Asia Times: ANALYSIS: Watch for more flashy judo from a Japan now on the mat



	January 08, 1999	atimes.com

Japan Economy

ANALYSIS: Watch for more flashy judo from a Japan now on the mat
By Richard Hanson

Tokyo - It's not an ancient Confucian saying, but another proverb may help understand what's happening in Japan's roiling financial markets: Be careful what you wish for - you may get it.

For years, American and other foreign financial institutions, and theirallies in government, have been prodding Tokyo to open the world'ssecond largest economy to greater market access, and especially to expose banks,brokers and insurers to more foreign competition.

In 1998, it happened. The question is what follows.

As the Japanese economy faces a second year of economic decline, Japan,as it has done at crucial points in its history, is welcoming an inflowof foreign financial technology and investment. Notable among theenthusiasts building business in Tokyo are such prominent names asMerrill Lynch, Fidelity and Citigroup (the latter has been merged so often as tomake the name a moving story).

What all see is that there might be an opportunity to tap Japan's hugereserve of private savings - officially put at yen 1,200 trillion, abouta third of the global pool. ''It is a growth industry,'' Bill Wilder, president of Fidelity Investment Japan Ltd., told a Japanese newspaper recently, ''But it has not started togrow yet."

Fidelity sells investment trust (mutual) funds through 23Japanese banks. It is now banking on the idea that its Tokyo operationswill expand when (or if) the Japanese government next year approves theequivalent of a private pension fund plan modeled on the U.S.'s 401K.This enables individuals to invest control their pension investments.

Putnam Investments Inc. has linked up with Japan's largest life insurer,Nippon Life, through a subsidiary, Nippon Asset Management. This involvesa capital infusion into the business of managing mutual funds, abusiness that Japanese life insurers were allowed to enter In December.

Merrill Lynch has hired some 2,000 employees from a failed Japanesebroker, Yamaichi Securities, and has opened over 30 branches in Japan.This is all but unprecedented for a foreign securities house in Japan. The onlyother precedent for a retail financial operation has been Citigroup(formerly Citibank, which now runs a popular chain of retail bankbranches in Japan.

U.S. firms have also made inroads into the insurance industry. Unum, basedin Portland, Maine, has linked up with a Japanese partner, middle-rankedChiyoda Mutual Life Insurance Co.

Changes in the insurance laws, lobbied for by the US government, have produced opportunities in Japan.

Chiyoda Mutual has agreed to reinsure, or find other reinsurers for, therisk behind a unique kind of group long-term disability insurance beingmarketed by the 150-year-old U.S. insurer's Japanese subsidiary, UnumJapan Co. The benefits are mutual.

For Chiyoda Mutual the reinsurance link with Unum represents whatamounts to a back-door entry into the casualty side of the insurancebusiness, without the bother of establishing a non-life subsidiary(which is now legally possible). Regulators couldn't object to a lifecompany reinsuring non-life risk; so far, life companies have stuck toreinsuring the risks of other life companies.

''We are the first Japanese life insurance company to reinsure casualtyinsurance,'' boasted one Chiyoda spokesman. In effect, Chiyoda willbecome Unum's representative in reinsuring the risks. The company already hadsigned a sales agreement for Unum products earlier this year.

The New York-based American International Group (AIG), a fierce lobbyistfor access to the Japanese insurance market, has been successful inflogging discounted automobile insurance through televisionadvertisements that rely on telephone sales, a relatively new approachto selling insurance in Japan.

The obvious interest in the Japanese market stems partly from the size of the market. There is also what one analyst describes as the ''herd'' factor.

Japan's economy has been in the doldrums since the early 1990s,when an asset-inflation ''bubble'' economy collapsed. When Japan wasriding high in the 1980s, with a strong stock market, Japanese firmsflush with cash made huge investments abroad (with poor results).

In something like deja vu, U.S. financial institutions, backed by astrong market in the 1990s, have behaved the same way.''The U.S.A. has investors; Japan has savers,'' observes Jim Rudy, anAmerican who runs a financial consulting business in Tokyo. ''Thequestion is whether the American companies are any better at doing duediligence in Japan than the Japanese were capable of doing in the UnitedStates."

What is different in Japan now is that the regulatory authorities,which for decades protected local financial institutions, have in effectopened the gates on their own.

There are several reasons for this. One is that once prestigious bureaucratic organizations, such as theMinistry of Finance (founded in 1869), have suffered serious politicaldamage from scandals related to the financial institutions that theyregulated.

''We think that Japanese banks and securities companies no longer deserveto be protected from foreign competition,'' said a senior official, whodeclined to be identified. The Ministry of Finance earlier this year wasstripped of its direct role as supervisor for banks, securities houses,and insurance companies.

In its place the parliament created a Financial Supervisory Agency(FSA). The FSA is under the jurisdiction of the Prime Minister's Office.It is still, however, staffed by officials affiliated with the Ministryof Finance. The birth of the FSA presents both foreign and Japanesefinancial institutions with the dilemma of figuring out just who isregulating them.

Adding to the uncertainties, Japan's government is committed toderegulate markets, an effort that has misleadingly been dubbed ''BigBang'', a reference to London's abolishment of fixed stock marketcommissions in the mid-1980s.

Japan dropped capital and foreign exchange controls in April 1998. In1999, securities commissions will be freed up, along with a decisionto revamp tax regulations that have inhibited investment into the Japaneseyen.

