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Monday, Feb. 28, 2005

JAPANESE PERSPECTIVES

Beware of financial conglomerates in FSA's Wild Kingdom


Every year, the media trot out a list of Japan's most popular phrases. Last year's "phrase of the year" award went to "I feel ultra-fine!" -- the quote by swimmer Kosuke Kitajima who brought home multiple gold from the Athens Olympics.

Although we are only two months into 2005, a phrase already has emerged that looks well-poised to grab the top prize. That phrase is: "financial conglomerates," aka "universal banking."

All of a sudden, financial institutions in Japan are trying to become everything to everybody. Hence mergers and tieups are all the rage among hitherto rivals and neighbors who were once thought protected by inviolate walls of separation.

The urge to merge is actually not all that new. The pressures of global competition have been driving Japanese financial businesses willy-nilly toward greater integration for some time. What is new is the policy environment.

If Japanese financial businesses were slow to venture beyond their traditional realms of activity, regulators were even more reluctant to allow them to do so. Letting financial service providers roam free to compete and fuse as they pleased was considered too perilous for financial stability, so the potentially lethal beasts were put into separate cages, with dedicated custodians appointed to each and every cage.

Thus the Japanese financial marketplace became a zoo, well managed but very boring, with the beasts growing ever less lethal the longer their lives behind bars lasted. Not any longer.

Toward the end of last year, the Financial Services Agency announced a two-year plan to overhaul its regulatory framework.

The basic approach is to do away with the zoo. In its place will come a kind of safari park arrangement in which the animals will be let out of their cages and allowed to sniff their way around each other to create alliances and territories befitting a workable mode of coexistence.

The custodians will now only keep watch from a distance. Thus freed from confinement, it is hoped the beasts will regain their animal instincts, thereby "conglomerating" into stronger and more superior beings, better able to compete in the global jungle.

So goes the theory. And it could work, too. In any case, they have very little choice in the matter. The zoo system is simply too anachronistic for the kind of world we live in today.

That, however, does not mean there are no problems with the new approach. For one, the regulators have left reform until so very late in the day that they have to do everything in a hurry. Hurry and flurry are fertile breeding grounds for cock-ups and chaos.

In essence, the same thing applies to the financial service providers themselves. Having done nothing for so long, they are in a sudden rush to do everything and anything without much thought about the consequences.

There are also two other important risk factors. One is that the safari park is a potentially dangerous place for visitors. They have to understand the risks involved in wandering about among unrestrained animals.

The other is that the perimeter fences of safari parks can never be made indestructible. At some point, some of the animals may get out and cause a lot of damage, stampeding into areas of activity totally unsuited to their natural talents and capabilities.

Furthermore, the safari park arrangement may end up spelling death for small but nonetheless important creatures providing life-saving financing to equally small and equally important nonfinancial businesses. Survival of the biggest should not be allowed to reign supreme.

It remains to be seen whether a sound ecological balance can be successfully maintained in the coming safari park regime. It is certainly a weighty challenge.

Noriko Hama is an economist and a professor at Doshisha University School of Management.


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