The Industrial Bank of Japan - Company History

After the Sino-Japanese War, Japan's modern industry rose faster than its capital could follow: plant and equipment demanded sums the money market could not supply. Modelling the answer on the French banque mobilière, the government promulgated the Industrial Bank of Japan Act in March 1900, and in March 1902 the bank opened with a capital of ¥10 million, a quarter of it paid in, under its first president, Soeda Juichi. It was designed to be the opposite of an ordinary bank: instead of gathering deposits and turning short-term working capital, it would raise money at home and abroad by issuing industrial debentures and channel it into industry through investment in securities. Funding and lending alike were to run through the securities market.

The design was ahead of the market it assumed. Supplying industry through securities requires that corporate shares and bonds actually trade, and in Meiji Japan the securitisation of capital was barely under way — so the volume IBJ could deliver this way had a hard ceiling. Within a few years it abandoned the original blueprint. When the mortgage acts and the Secured Bond Trust Act were passed in 1905, IBJ took up bill lending against securities, foundation mortgage lending against whole factories and mines, and general trust business. It became a bank that lent long against collateral rather than one that invested in paper.

Two things then defined it. The first was the import of foreign capital, its principal work from the founding into the early Shōwa years: with thin domestic savings, projects such as railways and electric power — which take a decade to repay — could not be financed at home, so IBJ sold bonds abroad and routed the proceeds into heavy industry. The second was crisis duty. Where the zaibatsu banks grew by holding their own affiliates close, IBJ had no affiliates to hold, and it converted that absence into a function: window for foreign money, and convener of deals that straddled rival groups. In the post-WWI slump, the 1923 Great Kantō Earthquake and the banking panics that followed, it lent into the wreckage — relief money for silk and steel, reconstruction credit for damaged industry, emergency funds for the City of Tokyo alongside Mitsubishi Bank — and, once the danger passed, pushed its borrowers to refinance short debt into long and bank debt into bonds. Lending, and then rebuilding the borrower's balance sheet, became the house method; from the late 1930s the same machinery was turned to equipment finance for the war economy.

IBJ began the postwar by cleaning its own books: special losses from the cancellation of government war indemnities were written off under the Financial Institutions Reconstruction and Reorganisation Act in March 1948, capital was raised to ¥500 million that December and to ¥1 billion in September 1949, and the bank restarted as a long-term lender funded by debentures. Then the legal ground moved. In March 1950 the law on bond issuance by banks took effect and the Industrial Bank of Japan Act was repealed on the same day; the charter that had made it a special bank simply ceased to exist. That April IBJ converted into an ordinary bank, issued ¥1 billion of preferred shares to the Counterpart Fund to reach ¥2 billion of capital, and in October was designated a Class A foreign exchange bank.

As an ordinary bank it was now free to do what city banks did — build a branch network, take retail and small-business deposits, move into short-term commercial finance. Internally, branch siting and even a merger with the Nippon Kangyo Bank were examined. IBJ declined all of it. It kept raising money by debenture and lending it long for plant and equipment, and in July 1951 added ¥1 billion of capital purely to widen its debenture issuance limit. What it chose not to do in these two years and eight months settled the next half-century: having no deposit base stopped being a legal condition and became a decision.

In December 1952 the Long-Term Credit Bank Act came into force. It did not create a new business; it wrote into law what IBJ was already doing — fund with financial debentures, lend for capital investment. The numbers then moved fast. At the end of March 1955 debentures outstanding stood at ¥158.7 billion against deposits of just ¥46.5 billion, while loans of ¥204.9 billion ran 62% to equipment and 38% to working capital: a balance sheet that was the mirror image of a city bank's. Nishimura Masao, a later president, summed the era up plainly — in a country short of money, the point was to supply long-term equipment finance to build industry. That premise, not the law, was what held the model together.

The equity market broke down in the early 1960s under a flood of new issues: the Tokyo average fell from ¥1,829.74 in July 1961 to ¥1,020.49 by July 1965. Japan Joint Securities was set up in January 1964 to freeze the surplus stock, but the acute problem was a single firm. Yamaichi Securities booked a loss of over ¥3.4 billion for the year to September 1964 and by March 1965 carried ¥72.5 billion of borrowings against ¥55.5 billion of customer money held in trust. IBJ sat with Fuji and Mitsubishi as one of the three main banks weighing rescue terms — but what it supplied was not only money. In November 1964 Hidaka Teru, an IBJ alumnus then running Nissan Chemical, was elected to Yamaichi's board and took the presidency to run the rebuild. When news leaked ahead of the plan and a run began, the Ministry of Finance, the Bank of Japan and the three banks met at the BOJ's Hikawa lodge on the night of 28 May 1965; Hidaka waited at IBJ until Nakayama Sohei, his entry-year classmate, came back to say it was settled. The Bank of Japan's first unsecured special loan under Article 25 was made that night, reaching ¥28.2 billion over eight tranches by late July.

That was the pattern: IBJ seconded people into industry so persistently it earned a nickname as a dispatcher of manpower. Nakayama Sohei — president and later chairman — built a study group on industrial problems around Kikawada Kazutaka of Tokyo Electric Power and brokered consolidation on the conviction that Japanese industry could only be strengthened by merger. When the presidents of Yawata and Fuji Steel were ready to give up under Fair Trade Commission scrutiny, he got the three of them in a room and turned them back; the 1970 merger went through. The creation of Yamashita-Shin Nihon Steamship, the Nissan–Prince merger and the founding of Shin-Daikyowa Petrochemical ran through the same hands. The self-interest was plain and unembarrassed: stronger merged clients meant larger financing needs for the bank that arranged them. The record was not unblemished — Arabian Oil succeeded, but Japan Oil Development, working concessions bought from BP, bled. As broker IBJ was without peer; as principal it often lost.

