Free Trade Agreement

Why NAFTA renegotiation is a better choice Than withdrawal for the U.S.? 1. Introduction The North America Free Trade Agreement (NAFTA) has brought diverse changes to Canada, the United States and Mexico after it was enacted in" rel="nofollow">in 1994. Accordin" rel="nofollow">ing to Article 102 of the NAFTA, it details of the objective of this world’s largest free trade agreement; which is to “liberalize the trade between Canada, Mexico and the United States with stimulatin" rel="nofollow">ing economic growth and give the NAFTA member countries the equal access to each other’s”(CBP) . There are much concerns that NAFTA has brought trade deficit to U.S. labor market, ~, ~ and etc. However, trump announced his in" rel="nofollow">intention on renegotiation of NATFA recently. Is it a right timin" rel="nofollow">ing to do renegotiatin" rel="nofollow">ing NAFTA for the United States? Why Trump has decide to renegotiate NAFTA? And, in" rel="nofollow">in fact, could it brin" rel="nofollow">ing better benefit to the United Sates rather than breakin" rel="nofollow">ing out NATFA? This paper will give the answer to those questions. I will prove that Trump’s decision on renegotiation of NAFTA, rather than breakin" rel="nofollow">ing it, was completely rational and will brin" rel="nofollow">ing positive impact on the U.S. My main" rel="nofollow">in researchin" rel="nofollow">ing time frame is from the 1990s to 2007 and I will use some later years data (from the early 1990s to present) to compare and support my fin" rel="nofollow">indin" rel="nofollow">ings. There is the reason for choosin" rel="nofollow">ing that period because NAFTA took effect on Jan. 1, 1994. After this date, NAFTA immediately elimin" rel="nofollow">inated tariffs on the most of the goods produced by the signatory nations. My main" rel="nofollow">in fin" rel="nofollow">indin" rel="nofollow">ing is that the rational decision was made after considerin" rel="nofollow">ing between costs and benefits. Renegotiation, on the other hand, could be beneficial if the political min" rel="nofollow">inefield along the way to its completion can be successfully navigated. Realistically, there are no changes to NAFTA that can stop the slow declin" rel="nofollow">ine of manufacturin" rel="nofollow">ing employment in" rel="nofollow">in the United States, which is caused much more by automation and technological advance than anythin" rel="nofollow">ing else. But, as an agreement negotiated a quarter-century ago, there is plenty of space for the Trump admin" rel="nofollow">inistration to propose an update to NAFTA that would favor U.S. workers and competitiveness. (Revise this in" rel="nofollow">in an easy & simple sentences, and put the citation please) ) ★ 2. Why Trump admin" rel="nofollow">inistration in" rel="nofollow">initiated NAFTA renegotiation process? https://www.ft.com/content/4c1594c6-e18d-11e6-8405-9e5580d6e5fb → sources from the above website. Please revise these. →Everyone agrees Nafta is in" rel="nofollow">in need of an update Mr Trump is not the first American president to call for the renegotiation of Nafta, or to see it as politically toxic. Barack Obama vowed durin" rel="nofollow">ing his 2008 campaign to renegotiate Nafta to update its labour and environmental standards. His admin" rel="nofollow">inistration argued that it delivered on that promise with its negotiation of the 12-country Trans-Pacific Partnership, which in" rel="nofollow">includes Canada and Mexico. Mr Trump killed that larger deal on Monday by signin" rel="nofollow">ing an executive order to pull out of the TPP. But in" rel="nofollow">in a strange way the Obama admin" rel="nofollow">inistration may have already laid the groundwork for a renegotiation of Nafta. Durin" rel="nofollow">ing his confirmation hearin" rel="nofollow">ing last week, Mr Trump’s pick for Treasury secretary, Stephen Mnuchin" rel="nofollow">in, acknowledged as much. “I would hope that the startin" rel="nofollow">ing poin" rel="nofollow">int is the work that you've done,” he told one TPP backer. . (Revise this in" rel="nofollow">in an easy & simple sentences, and put the citation please) https://www.ft.com/content/4c1594c6-e18d-11e6-8405-9e5580d6e5fb First reason of – economical reason – trade balance (please graph) Second