. In fact, it could be argued that no foreign investment bank firm had remained as committed to the Japanese market as had Merrill Lynch. What Merrill Lynch sought to target in Japan was a portion of the world’s largest asset pool— an estimated U.S.$11 trillion dollars of Japanese savings. Exhibit 1 tracks the growth in this wealth from the mid-1960s through 1998, as well as its allocation across different categories of assets. This enormous pool of wealth included the capital of 1,900 pension funds with aggregate assets in excess of U.S.$1.5 trillion. The breakdown of Japanese pension-fund capital across different fund categories is profiled in Exhibit 2. In 1998, Japan’s stock of savings was expected to continue its 5 percent annual growth and reach U.S.$14 trillion by 2002 (CIBC Oppenheimer 1998). Over the years, Merrill Lynch had built up its institutional securities business and an asset management business in Japan. It sought to add to this a strong, complementary retail securities presence in the world’s second-largest economy. In 1998, only about 7 percent of Japanese household wealth was directly invested in the stock market versus nearly 30 percent in the United States. Even a modest convergence of Japanese households toward a more “American” pattern of investment of household wealth would seem to create enormous opportunities for the retail securities industry. To put this another way, if Merrill were able to bring under its own management even a small fraction of the nearly U.S.$6 trillion in household wealth stashed in Japanese bank and postal savings accounts, it stood to reap enormous profits. Of course, other Western financial institutions were enticed by the same opportunity, but the difficulties of reaching sufficient scale in Japan to be able to reach out to the retail investor seemed daunting. Merrill’s top leadership considered a number of options through which it could reach the desired scale, including the acquisition of or merger with a domestic firm. Before Yamaichi’s collapse, Merrill Lynch had been in negotiations with the firm for several months, and Merrill was therefore well versed in Yamaichi’s day-to-day operations and knowledgeable about its financial condition (Donaldson, Lufkin and Jenrette 1998). The collapse of Yamaichi seemed to present Merrill with a once-in-a-lifetime opportunity to enter the Japanese market on a large scale and with limited cost. Rather than spend a large amount of money acquiring a going concern at a premium, Merrill was able to take over a large number of branch leases and hire, at a stroke, several thousand seasoned Japanese finance professionals, some with decades of experience. 2. The Merrill Lynch Bull The bull has, depending on the culture, several different connotations: In Spain, it brings to mind the annual pilgrimage to Pamplona for the Fiesta de San Fermín, when the brave engage in a dance of death as they run with a stampede of bulls. In the United States, it refers to robust market conditions. It also is synonymous with Merrill Lynch itself. In Japan, it is the famous symbol of yet another cultural icon—Korean barbeque restaurants. SPRING 2003 CHAZEN WEB JOURNAL OF INTERNATIONAL BUSINESS 2 Nine months after Yamaichi Securities’s collapse, the doors opened once again to 30 former Yamaichi branches comprising several thousand former Yamaichi employees, employees hired away from other financial institutions and Merrill Lynch managers. During this nine-month period, assets had dropped from JPY 22 trillion to just over JPY 7 trillion, as anxious investors withdrew capital from the securities firm. However, with Merrill Lynch’s global brand power, a domestic equity research capability ranked second in Japan (Nomura Securities maintained the top ranking) and an expensive advertising campaign that covered all media sources, Merrill was confident of its ability to succeed. Outside each branch, Merrill’s bull symbol stood proudly, and managers waited hungrily for clients to reinvest withdrawn money. Unfortunately, some potential clients also arrived hungry—literally. They thought the branches were Korean barbeque restaurants.2 3. Bank Deposits, Postal Accounts and Nomura Securities The vast majority