May 17th 2007 From The Economist print editionMaria Jeeves
After two decades in the wilderness, Japan is slowly returning to the international financial scene
WHEN Yuji Yamamoto, Japan's minister for financial services, recently announced his intention to revive Tokyo as a world financial centre, expatriate bankers could hardly suppress a smile. It has been almost 20 years since Japanese financial institutions flashed their capital around New York and London, and since then the balance of power has shifted dramatically.
Sumitomo Bank, which in 1986 rattled Wall Street by buying a slice of Goldman Sachs, is now part of a bigger group, Sumitomo Mitsui Banking Corp (SMBC), in which the surippa is on the other foot: Goldman is a big investor. Bankers in Japan complain that the locals have become insular in financial matters—the legacy of years when cash-strapped banks stopped sending their staff abroad and teaching them English. The country is a regulatory quagmire. Japanese authorities require more paperwork than does the rest of Asia put together, says a banker.
Most poignantly, while Japan was absorbed with its economic slump and bad-loan problems in the 1990s, Hong Kong and Singapore emerged as English-speaking Asian trading hubs with light regulation, lower taxes and, peripatetic bankers note, a less gruelling journey between airport and office. “These are brave words,” one foreign banker says of Mr Yamamoto's plans. “But Tokyo has lost a lot of time.”
International investment banks have not sat idly by. The recovery of Japan's equity markets, the profits from converting non-performing loans into investments such as golf courses and property, and trading in the oceanic government-bond market have made it a good place to do business in recent years, but a frustrating one nonetheless.
The bane of cheap credit
Last year capital-market fees paid to investment banks as a proportion of GDP were only one-third the level in America and half the level in Europe, bankers say. Japan's share of the global equity market has shrunk from over a third in 1990 to a puny one-tenth. One of the main reasons, says Mark Branson, chief executive of UBS Securities Japan, is that the local commercial banks continue to lend at very low rates to their business customers. As he puts it: “Cheap credit has been the dead hand on the capital market.”
The banking crisis and economic slump of the 1990s may have erased some of the most familiar names of Japan's glory days of banking, but they have not wiped out all the old habits. Three megabanks have emerged from a wave of mergers and takeovers: Mizuho, formed in 2000, SMBC, hatched a year later, and the biggest, Mitsubishi-UFJ, created in 2005. But they have retained some of their old practices of relationship lending, and are only just beginning to make use of capital-markets products.
“The lesson we learned in the past decade was that our loan books were very concentrated on property. We need more diversification, which means developing a syndicated-loan market and a risk-hedging market. We paid a high price to learn that lesson,” says Katsuyuki Hasegawa, senior economist at the Mizuho Research Institute. His figures show that in 2005 Japanese companies for the first time in a decade borrowed more than they repaid. However, last year two-thirds of their borrowing needs were met by bank loans, compared with just 19% in America, where the capital markets are much more liquid.
The market for syndicated loans is growing by about 15% a year, says Mr Hasegawa. The securitisation market is expanding almost twice as fast; Wall Street firms such as Morgan Stanley and Lehman Brothers have bought regional banks to gain access to their mortgage loans. Yet the debt markets remain backward, and Mr Hasegawa says they operate inefficiently: changing jobs, for example, can make it much harder for an applicant to get a mortgage, even if he is going to a more senior and better-paid post.
Another problem is the requirement for strict firewalls between corporate and investment banks. This dates back to the period after the second world war when Japan imported rules from America, including a version of the 1933 Glass-Steagall act, separating the activities of commercial banks and securities firms. America scrapped Glass-Steagall in 1999, but Article 65, as the Japanese law is known, remains on the books. Lenders and investment bankers are unable to share information on a client unless the client gives permission. This adds another layer of cost to investment banking in Japan. And regulation is unpredictable. “You're always feeling your way,” says one banker.
Given the cheaper and easier opportunities elsewhere in Asia, there are plenty of reasons not to allocate more investment-banking resources to Japan. But there are quite a few encouraging signs too. Japan Tobacco's acquisition of Gallaher, its British equivalent, was one of many recent overseas conquests: last year the value of outbound M&A from Japan exceeded that of the bubble years of 1990 and 2000 (see chart 10). Foreign investors now hold a quarter of Japanese shares and are shaking up corporate governance. In 2000 Ripplewood faced strong opposition when it rescued what became Shinsei bank, but the deal proved hugely profitable and other private-equity groups have managed to elbow their way into deals. And league-table rankings last year were fairly evenly shared between the top three global investment banks, Citigroup, UBS and Goldman Sachs, and the local brokers, Nomura, Daiwa and Mizuho.
Mr Yamamoto is thought to be in favour of a more liquid market for capital in which local as well as international firms can thrive, but he is up against powerful vested interests. So bankers were impressed when regulators did nothing to stop Citigroup's $7.7 billion acquisition of Nikko Cordial, owner of the third-largest Japanese broker by revenue (even though Nikko had been tainted by a recent administrative scandal). That was a sign of openness that anyone, Japanese- or English-speaking, could understand.