«Policy Research Institute, Ministry of Finance, Japan, Public Policy Review, Vol.8, No5, November 2012 563 Why Did the Debt Maturity of the Japanese ...»
Policy Research Institute, Ministry of Finance, Japan, Public Policy Review, Vol.8, No5, November 2012 563
Why Did the Debt Maturity of the Japanese Firms Get Longer？:
A Preliminary Investigation
Professor, Institute of Economic Research, Hitotsubashi University
As Japanese firms have reduced the proportion of debts in their capital structures, they have
also increased their debt maturities. Since the shorter debt maturity is more costly for the firms of poor performance, it is argued that the maturity length plays the role of signal as the theoretical model of Flannery (1986) and Diamond (1991, 1993) suggest. Using Financial Statements Statistics of Corporations by Industry (FSSCI) data, I examine if the story that both total amount of debt and the debt maturity choice serve as signaling devices of borrower firms, an extension of the signaling model of the choice of debt maturity. At least for the non-manufacturing industry sample, it is confirmed that there is a clear correlation between corporate performance and the reduction of corporate borrowings. On the other hand, when the growth rates of the total debt are at the similar level, the industries that have better performance measured by ROA are more prone to increase or less aggressive to reduce the short-term borrowings. The result of the empirical analyses is consistent with the static model of the debt maturity choice by Flannery=Diamond, when we look at the relationship between the growth rate of the short/long-term debt and ROA alone. However, when the growth rate of total debt is taken into account, significant parts of the variations in the growth rates of short-term and long-term debts remain unexplained.
1. Introduction Since around the beginning of the 21st century, thanks to steady and strong export demands, Japanese firms had been enjoying a subtle yet sturdy growth until the second half of 2008 when the whole world plunged into the serious financial crisis which leads to the full-blown global recession. On the other hand, since the domestic financial crisis of 1997/98, there has been a large-scale restructuring in both real and financial sides of Japanese firms.
In this regard, Iwaisako (2010), using the data of Financial Statements Statistics of Corporations by Industry (FSSCI), describes in details about the debt restructuring by Japanese non-financial corporations through the 2000s, particularly the large-scale reduction of bank borrowings.
T Iwaisako / Public Policy Review An additional, but important finding pointed out in Iwaisako (2010) is that since the financial crisis of the late 1990’s, the ratio of the long-term debt to total debt of Japanese firms is rising rapidly. Table 1 shows, using the “all firm sizes” and “all industries” category from FSSCI data, the “Short-Term Debt/Long-Term Debt" ratio and the “Short-Term Borrowing/Long-Term Borrowing” ratio at the end of every five years since the year 1985.
Later indicator is the measure using narrow classes of debts, borrowings from financial institutions.
When evaluated with the former indicator, in the year 1985, the amount of short-term debt roughly doubled the amount of the long-term debt. By 2008, the ratio went down to 1.09, so that the amounts of short-term and long-term debts became nearly as the same. The same conclusion is reached when the latter indicator is used: the ratio of short-term loans have been greatly reduced that it went down to about 0.5 by 2008 from 1.14 in the year 1985. Therefore, it is evident that the average debt maturity has got longer over the years and the magnitude of this change is both quantitatively and economically important to be ignored.
Table 1: Increasing Debt and Borrowing Maturities of Japanese Non-financial Corporations
Although the increase in average debt maturity of nonfinancial corporations may not have much importance as the large decline in their average debt/equity ratio, which has already been discussed extensively in the literature, in itself is interesting as an economical phenomenon. For example, from the perspective that emphasizes long-term relationship between the borrowers and the lenders, such as in the literature on the “relationship banking” and the main bank system, the longer debt maturity of the company can be considered as the embodiment of the change in bargaining power in the implicit contract. The longer debt maturity also has potential importance, for example for the risk management practice of both borrower firms and the lender financial institutions. It might have an important implication for the monetary policy analysis since the large change in debt maturities might affect the transmission mechanism of the central bank’s policy tools.
In this paper, as in Iwaisako (2010), I use the FSSCI data to analyze the long-term trend of Policy Research Institute, Ministry of Finance, Japan, Public Policy Review, Vol.8, No5, November 2012 565 Japanese non-financial corporations’ debt structures. More specifically, I ignore the issue regarding the firm size and concentrate to the contrast between manufacturing and non-manufacturing sectors. The analyses in this paper will mainly focus upon firms’ borrowings from the financial institutions, because the numbers of short-term and long-term debts of a company as a whole include some types of debts that are difficult to be classified such as commercial papers and the tax-accounting related categories. The focus of this paper’s analysis is admittedly narrow. However, given that this topic has never been the subject of serious research before, it is an acceptable and natural first attempt, showing a large picture using the data with relatively coarse classifications.
Although I am not aware of any previous researches exactly on this topic, I should mention some existing researches that are closely related to the theme of this paper. First regarding the maturity structure of the Japanese firms, there are studies such as Cai et.al. (1999) which examined the effect of the main bank affiliation on the choice of corporate bond maturity, and Fukuda and Kei (1996) which examined about the effect of the loan made by the Development Bank of Japan on corporate debt maturity. However, both papers are about rather old sample periods from the 1960-80’s.
As for more recent research, there are the series of discussion papers by Yoshiro Miwa (see Miwa  for an overall summary). They are comprehensive studies of the changes in financing behavior of Japanese firms and the evolution of their financial structures in recent years, using the original individual firm data collected for the FSSCI data. In addition, there is a large body of recent studies on “relationship banking” and/or small business lending in Japanese financial system, such as Tsutsui and Uemura eds. (2007), Uesugi and Watanabe eds.
