Opening Japan's Financial Markets

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It is widely asserted, outside Japan, that the failure of foreign banks to penetrate Japanese financial markets is the direct result of stringent Japanese protectionist policies. However, although there may be some truth in this, it is a one-dimensional argument. Opening Japan's Financial Markets takes a broader view. It accepts that the Japanese bureaucracy have skillfully limited the scope of foreign banks. However, in examining the history of foreign banking activity in Japan, it becomes clear that ineptitude on the part of foreign banks and governments has also been a major factor.

Opening Japan's Financial Markets Review

This is a review from the Financial Times in London. JRB Copyright 1994 The Financial Times Limited; Financial Times (London) November 2, 1994, Wednesday By CHRISTOPHER HOWE 'OPENING JAPAN'S FINANCIAL MARKETS' By J. Robert Brown Jr. Routledge, Pounds 45, 272 pages ... The Japanese began systematic preparations to penetrate the western economies about 130 years ago. Serious, large-scale efforts to reverse the process date only from the rise of the Japanese trade surplus in the early 1980s. Given the linguistic, psychological, institutional and other barriers between the parties, it is not surprising that the balance of economic advantage in recent years has seemed to be so much in Japan's favour. Furthermore, although the west is beginning to catch up, at least in consciousness of the problem, the problem itself gets more difficult. For whereas the main challenge used to be how to penetrate the markets for goods, there is now increasing concern with the markets for services and with the obstacles to making a success of direct investment in Japan. J. Robert Brown's book is one of the most interesting accounts of these subjects yet to appear. Based on careful study of the literature and on more than 100 detailed interviews, it throws new light not only on the banking sector, but on the wider issue of how public and private sectors can interact in the process of market opening. A small number of western banks had established themselves in Japan before the Pacific War, including the old British Far Eastern banks, and Citibank, representing America. These mainly supported foreign trade and the banking needs of foreign companies in Japan. In the case of Citibank, at least, care was taken not to compete with domestic banks, on whom it relied for advice on local creditworthiness. During the post-war occupation, foreign banks had a new opportunity to re-enter the market and three prominent American Banks did so. Again, however, the foreigners were sidelined rather than integrated into the mainstream of the financial system, focusing on trade finance and short- to medium-term dollar lending. After the occupation, the Japanese government and the Ministry of Finance (MOF) resumed control. No new foreign entrants were allowed in for many years and a highly regulated financial system was established. In this system, Japanese institutions were assigned designated, highly specialized roles and the volume, direction and price of credit flows were each tightly controlled by an MOF with enormous legal and discretionary authority. The only way in which foreigners could be fitted into the picture was to restrict them to specific classes of business, such as foreign exchange, trade and dollar lending. Foreign banks acquiesced in these arrangements through much of the 1960s and early 1970s partly because their niches were exceptionally profitable. So much so, that in the early 1960s Citibank's profits from only four branches were larger than those of Fuji Bank, the largest of the Japanese City Banks. The other reason for acquiescence was that in the Japanese system, since banks rather than security markets were the main source of industrial finance, they were called upon to provide what was in reality a form of risk-sharing, equity finance, and were also expected by the authorities to provide both leadership and, when necessary, bail-outs for large companies. At the time, western bankers, with their short term, balance sheet approach to lending, found these practices unacceptable and hence were unwilling to undertake a lead role in company lending, even had they been encouraged to do so. All this began to collapse after the oil shock of the 1970s and the rise of US-Japan trade frictions in the 1980s. What Brown brings out so clearly is that liberalisation and market opening occurred because it was in the interests of both the western banks and the Japanese City Banks. Both sides wanted new instruments and avenues to funds and both wanted abolition of the old division between banking and securities business. The government had ultimately to agree to change, and all that this entailed, because of its need for large-scale bond financing to cover its budgetary deficit. Brown also shows that, although driven by these underlying factors, the occasion of the big breakthrough was the Reagan-Nakasone summit of 1983, when an embarrassing absence of business allowed the Americans to put the financial services issue on an unexpectedly high-level agenda. In spite of all the change and the formal steps towards liberalisation that have taken place, the longer term results remain disappointing. On the positive side, examples such as Citibank have shown that by taking a long view and making a careful analysis of the market, by a shrewd combination of conformity and innovation, and by good training and personnel policies, it is possible to make a success of business in Japan. On the other hand, the overall profitability and market shares of western banks as a group, remain very low. A fundamental reason for this is that there remain strong traditional elements in both the relationships between the financial system and the MOF, and between the institutions and their customers. Whether the political economy of the post-'Bubble' era will change this, or whether western companies will adapt even more flexibly to Japanese ways, remain fascinating questions for the future.

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