reason of – political reason 3. If breakin" rel="nofollow">ing out OF NAFTA, FIRST negative impact on U.S. - no tariff elimin" rel="nofollow">ination from termin" rel="nofollow">inatin" rel="nofollow">ing NAFTA- > high MFN % → harm on U.S. Industry and Agriculture 4. CASE STUDY: US agricultural exports, writer, do you thin" rel="nofollow">ink it can brin" rel="nofollow">ing any benefit? American farmers have benefitted from NAFTA: Sin" rel="nofollow">ince the agreement's implementation, US agricultural exports have nearly doubled to Mexico, and have in" rel="nofollow">increased by about 44% to Canada, accordin" rel="nofollow">ing to the Office of the US Trade Representative. https://www.thestar.com/busin" rel="nofollow">iness/real_estate/2017/06/01/nafta-renegotiation-could-spare-energy-sector.html 5. If breakin" rel="nofollow">ing out OF NAFTA, SECOND negative impact on U.S. - if withdraw : Bad impact on U.S. auto companies in" rel="nofollow">in economic scale. 6. Case study: Auto – writer, do you thin" rel="nofollow">ink it can brin" rel="nofollow">ing any benefit? Additionally, NAFTA has been credited with helpin" rel="nofollow">ing the US auto sector become globally competitive due to the cross-border supply chain" rel="nofollow">ins. Even though it is criticized with labor employment loss in" rel="nofollow">in America, there is no doubt that NAFTA contributed on in" rel="nofollow">increasin" rel="nofollow">ing U.S. car brand competitiveness. ★Rules of origin" rel="nofollow">in: ★ Plus, it seems that they are goin" rel="nofollow">ing to renegotiate about the revisin" rel="nofollow">ing the ratio 7. By the renegotiation, NAFTA’s signatory countries can spare energy sector. Ex) a report by the America’s society/ council of the Americas concludes: “Mexico’s energy reforms will benefit North America broadly, by providin" rel="nofollow">ing an opportunity for North American leaders to develop a fully in" rel="nofollow">integrated North American energy sector” 6. Textiles ? 7. Also, American will benefit from NAFTA renegotiation if they try to modernize NAFTA to take advantage of new technologies 8. Renegotiatin" rel="nofollow">ing FTA will provide opportunity to fix the non-trade issues by the in" rel="nofollow">inclusion of environmental and labor regulations . this also support that renegotiation NAFTA will brin" rel="nofollow">ing positive impacts on workers and environment. Fin" rel="nofollow">inally, renegotiatin" rel="nofollow">ing NAFTA provides an opportunity to fix its biggest flaw: The in" rel="nofollow">inclusion of non-trade issues such as environmental and labor regulations in" rel="nofollow">in politically motivated “side agreements” that accompanied the trade deal. In 1993, Rep. Jim Kolbe, R-Ariz., observed: “We should keep in" rel="nofollow">in min" rel="nofollow">ind that NAFTA is first and foremost a trade agreement. It is not a labor or environmental pact.” Subsequent trade agreements gradually in" rel="nofollow">increased environmental and labor mandates. For example, President Barack Obama called the proposed Trans-Pacific Partnership, which in" rel="nofollow">included a min" rel="nofollow">inimum wage provision, the “most progressive trade deal in" rel="nofollow">in history.” Inclusion of environmental and labor mandates risks turnin" rel="nofollow">ing trade agreements in" rel="nofollow">into multin" rel="nofollow">inational regulatory arrangements that restrict trade flows rather than free them. It also obscures the fact that trade is good for workers and for the environment. Data presented in" rel="nofollow">in The Heritage Foundation’s annual Index of Economic Freedom demonstrate that countries that are more open to trade not only have stronger economies, they also score higher on the global Environmental Performance Index. The U.S. trade representative is committed to an “America First” trade policy aimed at encouragin" rel="nofollow">ing companies to stay in" rel="nofollow">in the U.S., create jobs in" rel="nofollow">in the U.S., and pay taxes in" rel="nofollow">in the U.S. . Revise this in" rel="nofollow">in an easy & simple sentences, and put the citation please) http://dailysignal.com/2017/04/28/trump-plans-to-renegotiate-nafta-heres-how-it-can-be-improved-to-benefit-america/ Fowlin" rel="nofollow">ing is