The income statement swelled through the same years: ordinary income of ¥210.9 billion in the year to March 1971, ¥500.1 billion by March 1975 through the oil shock, ¥1.2613 trillion in March 1982 and ¥1.589 trillion in March 1985 — 7.5 times in fourteen years. Net profit over the same span rose only from ¥14.4 billion to ¥44 billion, roughly threefold. Volume was growing far faster than profitability, and the figures said so long before anyone acted on it. Internationalisation started late relative to the Bank of Tokyo and the top city banks, but built steadily through the subsidiary IBJ Deutschland, which in December 1973 became the first Japanese bank affiliate abroad to join a lead-underwriting syndicate, for Sumitomo Heavy Industries' Frankfurt listing. That accumulation carried Kurosawa Hiroshi, an internationalist who had served at IBJ Deutschland, to the presidency in 1990.

After the Plaza Accord of September 1985 the official discount rate fell to 2.5% by February 1987 and stayed there until May 1989. Under cheap money, large companies raised what they needed directly in the capital markets and parked the proceeds in specified money trusts and fund trusts — borrowing less from banks even as money poured into the banking system. Banks chasing assets pushed into small business and real estate; property lending ran to roughly ¥44 trillion between 1985 and 1989, expanded less by credit judgement than by watching what rivals did. For a bank whose entire purpose was supplying long-term equipment finance, the corporate flight from bank borrowing was an existential thinning of the customer base.

It surfaced in the worst possible form. On 8 August 1991 forged deposit certificates worth ¥342 billion, issued to Onoue Nui, the proprietor of an Osaka restaurant, came to light. Onoue had become a prized client of IBJ's Osaka branch, holding ¥290 billion of discount financial debentures at the peak and borrowing ¥240 billion back from IBJ against them. The bank that called itself the champion of industrial finance had built that exposure to one individual — because she was simultaneously its largest supplier and largest user of funds. She was arrested for fraud, sentenced to twelve years, and went bankrupt with ¥430 billion of debt, then a record for an individual; the trustee spent a decade pursuing the lender's share of the blame and recovered ¥17 billion from IBJ. Toyo Shinkin, which had forged the certificates, failed, and Sanwa Bank took over its assets with the first-ever grant from the deposit insurance system. President Kurosawa was summoned to the Diet to apologise; he had joined in 1950, the year the IBJ Act was repealed, and spent his presidency on bad debt — Onoue in 1991, then the loss-making housing-loan company clean-up of 1996.

Whether the long-term credit bank had a role left was an older question. Nishimura Masao dated his own recognition to the Japan–US Yen–Dollar Committee of May 1983: with liberalisation and internationalisation coming, defending the vested interest of separated short- and long-term banking could only mean slow decline. The 1993 financial system reform let banks, securities firms and trust banks enter each other's businesses through subsidiaries, and IBJ opened IBJ Securities in July 1993 and IBJ Trust in October 1995 — but the promised loosening of business restrictions ran three years late, and IBJ Securities could not handle equities until the second half of 1999. The regulatory clock ran slower than the commercial one. In April 1998 Nishimura declared a two-year state of emergency: overhaul the cost base, work off the bad-debt legacy, restructure, strengthen the core business, prepare for consolidation. Alliances followed — derivatives and pensions with Nomura in May, a full capital tie-up with Dai-ichi Mutual Life in October. With no group of its own, IBJ had to assemble a camp deal by deal while the old zaibatsu groups simply closed ranks.

Then two of the three long-term credit banks disappeared: the Long-Term Credit Bank of Japan went into temporary nationalisation in 1998 and Nippon Credit Bank was declared insolvent on 13 December. Nishimura insisted the failures were caused by bad loans, not by the long-term credit model — but funding by financial debenture was the structure all three shared, and the market looked straight at the survivor. Debentures outstanding fell from ¥20.2397 trillion in March 1998 to ¥19.4714 trillion that September; unlike a city bank with deposits, an IBJ executive noted, debentures are bought by institutions, and institutions only buy from a bank they trust. In January 1999 IBJ moved first among the major banks to apply for about ¥600 billion of public funds. Bad-debt charges for the year were being marked up from ¥600 billion toward ¥700–800 billion — a third loss-making year since 1990, with cumulative write-offs approaching ¥3 trillion — and the reserve that had funded all of it was gone: unrealised gains on securities of more than ¥3 trillion in 1991 had become an unrealised loss of over ¥30 billion by September 1998. Against exposures of about ¥250 billion to Kowa Real Estate, ¥91.2 billion to Nihon Shin-Toshi Kaihatsu and ¥210.2 billion to the Sogo group, standing alone was no longer available.

What IBJ still had, deposit-rich city banks did not: a client base of large corporates and financial institutions, and a claim on investment banking. Yasuoka Masayuki, recruited from Bankers Trust as a managing director in 1998, conceded the long-term credit bank was a thing of the past and argued that no Japanese bank other than IBJ could contest global investment banking — becoming, in the phrase of the period, a doctor to industry, entering the client's balance sheet rather than merely funding its plant. In September 2000 IBJ went under a joint holding company with Dai-Ichi Kangyo Bank and Fuji Bank and its shares were delisted; the corporate entity survived until the April 2002 reorganisation into banking and securities subsidiaries. Ninety-eight years as an independent listed bank ended there. What died was the business of funding long-term industrial lending with debentures; what carried over was the corporate and financial-institution franchise, the habit of brokering industrial reorganisation, and the people gathered for investment banking. The bank that had turned belonging to no group into a profession finished as one of three being combined, rather than the one doing the combining.