EXECUTIVE SUMMARY: RETAIL FINANCIAL SERVICES IN JAPAN


June 2000



Japan has been influenced by China and Prussia: economic thinking owes more to Friedrich List than to Adam Smith: it is obviously capitalist, but slightly less obviously developmental, rather than liberal, capitalist. The real economy has rigidified into a tier of competitive industries and a tier of protected industries: it is a unique example of "arrested Listianism".

Financial services had been a protected industry and "Big Bang" is a programme of its deregulation. However, the Establishment is beginning to doubt the wisdom of promoting the incursion of foreigners, the collapse of major institutions and the anarchy of market forces. Concerns about weakened social solidarity and damaged electoral prospects are surfacing.

Japan's original, Yamato, and the imported Chinese cultural systems are quite inimical to financial transparency as are Prussian accounting principles. There is a banking crisis with non-performing loans of up to 35 per cent of GDP. Dis-information and near-zero interest rates are keeping a lid on the situation. Dislocation in the JGB issue market is the likely denouement.

The average Japanese individual is well educated, well informed and has a deeply suspicious psychology towards the Establishment and those in any position of authority. Opinion surveys show that there is an acute awareness of the supposedly concealed banking crisis and a considerable sophistication in the understanding of the economic and financial consequences.

Life assurance is now in crisis with a reverse yield gap between actual and assumed investment returns, lower numbers of policies per household and lower amounts assured. The other contract savings vehicle, defined benefit pensions, faces the same yield gap problem. The Establishment is promoting defined contribution schemes as a "solution" to the underfunding.

SITs were previously marketed by the securities houses on a churn and burn basis. Now with marketing by more reputable institutions, the image of SITs is improving and funds are moving out of bank deposits and life assurance into SITs. The educative impact of defined contribution pensions, Japanese 401(k), should further raise the profile of SITs in personal financial assets.

There are 245m credit cards and 370m cash cards in issue and much MITI regulation. Spending is currently 94 per cent cash and 6 per cent credit cards. From early March 2000 bank cash cards will be fully useable as debit cards and also deregulation is beginning. Spending should move to 75 per cent cash, 10 per cent credit cards, 10 per cent debit cards and 5 per cent e-money over the medium term.

Deregulation is also encouraging new entrants and the internet is having its own information impact: specifically the mobile i-mode format. Intermediaries' hitherto high charges are being abruptly squeezed. For the first time, there is now price competition in financial services. Many of the established institutions with their high fixed costs are remarkably poorly placed.

Citibank has invested heavily in Japan since the mid-1980s. Private banking initially suffered from a misunderstanding of local peculiarities, while other services, cards, forex deposits etc, have been simpler. The branch balance sheet epitomises the current distorted state of banking in Japan. Domestic banking circles express some doubt about Citibank's long term prospects.

The current turmoil in Japanese financial services should not faze the senior management of foreign institutions: there is a competitive advantage. However, there must be an awareness of the peculiarities of Japan. Also the implications of the banking crisis are important. Asset management-related is the attractive area: life assurance, personal pension products and SITs.



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