the example of writin" rel="nofollow">ing format. Please put the graph, and write in" rel="nofollow">in an organized form. Source: Fin" rel="nofollow">inancial Statements Statistics of Corporations by Industry (Nonfin" rel="nofollow">inancial Corporate Sector), Min" rel="nofollow">inistry of Fin" rel="nofollow">inance Japan Moreover, at that time, the bond issuance is strictly regulated by the government (Horiuchi, 1991) which implies that more cost would be associated with the process of bond issuance. For example, all types of bonds, in" rel="nofollow">includin" rel="nofollow">ing straight bonds and convertible bonds have to be secured by collaterals which are main" rel="nofollow">inly real estate assets. Bond Issue Arrangement Committee (BIAC) under MOF was established to monitor and determin" rel="nofollow">ine the eligible requirements for the bond issuance. The bankin" rel="nofollow">ing sector, which has the vested in" rel="nofollow">interest in" rel="nofollow">in the restriction of bond issuance, has created in" rel="nofollow">influence on the BIAC to secure their borrowin" rel="nofollow">ing to companies. Thereby, the process of issuin" rel="nofollow">ing bond has become more difficult and costly. This became the reason why sin" rel="nofollow">ince the late 1970s, many firms has issued bond abroad that leadin" rel="nofollow">ing the phenomenon of “hollowin" rel="nofollow">ing out” domestic funds. All in" rel="nofollow">in all, in" rel="nofollow">in 1955-1975, takin" rel="nofollow">ing all these cost disadvantages in" rel="nofollow">into account, choosin" rel="nofollow">ing bank borrowin" rel="nofollow">ings is certain" rel="nofollow">inly more beneficial and that is a rational choice of most of Japanese firms. Another kin" rel="nofollow">ind of benefit comes from the relationship with the main" rel="nofollow">in bank. There is no formal defin" rel="nofollow">inition of a main" rel="nofollow">in bank, but in" rel="nofollow">in Japan the term is referred to the particular bank from which companies obtain" rel="nofollow">in their biggest share of loans. Makin" rel="nofollow">ing a good relationship with one of the major banks or; for smaller firms with a regional bank; is one of the key elements leadin" rel="nofollow">ing to busin" rel="nofollow">iness success. The main" rel="nofollow">in bank not only provides borrowin" rel="nofollow">ings, but also holds equity which is widely viewed by many scholars and regulators as a tool to monitor firms’ busin" rel="nofollow">iness activities. Bein" rel="nofollow">ing provided a large and stable source of funds for in" rel="nofollow">investments, bein" rel="nofollow">ing helped in" rel="nofollow">in supervisin" rel="nofollow">ing the busin" rel="nofollow">iness activities, Japanese corporations receive huge benefits from the ties with the main" rel="nofollow">in bank. There was no reason for them not to borrow from banks and use a different fin" rel="nofollow">inancin" rel="nofollow">ing tool. In other words, they would have no longer refused that benefits and risked their companies with other uncertain" rel="nofollow">in sources of funds and unforeseen benefits. In terms of cost, thanks to the above-mentioned relationship with the main" rel="nofollow">in banks, firms can overcome the cost of fin" rel="nofollow">inancial distress. That is the reason why Japanese companies accept the high risk although one may argue that the cost of fin" rel="nofollow">inancial distress associated with debt fin" rel="nofollow">inancin" rel="nofollow">ing is unexpectedly huge. For the cost of agency problem, the lendin" rel="nofollow">ing and shareholdin" rel="nofollow">ing practices of the main" rel="nofollow">in bank at firms and the in" rel="nofollow">interlockin" rel="nofollow">ing relationship in" rel="nofollow">in regard to reciprocal shareholdin" rel="nofollow">ing arrangements and in" rel="nofollow">interlockin" rel="nofollow">ing directorship in" rel="nofollow">inside the keiretsu system help to mitigate agency costs of managerial discretion. Meerschwam (1991) suggested a further reason as follows: “Institutional features of the Japanese system helped to “socialize” some of the risks and costs associated with high leverage and fin" rel="nofollow">inancial distress” . The in" rel="nofollow">institutional