of Japanese savings in 1998 were held in bank deposits or postal savings accounts—financial instruments that paid very low rates of return. In contrast, Merrill Lynch offered potential investors a wide portfolio of investment products that, while riskier, offered Japanese investors much greater potential returns on their savings. With its acquisition of Yamaichi’s assets, Merrill Lynch had become by far the dominant non-Japanese brokerage firm in Japan. With the addition of a retail enterprise to its No. 2–ranked institutional business and research platform, it was now prepared to take on Japan’s leading securities firm, Nomura, and tap into Japan’s massive savings pool. Merrill’s optimism was exemplified by John Sievwright, president of Merrill Lynch Japan: Merrill Lynch has been in Japan for 37 years. We have a strong institutional capacity, our asset management side is growing, and now retail gives us the logical third component to our business in Japan. There will be nothing Nomura has that we don’t have. . . . The idea is not so much improving our share of the existing market, but more to tap money from outside, money saved in the post office or stuffed under the mattress. The returns on investments are so bad in Japan. We’ll be offering good yields, new products, and better managed funds, so we should attract considerable new money. 3 Nomura had consistently maintained the top domestic ranking among securities firms in postwar Japan. It operated 133 branches, employing 2,310 financial consultants; Daiwa operated 123 offices, employing 2,130 financial consultants; and Nikko operated 124 offices, employing 1,940 financial consultants (Nikkei Online). With 1,200 financial consultants trained under the Merrill doctrine, the company was expecting to make major inroads into what Merrill Lynch Japan retail president Ron Struaus referred to as “our top international market.” While Merrill now had a scale sufficient to reach into the pocketbooks of Japan’s cautious savers, Merrill’s top management believed that it also stood to benefit from its status as a relative outsider in the Japanese securities industry. The Japanese retail investor had become quite disillusioned with the leading Japanese securities firms. 2 3 This misunderstanding was reported in the Yomiuri Shimbun October 1998. Yomiuri Newspaper Interview, October 1998. SPRING 2003 CHAZEN WEB JOURNAL OF INTERNATIONAL BUSINESS 3 This disillusionment stemmed in part from the depressed state of the stock market. As Exhibit 3 illustrates, as of 1998, the Japanese stock market had fluctuated for several years in a range between roughly 40 percent and 60 percent of 1989 peak values. Among at least some investors, hope of an eventual return to those peak values had long since faded. Obviously, this dimension of investors’ disillusionment with the market would pose a challenge to Merrill Lynch as well as to its competitors. However, even during the boom years of the market, retail investors in the Japanese equivalent of mutual funds (so-called investment trusts, pioneered in Japan by Nomura Securities) had failed to benefit much from the market’s strong performance. One economic study found that Japanese households that invested in investment trusts received an average rate of return of only 1.74 percent per year between 1981 and 1992—a period during which the market rate of return was 9.28 percent (Cai, Chan and Yamada 1997). Regardless of performance measures, Japanese investment trusts underperformed their benchmark indices by between 3.6 percent and 10.8 percent per year in this period. Many of the management companies running investment trusts’ portfolios were subsidiaries of Japan’s securities companies and earned substantial commission income for their corporate parents by churning their asset portfolios. The turnover ratio in these investment trusts’ portfolios was more than twice the Tokyo market average. Japanese law prevented investment trust managers from comparing their performance with rivals in advertisements, making it harder for retail investors to identify investment trusts managed in the interests of investors rather than the interests of the management companies’ corporate parents (Cai, Chan