June 1999

Private banking used just to mean the preservation of family assets. That is achieved by protecting the assets: from taxation and other government intervention, from market and political risk, and from forced rules of succession and family breakdown -- the private banking for the old wealth of Europe -- off-shore, discreet, conservative, and very effective.

Post-War, new pools of private wealth have appeared: developing world funk money, overseas Chinese entrepreneurial assets, and expatriate employee savings. The down market trend of private banking has accelerated as certain large institutions moved into retail private banking. Private banking now has to be qualified: off or on-shore and personalised or retail.

Japan has had a form of on-shore private banking. The branch managers of the larger banks have provided one-on-one advice in the major areas of property asset planning, inheritance tax avoidance, and enterprise succession to their substantial clients. However, the advice was largely amateur and not professionally informed and also was not systematised in any fashion.

From the mid-1980's, foreign institutions started to offer a full range of private banking services to Japanese residents. This development was quietly observed: the tax authorities devoted time to a major study and elaborated counter-measures, and the domestic institutions made a show of offering on-shore personalised private banking services in a PR response.

The effective preservation of family assets is anathema to the bureaucrats. The results of the major study of Swiss private banking and general fiscal considerations have contributed to the formulation of an integrated tax administration policy: barriers to off-shore private banking, the introduction of a taxpayer PIN, and finally a higher macro-economic tax burden.

Step one of the tax policy is in place largely under the camouflage of the amendment to the Forex Act. The other two steps are in the bureaucratic pipeline. This is in line with the tax administration of the other advanced countries which are all now bringing private banking on-shore to prevent private capital flight, discourage tax avoidance, and eliminate tax evasion.

The domestic institutions understood the position of the tax authorities and there has never been any tax-aggressive off-shore activity. In on-shore personalised, the universal banking impact of Big Bang will improve their product capability enormously and elementary financial planning may also be made available. In on-shore retail, there is just the marketing of SITs.

Analytica estimates total Japanese personal assets at aroundJPY2,500tr: approximately 40 per cent property and 60 per cent financial. Japan is a mature Listian (= developmental capitalist) economy. Macro-economic and demographic realities mean excess savings must be managed overseas to earn satisfactory returns and to prevent exporting industry being throttled by a strong Yen.

On-shore personalised and retail, which will see a growing exposure to overseas high risk high return products via on-shore accounts, and which are transparent to the tax authorities, are acceptable. Off-shore personalised, which permits significant avoidance, has been moved into the grey area. Off-shore retail, which invites petty evasion, has been nipped in the bud.

The sophistication level of the clientele is low and much education is required. The six keiretsu banks, once universalised, expect to take the market largely with one size-fits-all products. Foreign players must first earn client trust, but then controlling costs and providing greater flexibility should start to see profitable volumes of business as the market gradually develops.

Copyright 1999 by Analytica Japan - All Rights Reserved