By Anthony Rowley
What Tokyo can – and can’t – teach the west about dealing with financial crisis and its aftermath
Is this the moment when Japan is poised to strike back, teaching the once-mighty US and Europe how to cope with a mega financial crisis, and sending its own banks in to act as white knights by buying up collapsing Western institutions?
Japanese bankers and officials are not sure that their crisis experience is that useful to the rest of the world – but they do believe that Japanese banks will go on the offensive overseas.
After the collapse of its bubble economy in the 1990s, Japan suffered a meltdown in the value of financial assets and real estate, to the tune of around 1,500 trillion yen (about $14 trillion) or three years’ GDP. It took Japan more than a decade to recover – during which government action to help the near-bankrupt financial system and the moribund economy was slow and grudging.
The collapse in Japanese asset values was equal to the nation’s entire stock of financial assets at the time, as economist and author Richard Koo notes – and yet it was not until the second half of the 1990s that the authorities began pumping money into recapitalising banks. And as management consultant Kenichi Ohmae observes, Japan went into its crisis with a dozen major money centre banks and came out of it with just three “mega” banks.
Japan’s experience should provide a “lesson in reverse” to authorities elsewhere, says Shijuru Ogata, former Bank of Japan deputy governor for international affairs and a well-known figure on the international banking scene. Japanese authorities did not move to recapitalise severely ailing banks until seven or eight years after the bubble collapsed, he noted to Emerging Markets.
The only similarity Ogata sees between the Japanese crash and the one now in the US and elsewhere is an “arrogance of optimism”.
In both cases “lenders and borrowers became over-optimistic, regardless of their ability to collect or repay money,” he says. “The difference is that, in Japan’s case, bad loans were concentrated on the balance sheets of lenders but in [the US and Europe] claims have been distributed because of securitisation.”
Makoto Utsumi, vice finance minister for international affairs during Japan’s crisis, also sees differences between what happened then and what is happening now. “In Japan’s case, it was a bad debt problem, and after a time everyone knew where the losses were and how much,” he says.
But in the US and Europe, no-one yet knows where the losses are, and mutual suspicion is rife among financial institutions. “It is much more complicated, and so the liquidity crisis is continuing for much longer than in the case of Japan.”
Deeper wounds
Rei Masunaga, another former senior official at the Bank of Japan and former deputy president of the Japan Centre for International Finance, cites a number of ways in which the Japanese crisis differed from the current one – and why the US financial system could suffer deeper wounds than Japan ‘s did.
The exposure of Japanese households to equity markets, and the exposure of foreign investors to Japanese markets, were both far smaller than is now the case in the US, he points out. And the financial derivatives market was virtually non-existent in Japan at the time of its crisis, he adds.
But if Japan cannot teach other economies how to escape from their crisis, it is in a position to render aid via its own banks and other financial institutions. Already in recent weeks, Japan’s largest mega-bank, Bank of Tokyo-Mitsubishi UFJ, has said that it will acquire a 1% stake in Morgan Stanley, the second largest stand-alone securities firm in the US. Nomura Holdings has purchased the Asia Pacific franchise and the European operations of failed Lehman Brothers Holdings.
Tokyo-Mitsubishi is also consolidating its long-standing holding in UnionBanCal to achieve full control, and Miktsui-Sumitomo, another of Japan’s mega-banks, is likely to extend its holding in Goldman Sachs. There may be more such such moves into overseas markets by Japanese banks, says Masunaga, noting that they operate on the foundation of a very strong deposit base. “There are limited opportunities for them to expand domestically,” he adds.
Utsumi, now president and CEO of the Japan Credit Rating Agency is also positive about overseas prospects for Japanese banks in the current troubled climate. “Losses at Japanese banks caused by sub-prime loans problems are not so serious – probably 3-4% of the total global losses,” he notes.
Higher rates
“There might be several banks with more severe problems but not the banking system as a whole. There is not much of a credit crunch in Japan, except in the real estate and construction sectors. Probably Japan is the only country where the banking system is working without much defect.”
Utsumi points out that there are considerable amounts of money moving out of Japan now by way of syndicated loans to corporate and other overseas borrowers. “This is very positive. In the past we saw a ‘Japan rate’ [premium] being applied to Japanese banks wishing to acquire funds in overseas markets. What is happening now is the opposite. Foreign banks are paying higher rates to get money in Japan.”
Overseas commentators have suggested that Japanese banks and insurance companies also are “over-paying” in their eagerness to acquire stakes in their counterpart institutions abroad. “Some newspapers cite the example of Mitsubishi Real Estate’s investment in New York’s Rockefeller Centre during the bubble economy period”, says Ogata. Mitsubishi was said by many to have paid well over the odds and later sold out at a loss.”I hope that they [Japanese banks and others] will not repeat this,” says Ogata.
He confesses to being “a bit sceptical” about Japanese banks’ latest foray into overseas markets. “The condition of Japanese banks and other financial institutions is relatively more stable than that of banks in the US and western Europe. In that sense, this is a good time for them to go abroad after quite a few years of isolation.” But “are they really prepared for it?” he asks.
“They have enormous savings in their pockets and interms of figures they have the ability to go overseas but in terms of personnel and ability to do due diligence are they really prepared. I am a bit worried.”