Part 1 Money and Finance ????? Chapter 2 Financial Markets and Financial Organizations ?????????

1
Part 1 Money and Finance ?????Chapter 2
Financial Markets and Financial Organizations
?????????
Naotsugu HAYASHI ? ?? Professor of Economics
????? Faculty of Business Administration
???? Hosei University ????
2
1. Formation and Role of Financial Markets
??????????

• Financial Markets ????
• the place where lenders lend money to borrowers
  and borrowers issue debt certificates in return
  ????????????????????????
• the place where lenders supply of money meets
  borrowers demand for money ??????????????????????
  ??
• the place where surplus units lend money to
  deficit units ????????????????????
• Financial Organizations ????
• the ones that intermediate
• these financial transactions
• ???????????????

3
2. Effects of Financial Markets ???????

• Flow Effect to Intermediate Fund Transfer
  ??????????
• to intermediate a transfer of funds from
  surplus units to deficit units and to promote
  investment and enhance economic growth
• ????????????????????????????
• Stock Effect to Transfer Assets ???????????
• to increase financial assets of surplus units,
  and to promote capital accumulation of deficit
  units
• ???????????????????????????

4
3.Direct Financing and Indirect Financing
?????????

• Direct Financing ????
• a method of financing that ultimate lender lend
  money to ultimate borrowers in exchange for
  primary securities ???????????????????????
• Primary Securities ?????
• debt certificates issued by ultimate borrowers
  ???????????????????
• Indirect Financing ????
• financial intermediaries such as banks borrow
  money from ultimate lenders and lend money to
  ultimate borrowers ?????????????????????????????
  ???????????
• Indirect Securities ????
• debt certificates issued by
• non-ultimate borrowers
• ??????????????
• ????

5
4. Financial Institutions and Financial
Intermediaries ???????????

• To adjust the terms and conditions of loan and
  facilitate financial transactions under direct
  financing
• ?Financial institutions such as securities
  companies
• they do not receive interests but a transaction
  fee
• ???????????????????????????
• ????????????
• ?????????????????????????
• To finance money to ultimate borrowers indirectly
• ?Financial intermediaries such as banks
• banks receive interests from borrowers and pay
  interests to depositors
• banks receive primary securities and issue
  indirect securities (deposit certificates)
• ????????????????
• ???????????
• ???????????????????????????????????????
• ?The Ratio of Financial Relation the ratio of
  financial assets against tangible assets becomes
  higher
• ?????????????/??????????

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5. Customers' Market and Open Market ?????????

• CustomersMarkets ???? ????
• the market where transaction conditions are
  determined depending on the individual customers'
  credibility, profitability and assets
  traditional market
• ????????????????????????????????????????
• Open Markets ????
• the terms and conditions of transaction are
  determined while unspecified large number of
  people is competing to each other contemporary
  market
• ????????????????????????????????????????

7
6. Short-term Market and Long-term Market
?????????????

• Short-term Financial Markets ??????
• the market where participants transact the
  financial assets whose maturity is less than a
  year
• Called the money market because people transact
  money and other financial assets with higher
  liquidity
• ???1???????????????
• ????????????
• Long-term Financial Markets ??????
• the market where participants transact the
  financial assets whose maturity is more than a
  year
• Called the capital market because people transact
  capital and other financial assets with lower
  liquidity
• ???1??????????????
• ????????????

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7-1. Types of Short-term Financial Markets
?????????

• Interbank Markets ?????
• main participants in these markets are banks,and
  so they are
• usually called inter-bank market
• ????????????????????????????
• ? Call Market ? Commercial banks and other
  financial institutions lend and borrow very
  short-term money to each other in order to adjust
  their daily payments balance of funds
• ????????????????????????????????????
• ? Bills market ? deals with short-term money
  whose maturity is more than 2 months and less
  than a year by discounting bills
• ??????????????????????????????????

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7-2. Types of Short-term Financial Markets
?????????