system mentioned is obviously the main" rel="nofollow">in bank and the system of Bank of Japan (BOF) and Min" rel="nofollow">inistry of Fin" rel="nofollow">inance (MOF). In time of fin" rel="nofollow">inancial difficulty, a main" rel="nofollow">in bank may not call back the loan; on contrary, it would do all to rescue the company. As mentioned by Aoki, Patrick and Sheard (1994) “In times of corporate distress, the main" rel="nofollow">in bank is expected to play the leadin" rel="nofollow">ing role in" rel="nofollow">in overseein" rel="nofollow">ing and organizin" rel="nofollow">ing a fin" rel="nofollow">inancial rescue or restructurin" rel="nofollow">ing” of the firm, and “to bear a disproportionate share of the costs of associated fin" rel="nofollow">inancial assistance (in" rel="nofollow">interest deferrals and/or exemptions), loan losses and new fundin" rel="nofollow">ing requirements” . The main" rel="nofollow">in bank, in" rel="nofollow">in turns, was assisted by the BOJ actin" rel="nofollow">ing as a guarantor of prin" rel="nofollow">incipal loans made to the keiretsu, meanwhile “the BOF coordin" rel="nofollow">inated with the MOF in" rel="nofollow">in assistin" rel="nofollow">ing the rescue operation of city banks by extendin" rel="nofollow">ing emergency loans to those banks” (Aoki et al., 1994). To be noted that the relationship between BOJ and city banks is strong. The BOF provides lendin" rel="nofollow">ing more to these banks than a private bank and encourage them to focus on meetin" rel="nofollow">ing the demands of firms for borrowin" rel="nofollow">ings without worryin" rel="nofollow">ing about goin" rel="nofollow">ing bankrupt. In fact, no bank in" rel="nofollow">in Japan has failed in" rel="nofollow">in postwar. The BOF, in" rel="nofollow">in turn was guaranteed by the Bankin" rel="nofollow">ing Bureau of the MOF which “regulates most Japanese banks, in" rel="nofollow">includin" rel="nofollow">ing the long-term credit banks and the Bank of Japan, by monitorin" rel="nofollow">ing the funds used by these banks” (Ballon and Tomita,1988). Besides, the MOF gives more favor to city banks that agreed to rescue firms in" rel="nofollow">in case of fin" rel="nofollow">inancial failures. MOF fears that one’s failure may drag along others’ failures, which is the so-called domin" rel="nofollow">ino effect of the whole busin" rel="nofollow">iness. Furthermore, the bankruptcy of large company leadin" rel="nofollow">ing to the lay-off of a large number of employees might have caused serious social problems. The expected cost of fin" rel="nofollow">inancial distress, thereby, has been “socialized” by the in" rel="nofollow">institutional system and the regulatory environment. Obviously, it is rational for Japanese firms to use bank borrowin" rel="nofollow">ings as their main" rel="nofollow">in source of fin" rel="nofollow">inancin" rel="nofollow">ing, because they obliged that they will be rescued by the main" rel="nofollow">in bank in" rel="nofollow">in case of fin" rel="nofollow">inancial failure. 3. Firm’s size and debt fin" rel="nofollow">inancin" rel="nofollow">ing Japanese firms have been said to take the goal of sales growth and market expansion more seriously than the goal of high return. Abegglen and Stalk (1985) found the result in" rel="nofollow">in a survey of Japanese companies that on a 1-10 scale of rankin" rel="nofollow">ing by importance “Market Share” was in" rel="nofollow">in the first position with 4.8 average poin" rel="nofollow">ints, while “Return on Investment (ROI)” followed in" rel="nofollow">in second place (4.1 poin" rel="nofollow">ints). Meerschwam (1991) also poin" rel="nofollow">inted out that if “market share and growth objectives are taken seriously, then high leverage is a natural outcome; rapid sales growth typically leads to asset growth”. It is easy to understand that by sacrificin" rel="nofollow">ing profits and dividend paid back to shareholders, a firm with high leverage may be able to cut prices, make more in" rel="nofollow">investments in" rel="nofollow">in R&D project and thus acquire the greater market share. “The Japanese companies typically borrowed more, spent more, made less a percentage of revenues, paid less in" rel="nofollow">in dividends, and grew faster than their American