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Monday, Aug. 30, 2004
COVER YOUR ASSETS
Financial-sector shakedown afoot
Amid close scrutiny both in Japan and abroad, the integration of Japan's major banks is progressing at a rapid pace -- and triggering unprecedented legal battles in the process.
The latest case, involving UFJ, Tokyo-Mitsubishi and Sumitomo-Mitsui, demonstrates how realignment of the banking in- dustry, which used to take place at the initiative of financial regulators, is fundamentally changing. It is also proof -- for better or worse -- that the globalization of domestic industries, which has been triggered by increased participation of foreign capital, is transforming Japanese society into one ruled by contracts and lawsuits.
What we have to keep in mind here is that the latest move is just the beginning -- not the end -- of a new wave of banking sector realignment. We are also continuing to witness two major ongoing trends -- the integration of different financial sectors and the squeezing of financial institutions competing in global fields.
The first trend involves an industry shakeup and integration that is encompassing all types of financial sectors -- banks, securities companies, life and nonlife insurance, consumer loans, leasing, and credit card firms.
The carefully partitioned, sector-by-sector financial system Japan constructed in the postwar years was aimed at evenly distributing the nation's scarce savings to various segments of the economy, including big corporations, smaller companies and special industries. For this purpose, the government regulated the winner-take-all principle of market economics and established the so-called convoy system, which was maintained through use of "administrative guidance." Several sets of reforms were introduced here and there as the nation began enjoying sufficient -- and then surplus -- savings thanks to the rise in per capita income that accompanied rapid economic growth.
But this time, it is market mechanisms -- not administrative guidance -- that are taking the lead in reshaping the financial system.
The new process will include privatization of the "yucho" postal savings system, which provides funds to certain sectors of the economy through the Fiscal Loan and Investment Program ("zaito") and government-affiliated financial institutions. The primary goal of postal reform is to put it on a level playing field with its private-sector competitors.
The second trend involves reducing the number of banks that can conduct international transactions or clear the 8-percent capital adequacy ratio set by the Bank of International Settlements.
The number of such banking groups in the United States and Europe, which own the two major currencies used in international settlements -- the U.S. dollar and the euro -- has already been reduced to about two in each country. Japan's population and the size of its economy are less than half of either the U.S. or the EU, and use of the yen in international transactions remains limited despite several efforts to boost it.
So the question is: How many international banks does Japan need?
Some observers in the U.S. and Europe say that Japan's needs could be fulfilled by only one international bank.
This realignment process is also likely to simultaneously hasten the realignment of purely domestic banks -- or those that can manage only a 4-percent capital adequacy ratio under the BIS rule. Such moves are inevitable, and they will occur at a fairly rapid pace in anticipation of the full introduction of the "payoff" system, which will limit deposit guarantees on bank accounts next April.
Naturally, these trends will accelerate the shakeup and integration of other, nonfinancial, Japanese firms, big and small, and various moves are already being reported.
Under these circumstances, it is needless to say that the public sector -- the nation's largest debtor with more than 700 trillion yen in accumulated debt -- has to be downsized.
Meanwhile, individuals and households -- who are the ultimate holders of Japan's pool of savings -- should realize that the ongoing shakeup of the major banking groups is only the beginning of a larger, more systemic change in the financial sector and spread their assets accordingly.
Teruhiko Mano is a professor at Seigakuin University.