Recent Developments in Cross-Shareholding

Hideaki Inoue

Introduction

Once credited as the driving force of rapid economic growth， Japan's corporate system has come under criticism not only for the magnitude of the bad loan problem at financial institutions， but for loss of confidence related to the main bank system and corporate balance sheets. Stock cross-holding， once regarded necessary for stable management， has also become of question-able value in the wake of the prolonged bear market.

The risks of long-term stockholding， largely ignored during the extended bull market of the 1980s， became apparent when the bubble finally burst and have proved to be highly detrimental to corporate health. For example， in the fiscal year ending March 1998， 16 banks (city， long-term credit， and trust) and five life insurers had switched to a cost-based stock valuation method.

From the viewpoint of market deregulation and global standards of corporate governance， since long-term stockholdings that do not benefit stockholders and companies are intolerable， cross-holding is expected to continue decreasing. Meanwhile， the stock market is strongly concerned that the dissolution of cross-holdings will drive down stock prices.

NLI Research Institute has been conducting regular surveys since fiscal 1996 to monitor the status of stock cross-holding. Below we discuss the results of the latest survey for fiscal 1997 (March 1998).