Bank of Tokyo-Mitsubishi Ufj, Ltd.

I. OVERVIEW

A) History of Japanese Economy

The Japanese economy is the 3rd largest economy in the world, coming right behind the American economy and the economy of China. It's one of the most studied economies among all due to its rapid growth in different eras. Its economy first interacted with Europe in the 16th century, and the Europeans were admirers of the country as it was one of the richest in metals and became a major exporter of copper and silver.

In 1603, which is the beginning of the Edo period, the interaction between the Japanese and Europeans was extremely intense, and that, however, exposed Japan to Christianization waves, which lead Japan to enter a period of isolation in order to avoid such religious waves. Significant expansion of domestic industries increased during this phase. The construction trade grew along with banking dealing activities. The Edo period ended in 1868, and by that time Japan had developed many business trading and handcraft production centers which helped the economy growth positively.

After the Edo period came the Prewar period in the mid-19th century. During this phase, Japan has opened to Western commerce again. Japanese leaders adopted a new western-based education system and sent thousands of students on scholarships to American and Europe. The Japanese government built new roads, railroads, dams, bridges, and ports. In order for the government to support industrialization, it decided to help private businesses in the allocation of resources process while stabilizing public growth at the same time. However, the biggest duty of the government was to help in providing the suitable economic conditions for businesses to grow and improve. The government, for instance, have built factories and shipyards that were afterwards sold to entrepreneurs at lower value prices, and many of these grew rapidly and helped the economy rise. The Japanese nominal wage rate was 10 times less than it is in America during this period, and this is considered as a strong statistical evidence from back then that shows how the Japanese economy expanded quickly.

The postwar period started in 1945 until present. Between 1960 and 1980 within this period of time, the real economic growth has been called a "miracle" as it increased by an average of 20%, and by the late 80s, Japan has moved from being a low-wage economy to a high-wage economy. But in the late 1990s growth slowed due to the Bank of Japan's failure to cut down interest rates quick enough to oppose the over-investment during the late 1980s. Japan therefore entered a liquidity trap and suffered huge budget deficits. By 1998, Japan still couldn't stimulate demand to end the stagnation economic situation, and out of desperation, the Japanese government carried out "structure reform" policies with a purpose of squeezing speculative behavior from stock and real estate markets.

Unfortunately, this step has lead Japan into a deflation economic situation between 1999 and 2004. Japan also used another technique called "quantitative easing", which is increasing money supply from the Central Bank of Japan to raise the public expectation of inflation domestically, and by late 2005, the economy lastly sustained recovery. However, all efforts to counter price deflation failed.

Below is a table showing the change in the Japanese GDP, USD exchange, inflation index, nominal per capita GDP, and the PPP capita GDP:

B) Japanese Financial & Banking System

The Financial Services Agency (FSA) serves as a regulatory authority of financial institutions in Japan. In the past, the Ministry of Finance used to hold the control and regulation bank supervision and inspection, but the Ministry of Finance has no regulatory authority over financial institutions nowadays. The FSA has the right to demand reports regarding the financial conditions of a bank, to inspect bank premises, to punish bad behavior (by suspending operations and license) and to order a holding of assets within Japan.

The Financial Services Agency (FSA) has been engaged in an initiative to advance the quality of financial regulation "Better Regulation" since the summer of 2007. Since then, the international financial market chaos started by the U.S. subprime mortgage problem which developed into a world-wide financial crisis, in particular, following the fall down of a major U.S. investment bank, Lehman Brothers, in September 2008.

In the middle of the radically changing environment for financial regulation, the FSA has struggled in order to correctly analyze the current situation, and has implemented different types of measures in a short period of time, keeping its stance regarding "Better Regulation" in mind when carrying out crisis responses. The FSA has continued to promote "Better Regulation" in conducting inspection and supervision, and to move ahead with it into the future. The foundation of "Better Regulation" consists of four major bases:

* A combination mix of rule-based with principle-based supervisory approaches.

* Timely recognition of priorities and effective response.

* Encouraging voluntary efforts by financial institutions.

* Improving the transparency and predictability of regulatory actions.

On the other hand, the Bank of Japan (BOJ) is the central bank of Japan, and often called Nichigin. It is not a regulatory authority but it conducts examinations in order to maintain a safe and sound financial system. It issues banknotes and bonds as well, manages the monetary policy and international activities, and performs economic research analysis. The BOJ Board sets the guidelines for carrying out the Bank's operations, and supervises the implementation of the duties of its officers, excluding auditors and counselors.

The main guidelines and outlines for banks are clearly stated in the below:

Japanese banks are also subject to other sub-laws and regulations that are:

Japanese Private Banks can be divided based on their functions or history. City Banks are large in size, with headquarters in the major cities and their suburbs. Regional

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