and Yamada 1997). As the market plunged, the performance of investment trusts worsened even further. Finally, part of the Japanese investors’ disillusionment with securities firms stemmed from the steady stream of financial scandals that had emerged since the market crash of the early 1990s. These scandals included illegal payoffs to so-called sokaiya racketeers, illegal use of small-scale investors’ funds to compensate large-scale investors for losses in the market (the tobashi scandals) and scandals that involved the provision of “hot” stocks to politicians on a preferential basis. Japanese bureaucrats charged with regulating the securities industry were also implicated in some of these scandals, reinforcing the increasingly cynical view among retail investors that no one was watching out for their interests. Merrill’s management believed that this view created a ripe opportunity for a new entrant unencumbered by the scandals, poor performance and questionable management of small investors’ funds that had soured investors on the leading firms in Japan. Indeed, looking back to Merrill’s own history in the United States, top management saw a parallel between the situation in Japan in the 1990s and the situation in the United States in 1940, when the founders of Merrill Lynch began their campaign to take “Wall Street to Main Street”—convincing a skeptical and disillusioned American investing public to put its money into stocks again, but under a set of principles and guidelines that safeguarded the interests of the small investor. 4. Anticipated Losses to Rejuvenate Image The new enterprise in Japan was not expected to reap immediate benefits for Merrill Lynch. In fact, Merrill’s long-term plan called for long-term positioning and pretax losses of U.S.$125 million for SPRING 2003 CHAZEN WEB JOURNAL OF INTERNATIONAL BUSINESS 4 1998 and U.S.$30 million in 1999 before finally breaking even in 2000. Management felt that the break-even process could be accelerated by properly educating a population of savers who lacked knowledge of and experience with most of the financial products Merrill had to offer. This process of investor education would be carried out largely by finance professionals inherited from Yamaichi—a firm whose track record in safeguarding the interests of small investors had been essentially no better than its domestic competitors. However, Merrill’s management was confident that its Merrill financial consultant training program would be able to impress Merrill’s principles and safeguards firmly upon the minds of the former Yamaichi professionals. In turn, these newly trained employees would be crucial in generating the return of lost assets by convincing Japanese investors that—at last—there was a large retail brokerage that acted in their interests. Merrill Lynch management addressed the issue of Yamaichi’s somewhat tarnished image head-on in the Japanese media, and it used an aggressive campaign, stressing its new management, to convince the public of the integrity of its newly formed firm. The mistakes of Yamaichi were not the only potential image problem facing Merrill Lynch. Critics of the firm pointed to another obstacle: overcoming the vulture image it had acquired in some minds for taking over a blue-chip Japanese institution for nothing. There was a sentiment among some business leaders and politicians that Merrill Lynch, which had negotiated for months with Yamaichi about a possible acquisition or partnership, had deliberately stalled the process until the firm collapsed, then took over some of the securities firm’s assets at a price far below their intrinsic value. As a counterexample, these critics pointed to Salomon Smith Barney, which had not only developed a joint venture with Nikko Securities, but also had injected U.S.