competitors” (Min" rel="nofollow">in Chen, 2004). A positive correlation between firm’s size and leverage is also consistent with the trade-off theory. Large firms tend to be more diversified and have the capability to collaterize their assets (in" rel="nofollow">includin" rel="nofollow">ing land, plants, and machin" rel="nofollow">ineries) to acquire the loans. Thornhill et al. (2004) noted that “firms with high collateral assets should have greater access to bank fundin" rel="nofollow">ing”. Meanwhile, to recall, “Return on Investment” (ROI) is just in" rel="nofollow">in the second rank of importance for Japanese companies. The peckin" rel="nofollow">ing-order theory says that there is a negative correlation existin" rel="nofollow">ing between profits and leverage . When a firm earns profit, accumulates capital as in" rel="nofollow">internal funds and pays off debt, leverage will fall automatically. Myers and Majluf (1984) also draw a conclusion from the peckin" rel="nofollow">ing order theory that the hierarchy of usin" rel="nofollow">ing funds is in" rel="nofollow">internal resources, debt, and then equity. The theory is consistent with the fin" rel="nofollow">inancin" rel="nofollow">ing behavior of Japanese companies because profit maximization is not their ultimate goal. Thus, they still have to resort to the debt in" rel="nofollow">instrument. Usin" rel="nofollow">ing debt is very rational which is comin" rel="nofollow">ing from the goal of market maximization of Japanese firms. So what was the rationale behin" rel="nofollow">ind the goal of profit maximization? It could be explain" rel="nofollow">ined by a factor embedded in" rel="nofollow">in the Japanese society called “Ie” (household). The concept of ie was preserved sin" rel="nofollow">ince the samurai era until now, in" rel="nofollow">in which family contin" rel="nofollow">inuity is greatly valued, especially with management of the household value. In the entrepreneurial families, “the concern with main" rel="nofollow">intain" rel="nofollow">inin" rel="nofollow">ing the quality of family managerial talent” implies the maximization of growth rationale and the strong emphasis of rein" rel="nofollow">investment should be seen as one of the busin" rel="nofollow">iness goals (Yasuzo Horie, 1966). However, beside that social reason, I suggest another reason for the ultimate goal of maximizin" rel="nofollow">ing market share of Japanese companies. It is in" rel="nofollow">intuitive that bein" rel="nofollow">ing a giant in" rel="nofollow">in the market, a company would have more a bigger voice, a greater in" rel="nofollow">influence in" rel="nofollow">in both economic and political issues. Thereby, it is easier for them to gain" rel="nofollow">in more side-benefits from the government. Bigger firms, more borrowin" rel="nofollow">ings? Table 3.1: Bank borrowin" rel="nofollow">ings of manufacturin" rel="nofollow">ing in" rel="nofollow">industry (Japan, 1955-1975, hundred billion yen) Year Big size Medium size Small size 1960 81 26 16 1961 101 31 17 1962 135 35 21 1963 181 40 22 1964 223 45 27 1965 255 49 35 1966 276 54 44 1967 295 61 55 1968 363 73 69 1969 433 87 84 1970 509 102 101 1971 633 124 123 1972 720 148 152 1973 767 173 192 1974 900 208 230 1975 1,090 246 281 Source: Fin" rel="nofollow">inancial Statements Statistics of Corporations by Industry (Nonfin" rel="nofollow">inancial Corporate Sector), Min" rel="nofollow">inistry of Fin" rel="nofollow">inance Japan. Table 3.1 shows that bigger firms have always enjoyed a greater amount of bank borrowin" rel="nofollow">ings than the medium and small firms do sin" rel="nofollow">ince 1960. Bank loans borrowed by bigger firms was about 4 times more than the medium size companies in" rel="nofollow">in 1960, but the rate has in" rel="nofollow">increased to about 50 times in" rel="nofollow">in 1975. The borrowin" rel="nofollow">ing rate of big size corporations itself also went up at a substantially high speed (nearly at an average of 18% every year in" rel="nofollow">in 15 years). Ballon and Tomita (1988) found out that “the majority of the city bank loans are made to large Japanese companies whereas the majority of the local bank loans are made to smaller Japanese companies”. It proves the fact that larger firms are likely to access to the greater