(2008) and Uchida (2010). However, none of these studies focuses on the specific phenomenon of the increasing debt maturity of Japanese firms.
The remainder of this paper is organized as follows. Section 2 describes how the debt maturities of Japanese corporations got longer over the years. Section 3 examines whether the continuing low interest rates since the 1990’s can account for why the debt maturity got longer.
In section 4, I summarize the existing theoretical analyses on the firms’ debt maturity choice based on asymmetric information between a borrower and a lender. Then, I carry out some empirical analysis based on the industry data. Section 5 gives the conclusions of this paper.
2. Trend in the Average Debt Maturity of Japanese Firms
In this section, I provide an overview of the trend in average maturity of corporate borrowings by Japanese non-financial corporations by looking at the numbers from the FSSCI data for three different firm groups, all industries, manufacturing industries, and non-manufacturing industries.
Figure 1 shows the ratios of short-term /long-term borrowings from the financial T Iwaisako / Public Policy Review institutions for three different types of firm groups. As it is evident at a glance, the average short/long borrowing ratio of the Japanese firms follows the long-term declining trend over the entire sample from 1985 to 2008.
Figure 1: Ratios of the Short/Long-term Borrowings from Financial Institutions As another obvious characteristic, non-manufacturing industries are more reliant on long-term debt than manufacturing industries. While the ratio of short-term /long-term borrowings of manufacturing industries was about 1.3 in the mid-1980s, it went down to 0.7 to the end of 2000. In contrast, the ratio of the non-manufacturing industries has gone down from
1.1 to about 0.5. Apart from the year 1993, the ratio of non-manufacturing industries has been consistently lower than the ratio of manufacturing industries.
The ratio of the all industries’ average has not been exactly the average of manufacturing and non-manufacturing industries, but closer to the latter. The fact that non-manufacturing industries are more dependent to debt or more precisely to bank borrowings for fundraising has reflected on the aggregate data.
Closer examination of the changes in the ratio of short/long-term borrowing suggest that its first significant decline had occurred during the year 1987 to 1990/91, which corresponds to the period of the “Bubble Economy”. Then, after the slight break during the downward trend in 1992 and 96, the decline restarted most likely prompted by the domestic financial crisis in the year 1997/98. Downward trend paused again around the year 2000. Then, as the economy started to recover around the year 2002, the ratio of short/long-term borrowing also started to decline.
Policy Research Institute, Ministry of Finance, Japan, Public Policy Review, Vol.8, No5, November 2012 567 Figure 2: Growth Rates of Firms’ Borrowings from Financial Institutions
Figure 2 shows the growth rates of the short and long-term borrowings from financial institutions for manufacturing / non-manufacturing industries on two different graphs. These graphs suggest that the decline of short/long debt ratios during the “Bubble Economy” and since beginning of 2000 happened in quite different manner.
Growth of short-term debt in manufacturing industries during the bubble economy is effectively zero. It is evident that in this period, the borrowing maturity got longer primarily because of the increase in long-term debt. On the other hand, the non-manufacturing industries, whilst growth rate of the borrowings became higher for both short-term and long-term, long-term borrowings grew very significantly in the year 1987, and short-term debts declined significantly in the year 1989. These two separate events made the average debt maturity of the non-manufacturing industries lower in the second half of 1980s. On the other hand, since the beginning of the year 2000, both manufacturing and non-manufacturing industries have reduced their short and long-term debts at the same time. Thus, the longer debt maturities are attained by that decrease of short-term debt outpaced the decrease in the long-term debt.
In addition, perhaps because of the economic recovery started in the mid-2000, the growth rate of bank borrowings has become positive for both short and long-term bank loans in the year 2005-2007. Last time when they were clearly on the positive side was back in the late 1990’s before the domestic financial crisis of 1997/98.
For the year 2008, the growth of bank borrowings was positive and significantly larger than the average of 2000s. This is particularly true for the long-term borrowings. This increase should be distinguished from the increase in the period immediately before that. The increase in 2008 perhaps reflects the fact that the global financial and economic crisis triggered by the Lehman shock happened in the fall also gave great impact on the Japanese economy leading into a severe recession, so that the firms increased their borrowings mostly for the liquidity reasons, not for equip investments.
3. Possibility of explanation by low interest rates.
One might suspects that a possible explanation for the fact that debt maturity of the Japanese companies has become significantly longer, especially when we focus on the period after the 1990’s, is the continuing low interest rate. That is because of the recent year’s prolonged trend of the low interest rates, and as the short-term loans with low rates cannot be earned enough to profit any margin to begin with, financial institutions has shifted their lending to the long-term loans.
However, the banks’ decision regarding the maturity of the loans they offer is not only affected by the absolute level of the interest rates, but also by the differences between short-term and long-term loan rates. Therefore we should interpret the data with caution. It also should be noted that the lower interest rates cannot explain the increase in the debt maturity Policy Research Institute, Ministry of Finance, Japan, Public Policy Review, Vol.8, No5, November 2012 569 during the “Bubble economy” in 1980s anyway.
If the profitability of short-term loan compared to the long-term loan has relatively decreased as the short-term interest rates became close to zero, it can be considered as indirect evidence that the financial institutions have moved away from short-term loans to long-term loans. In order to analyze this point, Figure 3 shows the spread of short and long-term loan rates and the spread of loan and deposit rates.
In the panel A in Figure 3, the short/long-term spreads of average loan interest rate by the domestic banks are shown. There are three different definitions of the interest rate spreads shown in this graph: the “Domestic Bank” and “Aggregate” are the differences in the average interest rate on the existing loan stocks, while “New” is literally the interest spread on new loans. Until the beginning of the 1990’s, only “Aggregate” data for stock of loans existed.