On the Effects of Cross Share Holdings Among Japanese Corporations

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This project has investigated three aspects of cross share holdings among Japanese corporations.First, we have examined the impact of cross share holdings on Japanese stock prices. It has been found that cross share holdings increases the PER (price earings ratio) of a firm and, depending on a firm's financial policy, the level of stock prices as well. As of 1990, Japanese PERs are on, average 80% higher because of cross share holdings than otherwise.Second, we have studied the impact of high leverage resulting from cross share holdings and the existence of the main bank system on the way monetary policy is carried out. The Bank of Japan has relied heavily on window guidance--i. e. direct control of bank lendings--for controlling aggregate demand.Third, the Japanese Keiretsu system as exemplified by cross share holdings has been extensively used by policy authorities in an attempt to extract information on the private sector. We have found that because of such smooth flow of information between the private sector and public authorities the Japanese financial system has been fairly efficient and stable. This is so despite heavy intervention by the authorities.