The lure of Japan's wealth has proved irresistible to foreign financialinstitutions - especially Americans, who are flush with profits from along bull stock market and a still-growing economy.

The point is that Japan desperately needs a foreign inflow of financialtechnology and capital when foreign U.S. and Europeancompanies are competing (at times with each other) to get in.

''Essentially from the American side, companies are looking for a meansof getting into the Japanese market,'' observes Kent E. Calder, aPrinceton University professor currently serving as a senior specialadvisor to the ambassador at the American Embassy in Tokyo.

Here's the hitch.

Every time foreigners have rushed to Japan with their expertise, Japanhas listened, learned, assimilated and improved. NASA, for example,invented the VCR. We know who made it available to consumers - Sony,JVC and Matsushita.

There's a long list of other economic boomerangs,from quality-control circles to sports utility vehicles, that have gonefrom America to Japan and back - as good or better that the original.

Some wonder whether the potential returns - so farpotential - are worth the risks of doing business in Japan, wheremarkets, despite reform plans, are less transparent and market practiceoccasionally involves links with Japan's seamier underworld.

Senior executives at several major Japanese banks and securities houseshave been caught making illegal payments to corporate gangsters, theso-called sokaiya. ''The problem of doing one's homework, due diligence,is real,'' admits a lawyer at one Major American investment house, whodeclined to be identified.

But for Japan, America's latest foray in financial technology is agodsend.

''This reminds me of the licensing boom of the '50s and '60s when Japanwas buying technology cheap,'' says James C. Abegglen, founder of AsiaAdvisory Service and a six-decade observer of the society for which he coined thenickname ''Japan, Inc."

He sees the inflow of financial investment from the USA and Europe asjust another ''licensing agreement,'' which this time involves acquaintingJapanese consumers with ways to invest their money.

That's important way beyond Japan. American companies investing in Japanare not really all that American. They see Japan as one part of a globalmarket, and the opportunity to expand in Japan is essential, even ifmuch of the competition is prompted by the same copy-cat instincts thatsent Japanese firms into dubious international ventures in the 1980s -shades of failed Japanese investments in Pebble Beach and RockefellerCenter.

The big foreign companies - including the brand-names of Fidelity,Merrill Lynch and Citigroup - are leading the way and believe thereturns will justify any risk, despite the still high cost of entry.They are in fact leading Tokyo's financial revolution. And the ailingJapanese financial institutions are paying attention.

Travelers (now Citigroup), with its familiar umbrella, recently hasplopped down a large sum of money for a significant stake in thethird-ranked Japanese broker, Nikko Securities. A number of othercompanies have announced tie-ups to market investment funds and otherthings to Japanese consumers.

American Insurance Group bought a new headquarters building nearbycentral Tokyo. GE Capital is talking about taking over a troubledinsurance firm. Goldman Sachs and Ford Motor's credit unit has also beeninvolved in managing sales of Japanese real estate and firms.

If past is prologue, Japan will transform itself in a relatively shortperiod of time.

''Opening the doors to foreigners [in finance] is like the start ofMeiji,'' says Yutaka Takahashi, president of RECOF International, a majorJapanese mergers and acquisition specialist. He's referring to theperiod starting in 1868 when Japan, faced with foreign threats anddomestic turmoil, plunged headlong into an effort to industrialize andbuild a strong military, ending nearly three centuries of feudalisolation.

As ordinary Japanese learn more about where and how to increase theirreturns on investments, its likely there will be more Warren Buffets emerging from their 126 million population.

And as the learning curve goes up for Japanese financial institutions,they will be there to compete with American and European firms nowflocking to the financial feast.

Given the growing trend toward mergers and investments, and the risingmobility of well-trained and motivated Japanese in the financial world,it is in fact becoming harder to distinguish between just what is a foreignand what is a Japanese institution. What is clear is that there will be more of the former and probably fewer of the latter around in coming years.

The number of takeovers is still small compared with the frenzied pacein the United States in the past year or two but the growth is striking. Annualacquisitions of Japanese companies by foreigners have more than doubledsince the early 1990s.

In 1997, there were 51 such cases, according to RECOF, up from 31 in1996. In the first five months this year alone, there were 27 takeovers,of which U.S. companies (with 14) accounted for more than half thenumber. Financial deals dominate. (Takeovers by of overseas firms byJapanese companies shrank from a peak of 459 cases in 1990 to 215 in1997.)

Japan's financial revolution probably will take several years to playout. It is one that Keiko Koide, a 51-year old Japanese housewife,summed up succinctly after returning from a two-year stay in America:''We need the supermarket idea of 'plastic or paper, and cash-back?' "

Cash back, with a direct debit from your local bank account to pay foryour groceries, is not yet a reality for shoppers at supermarkets inJapan. And while Japanese are using more charge cards (versus creditcards, where debts accumulate), the instinct is still to save.

But consumer habits, financial and retail, can change quickly,especially as marketing and services available to Japanese stores areupgraded.

Toys Are Us and Office Depot have also arrived. A personal Citibankaccount to allow individuals to speculate directly in the foreignexchange market is already here. You can buy car insurance, mail order,from foreign owned firms, and more is in the works in an effort to sellinvestments to Japanese.

The question in 2005: Will Japan's answers to the Beardstown Ladies be phoning theirMerrill Lynch broker? And who will own it?

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