$1 billion into its new partner’s faltering operations. These views were noted by Merrill management, but from its perspective a partnership with Yamaichi along the lines of the Nikko Salomon Smith Barney venture would not have been viable. The enormous but difficult-to-quantify off-balance-sheet liabilities of Yamaichi (which eventually brought down the firm, in spite of loans from the Bank of Japan) were an enormous barrier to any kind of partnership. In other words, the view of Yamaichi as an institution with high intrinsic value may have reflected nationalistic sentiment, but it also showed a real ignorance of the depth of the financial problems of the firm prior to its collapse. Furthermore, Merrill’s market research had confirmed the depth of cynicism on the part of the Japanese investing public with respect to domestic institutions. In the view of Merrill’s managers, the remaining brand equity of Yamaichi as a going concern was minimal and worth little. Finally, as Merrill’s managers liked to point out, they had effectively saved the jobs of about 3,000 former Yamaichi professionals—something no Japanese institution had been prepared to do at the time. 5. The Environment Most financial analysts applauded the move by Merrill Lynch to enter the retail securities business in Japan on such a large scale, calculating that the original U.S.$0.50 per share investment would someday pay handsome dividends. The following quote, taken from a Bernstein Research report (1998), was a typical assessment from the analyst community: “Merrill Lynch’s attempts to change the habits of retail investors and brokerage employees in Japan are nothing short of Herculean. We project that Merrill’s retail effort will be successful. If the SPRING 2003 CHAZEN WEB JOURNAL OF INTERNATIONAL BUSINESS 5 gambit works, Merrill will emerge as the best and most completely positioned of the U.S. firms in the region. Merrill will be the major company in the world, outside of the United States, in which it will have three strong legs to the stool—institutional, retail, and asset management.”4 These predictions were contingent on a recovery by the Japanese stock market; therefore, it was universally anticipated that Merrill Lynch’s earnings volatility would increase. What analysts were unable to foresee was the extent to which adverse domestic macroeconomic conditions would influence the new venture’s profitability. In early 1998, expert observers of the Japanese economy were cautiously optimistic that a long-awaited turnaround was finally at hand. The Japanese government finally seemed to be coming to terms with a banking crisis, and it also seemed willing to do what was necessary to recapitalize and restructure the banks and use fiscal stimulus to jump-start economic growth. The belief was widespread that, once economic growth resumed, the stock market would also begin to rise. Surely a wealthy, modern, technologically advanced economy like Japan would not languish forever. On January 12, 1998, the Nikkei 225 weekly average stood at JPY 16,046 (far below the bubble’s peak at JPY 39,000). Sufficient upward movement in the market was, as Patrick Hogan, director of Japan Equities, stated, “crucial because market movement in either direction would magnify the end result on our newly formed venture.” The year was, however, far from bullish, and by year’s end the Nikkei had dropped to JPY 13,709, a 14.6 percent decline. As Exhibit 3 illustrates, after an aborted recovery in 1999–2000, the Japanese stock market resumed a downward trend. By 2002, the value of the stock price index was at 20-year lows, with little hope of a recovery in sight. The poor performance of the Japanese economy continued to weigh heavily on the market. Nominal Japanese GDP continued to shrink; the economy recorded real growth only because prices were falling even faster than nominal output. Merrill had anticipated that its retail business in Japan would be based primarily on the sale of Japanese securities, but Merrill’s global presence meant that the firm was in a position to offer its clients access to a portfolio of foreign securities products—a portfolio much broader and more sophisticated than anything offered by Merrill’s domestic rivals. The appeal of foreign securities, though, was undercut by substantial foreign-exchange fluctuations. As illustrated by Exhibit 4, the yen strengthened dramatically between 1998 and 2000. Investors who purchased foreign securities in 1998 saw the yen value of the investment returns substantially reduced by yen appreciation. In this challenging market environment, Merrill’s management found that its