ECONOMIC RESEARCH CENTER DISCUSSION PAPER No.179 Developing Vietnam’s financial market: Using examples from Japanese experience by Nguyen Thi Quy December 2010 ECONOMIC RESEARCH CENTER GRADUATE SCHOOL OF ECONOMICS NAGOYA UNIVERSITY Table of Contents ABSTRACT ................................................................................................................................................... 7 CHAPTER 1 ................................................................................................................................................. 8 OVERVIEW ABOUT VIETNAM’S FINANCIAL MARKET .......................................................... 8 I. FINANCIAL MARKET ...................................................................................................................... 8 1. The formulation and development of the banking system ................................................................... 8 1.1. Period before 1990s: operated under one-level banking model .............................................................. 8 1.2. Period from 1990 to present: operated under two-levels banking model .................................................. 8 2. Scale of operations of the Vietnamese banking system ...................................................................... 10 3. Division of the market portion for operations of commercial banks ................................................. 14 4. Evaluation of the monetary market development process ................................................................. 16 4.1. The formation and development process of monetary market .............................................................. 16 4.2. Evaluating the real situation of the monetary market development ..................................................... 18 4.3. Evaluation of the real situation in developing the market of deposit and mobilized capital ....................... 19 5. Evaluation of the development process of the capital market ............................................................ 20 5.1. The formation and development process of stock exchange market ...................................................... 20 5.2. Lessions on the development of 2 stock exchange centers ................................................................... 21 II. VIETNAM’S MONETARY POLICY IN CURRENT YEARS ................................................. 23 1. Vietnam’s monetary policy before global financial crisis 2008 ........................................................... 23 1.1. Low rate inflation period (1999- 2003) ...................................................................................... 23 1.2. Higher rate inflation period (2004- 2008) ................................................................................... 23 2. New points of monetary policy in global financial crisis 2008 ........................................................... 27 CHAPTER 2 ............................................................................................................................................... 30 FINANCIAL SYSTEM AND MONETARY POLICY OF JAPAN ............................................... 30 I. JAPANESE FINANCIAL SYSTEM ............................................................................................... 30 1. General evaluation ............................................................................................................................ 30 2. Characteristics of Japanese financial system ...................................................................................... 31 2.1. Households’ Invested Assets promoted the Japanese financial system ................................................... 31 2.2. The close relationship between banks and enterprises and the enterprise capital supporting responsibilities formed Main Bank System ................................................................................................................... 32 3. Japanese financial market .................................................................................................................. 33 2 4. Japanese bank and financial institution system .................................................................................. 35 4.1. Organizational structure ........................................................................................................... 35 4.2. Non- performing Loans ............................................................................................................ 38 4.3. Business profits of Japanese banks .............................................................................................. 41 5. Reforms of the Japanese financial system .......................................................................................... 44 5.1. Actual situation ...................................................................................................................... 44 5.2. Depression causes of the Japanese financial market ......................................................................... 44 5.3. The need for reform .................................................................................................................. 45 5.4. The main reform programs ........................................................................................................ 46 5.4.1. The Japanese financial Big Bang .......................................................................................... 46 5.4.2. The Postal Saving System Reform (2007) ............................................................................ 47 II. JAPANESE MONETARY POLICY ............................................................................................... 49 1. The monetary policy by periods ........................................................................................................ 49 1.1. The period of 1953-1975: The traditional monetary policy .............................................................. 50 1.2. The period of 1975-1981: New monetary policy ............................................................................ 51 1.3. The modern monetary policy 1981 .............................................................................................. 51 2. Zero interest rate policy .................................................................................................................... 53 3. Exchange rate policy ......................................................................................................................... 55 4. The Japanese current financial system – problems and solutions ....................................................... 60 4.1. General evaluation of the Japanese current financial system............................................................... 60 4.2. Challenges.............................................................................................................................. 60 4.3. Countermeasure policy .............................................................................................................. 61 CHAPTER 3 ............................................................................................................................................... 62 PRACTICAL LESSONS FOR VIETNAMESE FINANCIAL MARKET ..................................... 62 1. The first lesson ..................................................................................................................................... 62 2. The second lesson ................................................................................................................................ 65 3. The third lesson .................................................................................................................................... 72 4. The fourth lesson ................................................................................................................................. 77 5. The firth lesson ..................................................................................................................................... 78 CONCLUSION .......................................................................................................................................... 82 REFERENCES........................................................................................................................................... 83 3 List of Tables Table 1.1: A number of main targets of monetary – banking operations in 1991-2008 ................. 12 Table 1.2: Operation Scale of Commercial Banks in 2007 ................................................................ 13 Table 1.3: Effectiveness of the State Commercial Banks during the period of 2000-2007 ............ 15 Table 1.4: Mobilized capital source and loan debt balance of the CB in 2001-2007 ...................... 16 Table 2.1: Changes in Households' Asset Allocation in the U.S and Japan ..................................... 31 Table 2.2: Major Financial Markets in Japan and Their Size ............................................................ 34 Table 2.3: Banking Groups and Consolidated Assets........................................................................ 37 Table 2.4: Number Changes of Private-Sector Financial Institutions by Business Type ............... 38 Table 2.5: Outstanding Stock and Disposals of Non-Performing Loans ........................................ 40 Table 2.6: Profitability of Japanese Banking Sector ..........................................................................