bank loans sources thanks to their power and in" rel="nofollow">influence on the bankin" rel="nofollow">ing system, MOF and MITI as well. Herbert Glazer (1967) proposed that “the government has sometimes rewarded firms holdin" rel="nofollow">ing large market shares by allocatin" rel="nofollow">ing important in" rel="nofollow">inputs subject to exchange control in" rel="nofollow">in proportion to shares of sales or capacity”. Therefore, Japanese companies were in" rel="nofollow">increasin" rel="nofollow">ingly tryin" rel="nofollow">ing to expand the busin" rel="nofollow">iness, establish more branches and hire more employees. It could be said that market maximization goal supports the life time employment practice, not the other way around. There were some giant groups companies or conglomerate which is the so-called keiretsu in" rel="nofollow">in Japan. The keiretsu system with its in" rel="nofollow">interlockin" rel="nofollow">ing relationship of shareholdin" rel="nofollow">ing and managerial directorates with the main" rel="nofollow">in banks and their group members help them not only to borrow easier but also borrow at preferential rates. Frankel (1991) compared the sources of funds with free-lunches and stated that “Such sources of funds were not available to the man-in" rel="nofollow">in-the- street, or even to the corporation-in" rel="nofollow">in-the-street. To those favored corporations who did have access to such funds, such as members of the in" rel="nofollow">industrial groupin" rel="nofollow">ings known as keiretsu, the number of profitable in" rel="nofollow">investment projects typically exceeded the supply of funds available.” As long as the relationship still benefits them, in" rel="nofollow">indusial groups will contin" rel="nofollow">inue to choose bank borrowin" rel="nofollow">ings as a source of fin" rel="nofollow">inancin" rel="nofollow">ing. It is undoubted that they behaved very rationally. Small and medium firms, on the other hand, lack this strong tie with major banks have surely less in" rel="nofollow">incentives to in" rel="nofollow">increase their bank borrowin" rel="nofollow">ings. Big size companies received another benefit from amakudari, former officials of MOF who might be their directors or high-position employees. Through amakudari, they can make the in" rel="nofollow">influence on MOF. The MOF, in" rel="nofollow">in turns, in" rel="nofollow">influences the long-term credit banks through their amakudari who are former MOF officials now workin" rel="nofollow">ing for these banks. Amakudari might make use of their relationships to borrow more funds at preferential rates or ask for help from the regulatory system when bein" rel="nofollow">ing at a fin" rel="nofollow">inancial distress situation. Small and medium size companies which could not have amakudari in" rel="nofollow">in their executives boards have struggled in" rel="nofollow">in acquirin" rel="nofollow">ing more borrowin" rel="nofollow">ings from banks. To recall, in" rel="nofollow">in the good time, the strong tie between bankin" rel="nofollow">ing system and the in" rel="nofollow">industrial conglomerates is really good, helpin" rel="nofollow">ing Japanese firm grow with extreme speed and even domin" rel="nofollow">inate the world market. In contrast, in" rel="nofollow">in the bad time, Kang and Stultz (2000) argued that “the close relations between banks and borrowin" rel="nofollow">ing firms can be detrimental durin" rel="nofollow">ing the recessionary period such as 1990s”. As can be seen in" rel="nofollow">in figure 3.1, sin" rel="nofollow">ince that late 1980s, Japanese firms cut the debt amount and use more capital stock to fin" rel="nofollow">inance the busin" rel="nofollow">iness. The debt to equity ratio in" rel="nofollow">increasin" rel="nofollow">ingly in" rel="nofollow">increased until 1988 when it reached about 7.5, but sin" rel="nofollow">ince then it experienced a contin" rel="nofollow">inuous fall. Due to the fin" rel="nofollow">inancial bubble and the burden of huge bad debt amounts, the bank system has been tryin" rel="nofollow">ing to rescue itself rather than helpin" rel="nofollow">ing their busin" rel="nofollow">iness partners. Therefore, corporations also had to fin" rel="nofollow">ind the way to save themselves. They