• Open Markets ??????
• ? Repurchase Market a market where securities
  companies deal with repurchase and resale
  agreements of bonds for 1 to 3 months, which is
  called Saiken Gensaki
• ???????????????????????????13???????
• ? Certificates of Deposit (CD) Market a market
  where banks issue negotiable certificates of time
  deposit and business corporations trade them
• ?????(CD)??????????????????????????????????
• ? Commercial Paper Market a market where good
  business corporations can issue a promissory note
  to obtain short-term operating funds without any
  collateral of real estate.
• ??????????(CP)????????????????????????????????
  ??????
• ? Short-term government securities and short-term
  government bond markets markets for short-term
  securities and bonds issued by the
  government??????????????????????????????

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8. DEPOSIT Market and LOAN Market ?????????

• Deposits Market ????
• Individuals and firms deposit their surplus
  money to banks and Post Bank
• ???????????????????????
• Loan Market ????
• banks lend this money to firms and individuals
• ??????????????????????
• Demand Deposits and Time Deposits ??????????
• You can withdraw demand deposits by demanding
  withdraw but cannot withdraw time deposits even
  by demanding withdraw until the maturity date
  ??????????????????????????????????????????????????
  ???????????

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9. Type of Long-term Financial Market ?????????

• Capital Market ????
• Long-term financial markets mainly deal with
  long-term funds for investment and therefore are
  called capital market
• ? Long-term Loan Market ??????
• long-term loan for equipment investment
• ?????????????
• ? Securities Markets ????
• Bond Market ?????
• National Bonds issued by the government????????
• Municipal Bonds issued by local governments
  ????????????
• Corporate Bonds issued by corporations
  ??????????
• Financial Debenture issued by financial
  institutions ??????????
• Stock Market ????
• stocks, convertible bonds, warrant bonds
  ?????????????
• Issuing Market ????
• a market where securities are issued newly
• ??????????????
• Circulating (Secondary) Market ????
• a market where issued securities are traded
  before the maturity date
• ?????????????????

12
10-1. Nature and Function of Interest ????????

• Interest ??
• a price or rent for lending money for a certain
  period
• ????????????????????????????
• Interest Rate ???
• a ratio of interest against the amount of money
  lent
• ??/?????
• Agio theory ???
• funds lent to borrowers increase in value over
  time as if wine becomes mature.???????????????????
  ??????????
• Patience Theory ???
• interest is a price for patience with being
  unable to use the money lent to a borrower for a
  certain lending period
• ????????????????????????????????

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10-2. Nature and Function of Interest
????????

• Liquidity Preference Theory ??????
• interest is a reward for parting with liquidity
• ??????(??)??????????????
• Risk Premium ????????
• risk of price fluctuation a risk of
  depreciation of monetary value due to inflation
  during a lending period
• ?????????????????????????????
• default risk a risk that a borrower
  ??????????????????????????????????
• Factors of Demand and Supply ????
• The more the demand for money increases relative
  to the supply of money, the higher the scarcity
  and importance of money, and the more interest
  increases
• ???????????????????????????????

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11. Interest Rate Function of Adjusting the
Supply and Demand????????????

• When an interest rate rises ??????
• ? the supply of money increases and the demand
  for money decreases
• ??????????????
• when an interest rate falls ??????
• ? the supply of money decreases and the demand
  for money increases
• ??????????????
• Function of adjusting the supply and demand for
  money
• an interest rate adjusts the demand for and
  supply of money just as a price of good does
• ???????????????
• ?????????????(??????)

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12. Types of Interest Rate ??????????

• Short-term Interest Rate ????
• the interest rate in the short-term financial
  market
• call rate, bills rate, Gensaki(repurchase)
  rate, CD rate,
• CP rate, short-term lending rate
• ??????????????
• ???????????????????CD????
• CP??????????
• Long-term Interest Rate ????
• the interest rate in the long-term financial
  market
• long-term lending rate, national bond yield,
  corporate bond
• yield, financial debenture yield, and stock
  yield
• ??????????????
• ??????????????????????????
• ?????

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13. Term Structure of Interest Rates and Yield
Curve ??????????

• Financial obligations have different liquidity,
  repayment period, default risk?interest rate
  differentials, term structure of interest rates
• ???????????????????????????????
• a system of interest rates the interest rates
  lined up from the shortest-term to the
  longest-term ????(?????)????????????????
• Yield curve ?????
• a curve depicted by a system of interest rates
• ????????????
• The longer is the maturity of debt
• ?liquidity becomes lower, depreciation risk
• by inflation is higher, and default risk is
  higher
• ?the higher an interest rate is
• ?a yield curve upward sloping to the light
• ?????????
• ??????????????????????????
• ???????????????????
• the yield curve may be reversely downward sloping
• to the light during depression
• ?????????????????????????????????

