October 1998

All the attention is on the immediate news: the post-bubble wreckage that is Japanese finance, the initial and unconvincing restructurings of the institutions, the confused debate about bank recapitalisation using public funds, and the high profile partnering agreements announced both domestic/domestic and foreign/domestic. Much heat is being generated, but little light.

The post-war structure of segregated institutions under MoF micromanagement, together with the intricate balance of vested interests that was the convoy system, is in collapse. We are witnessing the historic pattern of an ossified Japanese system in distress, import of the foreign know how, a recovery being staged, and an exclusion of any lingering undue foreign influence.

Big picture policy is decided by the bureaucracy and vested interests quite apart from the formal structure of Cabinet and Diet. The chosen foreign model is investigated in detail and the bureaucrats then guide the consultative committees, draft the legislation, steer it through the Diet, and administer it appropriately: in a process that may extend over several decades.

By the early 1980's the MoF had become aware of the implications of the exogenous factor of US liberalisation gaiatsu and the endogenous factor of creeping disintermediation. Never happy to leave the development of its charge, and source of amakudari slots, to the forces of the free market, there was intensive study of foreign experience to find the big picture solution.

Not for the first time, the German solution was adopted: a first tier of large universal banks, a second tier of quasi-universal regional banks and a third tier of co-operative banks. While the bureaucrats grappled with the problem of moving their juggernaut of vested interests down the royal road to universal banking, an inconvenient bump was hit -- the 1980's credit bubble.

The balance sheet weaknesses caused by that bump and the protected industry syndrome caused by the convoy system have combined to annihilate the international competitiveness of the Japanese institutions. Paralleling the post-war catch-up of exporting industry, the leading financial institutions will consolidate and universalise over the next five to ten years.

The six keiretsu banks plus IBJ are the candidate cores of the universalisation process. Big Bang is a name given to the MoF plan of liberalisation, cross-over subsidiaries and FHCs to catalyse the process. The implied employment and senior management status attrition is a brake. Within the civil code tradition, slow legal and tax responses further retard the process.

Foreign institutions, largely oblivious to the big picture solution, are entering implicitly on the basis of their home market experience. In wholesale, progress is being made especially among the export competitive international companies. In retail, the image of foreign institutions has improved, but lack of distribution and an unsophisticated product comprehension are a block.

Avoiding exposure to weak balance sheets, a wide variety of partnering patterns to accelerate entry has been seen. Second tier players attracted by prestigious point-of-failure institutions have already suffered adverse PR. First tier players have been quite careful to avoid keiretsu entanglements. Investment in independent marketing is high risk and a slow to never return.

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 the tools. The job is the partner: the small picture of the lower profile regions, institutions and intermediaries.

Copyright 1998 by Analytica Japan - All Rights Reserved