realized that they could not depend on their main" rel="nofollow">in bank anymore. They started to use in" rel="nofollow">indirect fin" rel="nofollow">inancin" rel="nofollow">ing sin" rel="nofollow">ince borrowin" rel="nofollow">ing from bank would no longer brin" rel="nofollow">ing benefits to them. The boomin" rel="nofollow">ing of fin" rel="nofollow">inancial market also helped firms to access to cheaper sources of funds more easily. This again" rel="nofollow">in proved the fact that companies always made the decision after calculatin" rel="nofollow">ing the expected gain" rel="nofollow">ins and losses. Figure 3.1: The total borrowin" rel="nofollow">ings and capital stock ratio of non-fin" rel="nofollow">inancial sector in" rel="nofollow">in Japan (1955-2015) Source: Fin" rel="nofollow">inancial Statements Statistics of Corporations by Industry (Nonfin" rel="nofollow">inancial Corporate Sector), Min" rel="nofollow">inistry of Fin" rel="nofollow">inance Japan 4. Conclusion Despite not a few critics about the in" rel="nofollow">interventionist regime of bureaucracy, the extreme speed of development of Japanese economy has still made an impression to other countries all over the world. Within" rel="nofollow">in a relatively short period of time, Japanese companies owned largest shipbuildin" rel="nofollow">ing, steel-makin" rel="nofollow">ing and textile-manufacturin" rel="nofollow">ing in" rel="nofollow">industries in" rel="nofollow">in the world’s market. This phenomenal growth could not have been achieved without very aggressive corporate fin" rel="nofollow">inancial policies, in" rel="nofollow">in other words, the debt fin" rel="nofollow">inancin" rel="nofollow">ing policies. Understandin" rel="nofollow">ing the rationale behin" rel="nofollow">ind their fin" rel="nofollow">inancin" rel="nofollow">ing behavior, however, is important for the government, and the policy makers to reconsider their in" rel="nofollow">intervention in" rel="nofollow">in the market and the wrong signals they give to the private sector, especially big corporations. That is the guarantee of the government, or the so-called “too big to fail” term which is usually mentioned durin" rel="nofollow">ing periods of fin" rel="nofollow">inancial spiral. The guarantee of the government which resulted in" rel="nofollow">in the rational choice of Japanese companies in" rel="nofollow">in respect to the high ratio of debt to equity fin" rel="nofollow">inancin" rel="nofollow">ing created a hidden danger to the fin" rel="nofollow">inancial system. Sin" rel="nofollow">ince companies were guaranteed, they were not able to aware of the high risk of usin" rel="nofollow">ing high fin" rel="nofollow">inancial leverage. The government even did not foresee and take the risk to the whole fin" rel="nofollow">inancial system in" rel="nofollow">into account. In the good times, Japanese companies contin" rel="nofollow">inue to grow and in" rel="nofollow">increase their market share; but in" rel="nofollow">in the bad times, when the possibility of default by one firm would lead to the default of others and go beyond the control of the bankin" rel="nofollow">ing system as well as of the government. This so-called systemic risk would result in" rel="nofollow">in a fin" rel="nofollow">inancial crisis which was proved to happen in" rel="nofollow">in Japan durin" rel="nofollow">ing the period of economic bubble. Even in" rel="nofollow">in the period of bubble burst, firms were still waitin" rel="nofollow">ing for the government to save them. In a survey of carried out in" rel="nofollow">in 1989 of Shiller, Kon-ya and Tsutsui, 68 per cent out of 139 Japanese in" rel="nofollow">institutional in" rel="nofollow">investors agreed with the statement "The Min" rel="nofollow">inistry of Fin" rel="nofollow">inance will take steps to assure that stock prices in" rel="nofollow">in Japan will not lose too much of their value”. The lesson, therefore, can be drawn from the fin" rel="nofollow">inancial bubble in" rel="nofollow">in Japan is that wrong in" rel="nofollow">incentives given to companies by the government may be highly risky to the economy, in" rel="nofollow">in this context, to the fin" rel="nofollow">inancial system. Corporations always act on their in" rel="nofollow">interests, thus are rational with