assets under management were growing much more slowly than anticipated. In a nation where finance is relationship-based, clients who had severed relationships with the old Yamaichi had, to Merrill’s dismay, developed new ones. Clients who transferred funds to Merrill from brokerage accounts with other domestic brokerage firms often received emotional telephone calls from their brokers pressuring them to maintain their current relationships. In fact, the bulk of the posttakeover influx of money was attributed to wealthy individuals who placed only a small portion of their estate in Merrill Lynch’s accounts (Warburg Dillon Read 1998). While the money arrived more slowly than anticipated, the fixed costs of maintaining such a large-scale retail presence continued to grow. Foreign financial firms tended to offer employee compensation packages that were more generous than those of domestic firms, and this was 4 Yomiuri Newspaper Interview, October 1998. SPRING 2003 CHAZEN WEB JOURNAL OF INTERNATIONAL BUSINESS 6 particularly true in the case of expatriates, who often received such benefits as housing and schooling for dependents. Merrill relied heavily on domestic employees, but it still had to contend with relatively high fixed costs. Losses of U.S.$125 million had been predicted early in the year, but these were less than half the level of actual realized losses. On an annual basis, Merrill Lynch continued to lose money throughout the entire life of the venture, with losses peaking in 2001 at U.S.$500 million. Merrill Lynch also found that the much-heralded “Big Bang”5 was cutting into its revenue stream: retail and institutional trade commissions had been cut in half, in many cases by two-thirds. The loss of commission income made an increase in assets under management all the more critical. Merrill Lynch shareholders and analysts began to voice concerns about the future profitability of the current venture with its high fixed costs. 6. Retreat Merrill Lynch was forced to make a major decision concerning how long it could incur such huge losses. By 2001, a slowing U.S. economy, large declines in U.S. and European equity markets and emerging signs of a global recession began to put pressure on the Merrill Lynch parent firm. A shake-up of the firm’s top leadership in the United States coincided with a new campaign to cut back on unprofitable operations and shrink staffing worldwide. The firm’s global leadership felt that it was no longer in a position to make expensive bets on a long-term, but highly uncertain, payoff. On January 9, 2002, Merrill Lynch announced that it was closing all but eight of its retail branches; in July, it announced that it would maintain only three of these branches; by September, it was down to two. In November, it was decided that the firm would merge the Japan and Hong Kong operations. Merrill was in a full-scale retreat. The company had taken a great gamble, but the gamble, unfortunately, did not pay off. Adverse economic conditions in Japan posed enormous challenges for a new entrant into the Japanese retail securities industry. For a short time, Merrill seemed to have reasonable prospects for success in Japan as it witnessed a daily U.S.$600,000 increase in investments (Nikkei Online). However, the euphoria began to wane as the increase in total assets under management quickly stalled, peaking in 2000 at approximately JPY 1 trillion (U.S.$9.59 billion)—less than 5 percent of the assets held by Yamaichi before its bankruptcy. 5 The Big Bang was a set of comprehensive reforms on Japan’s financial markets launched in November 1996, under the administration of Prime Minister Ryutaro Hashimoto. SPRING 2003 CHAZEN WEB JOURNAL OF INTERNATIONAL BUSINESS 7 References Bernstein Research Weekly Notes. 1998. Merrill Lynch Japan: Going for the big win. 25 September. Cai, Jun, K. C. Chan and Takeshi Yamada. 1997. The performance of Japanese mutual funds. Review of Financial Studies 10, no. 2: 237–73. CIBC Oppenheimer Brokerage Report. 1998. Merrill Lynch investment conclusion—Strong buy. 28 April. Credit Suisse First Boston Monthly Equity Research Report. 2002. Japanese securities brokers: Irrational exuberance? March. Donaldson, Lufkin & Jenrette Financial Services. 