Norinchukin Bank

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Norinchukin Bank

8-3, Otemachi I-chome
Chiyoda-ku
Tokyo 100
Japan
(03) 279-0111

Cooperative
Incorporated: 1923
Employees: 3,130
Assets: ¥32.5 trillion (US$260 billion)

The Norinchukin Bank is a unique institution in Japanese banking. It is a cooperative agricultural bank owned by farming, fishing, foresting, and other rural cooperatives. It has ties to virtually all Japanese industries and plays an important role in determining Japanese monetary policy.

The Norinchukin Bank was established by the Japanese government in 1923 specifically to modernize and expand Japan’s agricultural industries. The name Norinchukin comes from the Japanese words for agriculture (no), forestry (rin), cooperative (chu), and bank (kin).

As a cooperative, Norinchukin is able to offer its members financing at very competitive rates. The bank is also a supporter of a political lobby which opposes agricultural imports and any deterioration in rural living standards, arguing that unlike industry, which is dependent on imported raw materials and fuel, agriculture is one sector in which Japan can and should be more self-sufficient.

During World War II, the Japanese agricultural industry was virtually unaffected by allied military action until late in the war, when bombing destroyed railroads and processing factories and energy resources were exhausted. In an effort to finance the war, the government placed such restrictions on banks that Norinchukin was depleted of investment funds.

At the end of the war, Japan’s factories had been destroyed and many of its people were near starvation. Agricultural commodities were the only products that could be produced immediately. The occupation authority undertook land reform and set new commodity prices in its effort to restore a functioning economy. As a primary source of funds, Norinchukin played an important role in this effort. The bank gained a reputation for conservative management and ultra-safe deposits which later helped it grow during the late 1940s and early 1950s.

As the leading agricultural bank, Norinchukin played a semi-official role in state economic organization. Because of its unique position, Norinchukin reported to two government agencies: the Ministry of Agriculture, Forestry and Fisheries and the Ministry of Finance—in that order.

Japanese industry, however, recovered quickly after the war, and as export income grew, it became clear that certain labor-intensive industries weren’t economical. The first industry to go was the textile industry, from which the government actively encouraged divestment. Agricultural industries feared they were next. In response, they formed an effective political lobby through the farmer’s cooperative organization, or nokyo, which did win greater support for agricultural industries in the form of import quotas, subsidy programs, and measures to ensure the viability of agricultural institutions like the Norinchukin Bank.

The bank’s success rested on its large savings base. With this money, Norinchukin was able to buy government bonds which yielded 6% to 7%, several points more than the interest it paid, giving the bank a comfortable spread. In return, the bank offered better interest rates than commercial banks and paid dividends. Because its investments are primarily in low-risk government bonds, returns are very stable. As a cooperative, Norinchukin is not profit-motivated, and with strong government support for the industry, the financial integrity of its investor base is well protected.

The bank collects funds through a complicated three-tier system. At the lowest level, the nokyo offers savers deposit desks at 16,000 offices (only the postal savings system has more offices). These offices serve 5,612 cooperatives which, with several fishing cooperatives, deposit their savings with 47 prefectural, or county, agricultural banks called shinnoren. Nokyo offices are entitled to make loans from their deposits, but two-thirds of what remains must be deposited with the shinnoren. The shinnoren may, in turn, make their own loans, but half of whatever they don’t loan must be deposited with Norinchukin.

As Japan began to play a more important role in the world economy, consumers, tired of paying high prices for food, began to pressure politicians to support imports and cut agricultural subsidies. But the agricultural lobby’s influence in local elections was strong enough to turn several subsidy opponents out of office.

Norinchukin’s traditional profitability in spread lending became compromised by low interest rates during the mid-1980s. At the same time, the government was issuing fewer bonds as Japan began to prosper. Norinchukin was nevertheless required to accept deposits from shinnoren, leaving it flush with capital, but squeezed by ever-smaller profit margins and lower demand for loans from agricultural industries. Norinchukin was described by Euromoney in 1987 as “a desperate dinosaur.”

Regulation and xenophobia kept Norinchukin out of foreign capital markets for almost 60 years, but in 1979 the bank finally set up an international department. This department began to buy foreign government-backed bonds and even some Japanese-backed Eurobonds. As funds began to leave the bank (and the agricultural cooperative system) in the search for higher rates of return, Norinchukin grew more interested in international securities markets. Since it had no experience, it established a relationship with the Bank of Tokyo, exchanging its broader representation (the Bank of Tokyo has only 32 branches) and capital for know-how and a chance to participate in deals.

With help from the Bank of Tokyo, Norinchukin established a representative office in New York in 1982. The office was upgraded to a branch in 1984; a second office was opened in London in 1985; and two years later the bank opened a securities brokerage in London. In 1986 the Japanese government rewrote the bank’s charter, effectively allowing Norinchukin to act as a full-service commercial bank. In 1989 the bank established Norinchukin Finanz (Schweiz), a wholly owned subsidiary, in Zurich.

Despite these changes, Norinchukin remains an agricultural cooperative, a bank with a deep commitment to agriculture. Norinchukin will also continue to evolve slowly into a modern international bank. It is, however, often at odds with the shinnoren, which favor a speedier realignment and disagree with Norinchukin’s penchant for lending to foreign agricultural interests.

While it retains substantial support from its members, the possibility of a decline in agriculture in Japan is almost certain to make Norinchukin act more like a regular city bank. As Japanese banking adjusts to deregulation, Norinchukin may well widen its association with the Bank of Tokyo (which, like Norinchukin, is one of only a few banks chartered to issue debentures). Still, the bank is unlikely to do more than simply de-emphasize agricultural banking. Like every other bank in Japan, Norinchukin recognizes that it must diversify in order to remain competitive.