First there was the startling advance of Japanese banks into world markets in the late 1980s, their balance sheets gorged with inflated assets. Then followed a humiliating retreat after the collapse of the bubble economy in the early 1990s, as the banks retired from the field to lick their wounds and nurse their bad debts. Now, Japanese banks are planning a second advance onto the world stage, this time in different form and using more sophisticated and mature strategies.
It will not be the same names – those of Japan's great corporate dynasties, such as Mitsubishi, Sumitomo and Mitsui, or others like Bank of Tokyo, Industrial Bank of Japan or Dai Ichi Kangyo Bank – that will lead the advance. This time, it will be anonymous-sounding entities like MUFG, SMFG and Mizuho. These are all that remain of the clutch of Japanese city banks, foreign exchange banks and long-term credit banks that are in process of merging into just three mega-banks.
The names of these acronymic institutions do not roll off the tongue with the same ease as Citigroup, JP Morgan, Goldman Sachs or even HSBC. But they hope to achieve the same kind of global reach and universal competence as Japan moves into the second stage of its financial system renaissance, which began two years ago under Heizo Takenaka, then financial services minister, initially with the objective of ridding leading banks of their mountain of bad debt.
Second phase
Phase one of the plan is now complete, and Japan's Financial Services Agency (FSA) is in the process of launching phase two, which aims at modernizing and internationalizing key parts of the nation's financial system while promoting the emergence of financial conglomerates capable of competing on a global scale. Phase two represents a "roadmap for a [future] financial system in Japan", says Toru Shikibu, FSA deputy commissioner for international affairs.
Legislation will be introduced allowing the formation of "financial conglomerates", says Shikibu. Unlike their predecessors forming the component parts of the new institutions, the new multi-functional conglomerates will not be focusing on asset building.
Instead of plunging recklessly into real estate lending in the US or Europe or competing to get their names on syndicated loan tombstones, Japan's new conglomerate banks will aim for fee-based corporate finance, underwriting and consumer financial services business.
Japanese banks are already world-class in size. In asset terms, Mizuho is the world's largest banks and a planned merger between Mitsubishi-Tokyo Financial Group (MTFG) and UFJ (to form MUFG) would produce another world-class institution. But they are not legally able to combine banking and securities function under one roof as yet.
Change is on the way, however, as signalled by the fact that Sumitomo-Mitsui Financial Group (SMFG) and Daiwa Securities have announced their intention to step up cooperation while hinting that this could lead to a full merger eventually, producing another world class institution in asset terms.
But size is not all, as Japanese banks discovered to their cost 20 years ago. In those bubble economy days, when Japan's GDP was rapidly closing on that of the US, when the Tokyo Stock Exchange rivalled New York in terms of market capitalization and when the grounds of the Imperial Palace in Tokyo were worth as much as the state of California, anything seemed possible.
If Japan could take over the Rockerfeller Centre, it would not be long before Japanese banks could gobble up Citibank, Bank of America and others. But such hubris was quickly shattered along with Japan's asset bubble.
Japanese banks endured more than a decade of being burdened with bad debts. At an agonisingly slow pace, and with prodding from financial authorities the banks clawed their way back to better health. The dozen largest banks meanwhile merged into just four groups.
Three-point turn
Even that was not enough for policy-makers who smarted over the humiliation of Japan's once internationally-known banking names. Takenaka wanted to restore Japan's reputation in international financial markets by reducing the number of leading banks to just three world-class institutions, and by building 'national champions' among the banks.
US banks and other institutions, freed of the constraints imposed by the Depression-era Glass-Steagall Act, began combining into financial supermarkets such as Citigroup with the world as their stage. As a result they were able to play a wide variety of roles under one roof. Japan is likely now to amend its own version of Glass-Steagall (the so-called Article 65, imposed during the post-war US occupation) to produce its own conglomerates.
The first of these is expected to result from the merger of Sumitomo-Mitsui Financial Group and Daiwa. This would enable the two to tackle banking and securities activities domestically and internationally on the basis of an enlarged capital base and fused functions. SMFG, the holding company for Japan's third largest banking group, and Daiwa, the holding company for the second biggest Japanese securities firm, aim to integrate their management structures by the end of fiscal 2005.
A merger between SMFG and Daiwa would compel other banks and brokerages in Japan to adjust their strategies. Nomura Holdings, Japan's leading securities house, has preserved its independence by maintaining arms-length business relations with various banks. The third-largest brokerage, Nikko Cordial has a wholesale securities joint venture with Citigroup and is cementing ties with Mizuho. But these companies will need to cooperate more closely with other financial institutions if a SMFG-Daiwa merger creates a new rival.
Given that bank lending in Japan – corporate lending especially – has declined continuously for five years, banks feel the need to consider alternative activities and markets and MUFG will focus on overseas acquisitions in order to broaden its customer base. The "national champion" argument has been behind the officially supported plan to form MUFG.
UFJ's hopes of remaining independent were squashed by the setting of official benchmarks, which UFJ alone was unable to meet, for dealing with non-performing loans. The officially sanctioned merger came very close to being upset, however, when SMFG (which has investment banking ties with UFJ) launched a rival takeover bid. But SMFG was appeased with the promise of accelerated legislative change to let it merge with Daiwa.
Japan's national banking champions
1. Mizuho
Mizuho was the result of the merger of Dai-Ichi Kangyo Bank, Fuji Bank and Industrial Bank of Japan in 2000. The group was re-organized in March 2003 when a new financial holding company, Mizuho Financial Group, was established.
2. MUFG
This will be the result of merger between Mitsubishi-Tokyo Financial Group and UFG. They are not yet legally allowed to combine banking functions under one roof but the process should be complete by October.
3. SMFG
A merger between Sumitomo Mitsui Financial Group and Daiwa is planned. The two banks hope to integrate management structures by the end of fiscal year 2005.