1998. Merrill Lynch: Striking while the iron is hot— Merrill’s PC blitzes Japan. 13 February. Monetary and Economic Department, comp. Bank For International Statements: BIS Paper. Japan, October 2001. Nikkei Interactive Online. Articles on Merrill Lynch and Yamaichi Securities http://www.nni.nikkei.co.jp Royama, Shoichi. 2000. The Big Bang in Japanese securities markets. In Crisis and Change in the Japanese Financial System, edited by T. Hoshi and H. Patrick. Boston : Kluwer. Warburg Dillon Read Securities Industry Report. 1998. Report on Merrill Lynch. 5 September. Yomiuri Shimbun Online. Http://www.yomiuri.co.jp. October 1998. SPRING 2003 CHAZEN WEB JOURNAL OF INTERNATIONAL BUSINESS 8 Exhibit 1 End of Year 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 Financial Assets in Japan / Allocation across Asset Classes, 1964–98 Total Financial Assets (100 Million Yen) Cash and Deposits (%) Trust Accounts (%) Insurance and Pension (%) Securities Investment Trust (%) 268,923 312,634 368,622 427,524 511,181 627,386 716,600 855,700 1,113,458 1,277,312 1,482,031 1,784,637 2,086,751 2,383,784 2,761,873 3,098,572 3,440,324 3,859,283 4,277,128 4,776,162 5,267,657 5,721,344 6,422,768 6,963,165 7,857,442 8,934,421 9,246,119 9,809,059 10,178,181 10,751,453 11,309,336 11,816,068 12,091,513 12,293,513 13,056,563 59.4 60.1 60.8 62.6 61.8 60.8 62.6 62.0 60.1 64.7 65.5 64.3 64.2 64.5 64.0 64.4 64.3 63.8 62.8 60.7 59.2 58.5 56.1 55.7 52.7 51.7 53.9 54.9 55.4 55.1 55.3 55.7 56.9 58.8 55.2 4.1 4.6 5.0 5.4 5.5 5.3 5.6 5.6 5.4 5.6 5.7 5.8 6.0 6.2 6.0 6.1 6.0 6.3 6.6 6.7 6.8 6.9 6.5 6.3 6.4 6.3 7.0 7.1 7.4 7.3 7.1 6.7 6.4 5.9 2.8 11.5 11.6 11.8 12.1 12.2 11.9 12.6 12.7 11.6 11.9 12.2 12.0 12.1 12.3 12.3 12.7 13.2 13.5 13.9 14.2 14.7 15.5 16.3 17.6 18.6 19.2 21.0 21.7 23.0 24.0 24.7 24.8 25.1 25.6 27.8 4.6 3.4 2.6 2.0 1.6 1.6 1.7 1.7 1.5 1.6 1.8 1.7 1.7 1.8 1.8 1.7 1.5 1.6 1.8 2.5 2.9 3.0 3.6 4.7 4.9 4.6 4.2 3.5 3.7 3.3 2.8 2.8 2.6 2.3 2.1 Stocks (%) Other Securities (%) 17.1 16.5 15.1 12.6 13.5 14.9 11.8 11.8 15.5 10.2 8.9 9.9 9.0 7.8 8.3 7.7 7.4 7.1 6.8 7.9 8.5 8.5 10.9 10.0 12.6 13.9 9.0 8.1 6.2 6.6 6.6 6.8 6.1 4.8 7.2 3.3 3.8 4.7 5.3 5.4 5.5 5.7 6.2 5.8 6.0 5.9 6.3 7.0 7.4 7.6 7.5 7.6 7.8 8.0 8.0 7.9 7.6 6.6 5.6 4.8 4.3 4.9 4.7 4.3 3.7 3.6 3.2 2.9 2.5 5.0 Source of original data: Bank of Japan, Flow of Funds Statistics. Note: 1998 numbers are based on new flow-of-funds statistics that BOJ started to publish in 1999 and are not exactly comparable to the earlier figures. For example, trust accounts held by pension funds on behalf of households were classified in “Trusts” in the old statistics but in “Insurance and Pension” in the new statistics. Taken from Royama, 2000. SPRING 2003 CHAZEN WEB JOURNAL OF INTERNATIONAL BUSINESS 9 Exhibit 2 Japan’s Pension Market, 1998 Japan's Pension Market ($ billions) World's # 2 Market; 10% growth rate 510 700 PensionW elfare Service Employee Pens ion Fund s 270 250 Quali fied Pl ans Exhibit 3 Stock Price and Turnover in Japan, 1972–2002 45000 40000 TSE peaks, 1989 Ronald Reagan elected President, 1980 200000 Junichiro Koizumi elected PM, 2001 Plaza Accord, 1985 160000 35000 30000 25000 Japanese financial crisis of Nov. 1997 Nikkei stock price index 20000 120000 100000 60000 10000 0 140000 80000 15000 5000 180000 40000 Turnover (transaction volume) 20000 0 Source: Bank of Japan. The left axis tracks the price of the Nikkei 225 stock price index in yen. The right axis tracks the volume of turnover on the TSE, in units of 10,000 shares. SPRING 2003 CHAZEN WEB JOURNAL OF INTERNATIONAL BUSINESS 10 Exhibit 4 Movements in the Real Effective Exchange Rate of the Japanese Yen, 1972–2002 175 Yen peaks against the dollar, 1995 165 Plaza Accord 155 First oil shock 145 Japan's banking crisis, 1997 Second oil shock 135 125 115 105 95 85 2002 2001 2001 2000 1999 1999 1998 1997 1997 1996 1995 1995 1994 1993 1993 1992 1991 1991 1990 1989 1989 1988 1987 1987 1986 1985 1985 1984 1983 1983 1982 1981 1981 1980 1979 1979 1978 1977 1977 1976 1975 1975 1974 1973 1973 75 Source: Bank of Japan. The real effective exchange rate is a weighted average of the yen’s value against 25 major currencies. SPRING 2003 CHAZEN WEB JOURNAL OF INTERNATIONAL BUSINESS 11