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Big Bang Reforms Attract Overseas Banks

September 9, 1997

Foreign firms are making their way back to the Tokyo Stock Exchange. (Photo: Kyodo)

Overseas banks and securities companies are stepping up their offensive in Japan's financial markets. Banking institutions keen to expand into new business areas are lining up to take Japanese partners and build alliances. And securities companies which abandoned the Tokyo market in the slowdown following the collapse of the "bubble" economy of the late 1980s are coming back, while others are getting their first Tokyo Stock Exchange memberships. These companies all anticipate bigger markets and turnovers ushered in by the so-called "Big Bang" reforms. The prospect is one of tougher and more active competition among foreign and domestic financial institutions.

Big Opportunities
The most notable recent move by an overseas bank came with the July announcement of a full-fledged capital and business tie-up between a top Swiss institution and a major long-term credit bank. Both houses agreed to take stakes in each other, exchange executive-level staff, and set up a joint venture subsidiary to handle securities and investment-trust business.

Two earlier sorties by foreign banks stand out. In April, a top U.S. name and another long-term credit bank agreed to a capital tie-up. They plan to enter the securitization business in Japan, marketing mortgages in the form of small-unit securities. And in June, a British financial conglomerate formed a operational alliance with a Japanese "city bank" to sell investment-trust products through the partner's branches and other outlets. Foreign banks already active in Japan also are stepping up efforts to expand their business, for example by getting more deeply into low-interest housing finance and other forms of loans to individuals.

In the securities sector, too, foreign moves are being noticed. In January, a top British brokerage resumed its seat on the Tokyo Stock Exchange--memberships are a prerequisite for conducting stock and other business on the nation's bourses. It had first joined in 1988, but sold its membership and withdrew in 1993 after giving up stock activity amid slumping operating returns due to the collapse of the "bubble" economy. To meet the workload expected with reentry, it has taken on 50 Japanese full-timers.

And six months later, membership on the TSE was also acquired by a brokerage subsidiary of a major U.S. financial conglomerate centered on one of the world's largest banks. In addition to trading stocks and bonds, it is expected to handle investment trusts and the like; Japanese stocks, considered a bargain compared with U.S. stocks, are to be incorporated into global fund-management strategies.

Meanwhile, in February, a major U.S. securities house that has long been active in Japan teamed up with two local brokerages to market dollar-denominated money market funds (MMF)--mutual funds investing in safe, liquid securities at money-market interest rates. It hopes to attract individual investors through the branches of the two Japanese brokerages. The U.S. firm apparently wants to bring more firms into the alliance.

Other overseas brokerages are hastily preparing the ground for expansion of business, for example by headhunting Japanese analysts from domestic securities houses and think tanks.

Big Bang and the Customer
The reason for this scramble into or back into the Japanese market and buildup of operational strength is that business opportunities are expected to proliferate if Japan's Big Bang (named after the British financial reforms that began in 1986) comes off. The goal of these reforms is to revitalize the nation's capital and other financial markets with far-reaching deregulation and relaxation of restrictions. So far decided on is the October 1 lifting of the ban on integrated accounts (linking savings and investments) at brokerages. Customers will be able to also use their brokerage investment accounts for salary deposits, utility payments, and credit-card settlements. They will be able to judge banks and brokerages on profitability and convenience of accounts. Brokerage accounts were introduced in the U.S. in 1977 and spread rapidly. By the end of 1996, there were some 150 different popular kinds of account.

Investment trusts have traditionally been the exclusive field of brokerages. But from December 1, banks too will be allowed to offer this instrument at their branches, which far outnumber those of securities houses. Investment trusts will become a much less exotic option for individuals overnight.

Shopping for Forex Bargains
Looking beyond banking and securities, April will mark the coming into effect of a revised foreign exchange law. Through this deregulation, trading houses and manufacturers with overseas trade will be able to bypass banks and make direct settlements in foreign currencies. In addition, the forex business itself will be liberalized: Among other things, it will be possible to buy currencies at convenience stores and commissions can be expected to fall. Also in the works are a major relaxation of the so-called firewall system, under which banks, brokerages and insurance companies are barred from operating on each other's turf, and full liberalization of stock-transaction commissions.

If all this comes to pass, not only the customer but also industry will benefit from financial services that are much cheaper, broader, and more convenient. Financial institutions will probably have to show considerable ingenuity to provide all the services that were previous restricted. With these things happening in tandem, it is expected that new life will be breathed into Japanese financial markets, borders will be pushed out, and trading volumes will increase.

The inevitable downside will be greater competition among foreign and domestic firms, probably leading to some business failures and lost savings. In such cases, the national system of deposit insurance will cover the full sum of principal and interest up to the end of March 2001. But after that the principal only will be guaranteed, up to a sum of 10 million yen (83,000 dollars at 120 yen to the dollar) per capita. The customer also will be exposed to risk. As a result, relations between financial institutions and their customers will likely mature. The onus will be on financial institutions to disclose more data, and on customers to check for themselves whether the firms and their products are sound.

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