their fin" rel="nofollow">inancin" rel="nofollow">ing choices. Advice should be given to the government that to never become “the in" rel="nofollow">insurance” for any entities in" rel="nofollow">in the economy. It is noteworthy that Min" rel="nofollow">inistry of International Trade and Industry (MITI) has also played a role in" rel="nofollow">in manipulatin" rel="nofollow">ing the fin" rel="nofollow">inancial market through givin" rel="nofollow">ing favors to some targeted in" rel="nofollow">industries. Together, the MITI, the MOF, the BOF, and the long-term credit banks in" rel="nofollow">influence the allocation of credit to Japanese companies in" rel="nofollow">in certain" rel="nofollow">in in" rel="nofollow">industries. Ballon and Tomita (1988) presented their fin" rel="nofollow">indin" rel="nofollow">ings about MITI’s in" rel="nofollow">intervention as follow “MITI emphasizes the development of particular in" rel="nofollow">industries (e.g., knowledge-in" rel="nofollow">intensive in" rel="nofollow">industries) and facilitates this development. For example, MITI uses admin" rel="nofollow">inistrative guidance to grant tax in" rel="nofollow">incentives to the in" rel="nofollow">industries that it targets. Moreover, the long-term credit banks encourage companies in" rel="nofollow">in such in" rel="nofollow">industries to borrow funds in" rel="nofollow">in order to fin" rel="nofollow">inance growth”. MITI officials also in" rel="nofollow">influence these in" rel="nofollow">industries through Amakudari who work these companies after retirin" rel="nofollow">ing from MITI. However, due to the lack of bank borrowin" rel="nofollow">ings statistics by in" rel="nofollow">industry sector, it is difficult to provide a complete analysis. Further research on this issue is expected to carry out in" rel="nofollow">in the future. 5. References - Franco Modigliani and Merton H. Miller (1958), “The Cost of Capital, Corporation Fin" rel="nofollow">inance and the Theory of Investment” - Yasuzo Horie (1966), “The role of the Ie in" rel="nofollow">in the economic Modernization of Japan”, Kyoto University Economic Review, vol. 36 - Herbert Glazer (1967), “Capital Liberalization” in" rel="nofollow">in Robert J Ballon, ed. “Join" rel="nofollow">int Ventures and Japan” (Tokyo: Sophia University) - Caves and Uekusa (1976), Industrial Organization in" rel="nofollow">in Japan - Stephen Bronte (1982), Japanese Fin" rel="nofollow">inance: Markets and Institutions - Auerbach, A. (1985), “Real Determin" rel="nofollow">inants of Corporate Leverage” in" rel="nofollow">in Corporate Capital Structures in" rel="nofollow">in the United States - Abegglen, J. C., and G. S. Stalk, Jr., (1985). Kaisha, the Japanese Corporation. New York: Basic Books. - J. Mark Ramseyer (1987), Takeovers in" rel="nofollow">in Japan: Opportunism, Ideology and Corporate Control - Robert Ballon & Iwao Tomita (1988), The Fin" rel="nofollow">inancial Behavior of Japanese Corporations - Karel Van Wolferen (1989), The Enigma Of Japanese Power - Jeffrey A. Frankel (1991), The Japanese Fin" rel="nofollow">inancial System and the Cost of Capital: A survey - Melissa J. Krasnow (1993), Corporate Interdependence: The Debt and Equity Fin" rel="nofollow">inancin" rel="nofollow">ing Of Japanese Companies - Fukuda, Atsuo, and Shin" rel="nofollow">inichi Hirota. (1996). “Main" rel="nofollow">in Bank Relationships and Capital Structure in" rel="nofollow">in Japan.” - Min" rel="nofollow">in Chen, (2004) “Asian Management System: Chin" rel="nofollow">inese, Japanese and Korean styles of busin" rel="nofollow">iness”, p.171 Thom Learnin" rel="nofollow">ing. - Thornhill Stewart, Guy Gellatly and Allan Ridin" rel="nofollow">ing (2004), “Growth History, Knowledge Intensity And Capital Structure In Small Firms”, Venture Capital, Vol. 6, No. 1, pp. 73 – 89 - Rahul Kumar (2008), Determin" rel="nofollow">inants of Firm’s Fin" rel="nofollow">inancial Leverage: A Critical Review - Koji Sakai (2010), Fin" rel="nofollow">inancin" rel="nofollow">ing Behavior of Japanese Firms - Fin" rel="nofollow">inancial Statements Statistics of Corporations by Industry (Nonfin" rel="nofollow">inancial Corporate Sector), Min" rel="nofollow">inistry of Fin" rel="nofollow">inance Japan and US Federal Reserve - https://www.cbp.gov/trade/nafta