January 1998

Japan has a long isolated history with important institutional inputs from China and Prussia. It has a civil code jurisdiction and a tradition of a centralised and powerful bureaucracy. Economic thinking owes more to Friedrich List than to Adam Smith: the economy is obviously capitalist, but somewhat less obviously developmental capitalist rather than liberal capitalist.

Currently change is forcing itself on Japan: the quasi-mercantilist economy is maturing and society is aging rapidly, while the world economy is becoming more free-market oriented and globalised. Japanese financial markets are not yielding sufficient return to enable the accruing pension liabilities to be met satisfactorily. MoF financial regulation has lost all credibility.

The problems are known but the necessary action is blocked by vested interests. The response to such circumstances has always been reform. Big Bang is such a reform programme. It is an ingenious packaging of liberalisation measures in the bureaucratic pipeline together with an input from academia: Keio University. The presentational aspect is regrettably strong.

The international competitiveness of the Japanese financial services industry has collapsed. Paralleling the post-war catch-up of manufacturing industry, the domestic financial institutions will consolidate and restructure over the next five to ten years. They will employ flexible product sourcing and personnel policies and acquire the foreign technology and know how.

The Tokyo market is based on the strength of the Japanese economy and is a world domestic market such as New York, it will never become a world international market such as London. Japanese manufacturing companies' strength and their international spread mean that wholesale demand should grow as corporate treasurers' requirements become sophisticated.

Personal assets are currently around JPY2,500tr: 50 per cent financial and 50 per cent land. The retail investor is well aware of the lack of transparency, the degree of collusion, and the minimal shareholder rights that have characterised the equity market. There is hope that Big Bang means a fairer deal. Product development must be based on the specific psychology in play.

With strong demand from the large domestic market, the revitalised institutions will be formidable. Liberalisation is undoing the post-war financial structure and casting the banks back to their pre-war universal bank structure. The major institutions will be the six keiretsu banks and a limited number of independent institutions such as IBJ and Nomura.

Foreign institutions have a limited window of opportunity to establish themselves in Tokyo prior to the recovery of the domestic competitors. Global information flows, financial engineering sophistication, risk assessment, and asset management skills are enabling niche positions to be taken. PR and perception issues must be a vital concern to senior management.

All the above requires a sea-change at the MoF. Financial regulation must become rule bound, predictable, and transparent. That is the meaning of free, fair and global. Who is to regulate the MoF? Patently the politicians cannot. The media are not a candidate. The growing foreign presence in Tokyo is the answer: uchi gaiatsu -- foreign pressure from within.

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