Yield Curve
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14-1. Types of Depositary Financial Institutions
??????????
Financial Institutions or Organizations ????
Financial institutions in the narrow sense
intermediate direct financing ???????????????
Financial intermediaries intermediate indirect
financing ?????????????? Depositary Financial
Institutions or Organizations ?????? play a role
of credit creation ?????????? Commercial banks
(ordinary banks city banks, regional banks,
foreign banks)????(????????????????????) Long-te
rm credit banks (trust banks, long-term credit
banks) ??????(?????????????) financial
institutions for medium and small-sized firms
(Shinkin bank credit cooperatives, credit
unions, labour banks, Shoko Chukin bank
????????(?????????????????????????) financial
institutions for agriculture and fisheries
(Norinchukin bank, agricultural and fisheries
cooperatives ) ????????(????????????)
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14-2. Types of Depositary Financial Institutions
??????????
Non-depositary Financial Institutions ???????
indirect financial institutions that do not take
deposits ?no credit creation
??????????????????????? Non-bank ????????those
that are not regulated by the Banking Act
???????????? Insurance companies (life insurance
companies, casualty insurance companies, mutual
aid system) ????(????????????????????) Mortgage
finance companies ?????? Consumer finance
companies ??????? Consumer credit companies
???? Credit card companies ?????????? Leasing
companies ????? Securities finance companies
?????? Venture capital ??????????
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15. Central Bank ????

• Central Bank ???? the Bank of Japan ????, the
  Federal Reserve System, the Bank of England,
  Banque de France
• ? the governments bank a watchdog of the
  government vault
• ?????????????????
• ? the bank of banks that supervises all private
  banks
• ????????????????
• ? the issuing bank that has the right of
  issuing currencies
• ????????????
• watchdog of currency to have a responsibility
  to stabilize the value of the currency that the
  Bank issued by itself
• ????? ?????????????????????
• the ultimate objective of the Bank the
  stability of the currency's value the stability
  of general prices
• ?????????????(????)???
• The central bank as a watchdog is responsible for
  conducting monetary policy in order to pursue its
  ultimate objective of stabilizing the value of
  the currency issued by itself as the guardian of
  the currency that is price stability.

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16. Government-affiliated Financial Institutions
???????

• Government-affiliated Financial Institutions
  ???????
• to play a role of complementing private
  financial institutions
• ?????????????????
• Postal savings deposits ????
• ... has the largest deposits with the balance in
  the world, but does not engage in lending money
• ? to distribute its funds through the Fiscal
  Investment and Loan Program (FILP)
• Ministry of Communications in 1885, Ministry of
  Posts and Telecommunications in 1949,Ministry of
  Internal Affairs and Communications in 2001,Japan
  Post in 2003, Japan Post, Inc. in 2007 holding
  company 100 owned (Japan Post, Japan Post
  Service Co., Japan Post Bank Co., Kanpo Life
  Insurance Co.)
• ?????????????????????????????
• 1885?????1949?????2001??????????2003????????2007?
  ?????????????100??(?????????????????????????????
  ??????????)

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17. Fiscal Investment and Loan Program agencies
???????

• According to the "Fiscal Investment and Loan
  Program" in 2008 fiscal year, the total amount
  was 13.9 trillion yen 9.4 trillion yen was
  distributed to finance loans, 0.1 trillion yen to
  industrial investment, and 4.4 trillion yen to
  government-guarantee
• Stock Company, Ltd. ????
• Japan Finance Corporation???????? ,
• Development Bank of Japan Inc.????????
• Independent Administration Corporation
  (Agency)??????
• Japan Housing Finance Agency???????? ,
• Japan International Cooperation Agency??????,
• Urban Renaissance Agency?????? ,
• National Hospital Organization?????? ,
• National University Finance and Management
  Center????????????
• Promotion of Mutual Aid Corporation for Private
  Schools of Japan????????????? ,
• Japan Student Services Organization???????? ,
• Railway Construction, Transport and Service
  Organization??????????????