Japanese megabanks' responses to the U.S. financial crisis

International Finance in Japan

This work will provide a detailed discussion of the various ways the recent financial crisis in the United States and the ongoing U.S. recession in theory and in practice is affecting Japan.

In a recent report entitled: "U.S. Financial Crisis a Boon for Japanese Banks" Daniel Harris states that for global investors "...there may be a glint of hope in recent events: the crisis in the U.S. financial sector may serve as a long-awaited boon for Japan's 'megabanks'." (2008) Banks including Mizuho Financial (MFG), Mitsubishi UFJ (MTG) and Sumitomo Mitsui Financial (SMFJY.PK) have been effectively "...stuck in a stagnant domestic growth cycle that has limited the extent to which they have been able to compete at the aggressive level of their U.S. counterparts. Many employees at Japan's Nomura (NMR) talk of a stifling, hierarchical culture that has so far led to a disproportionate number of that investment bank's biggest rainmakers seeking out jobs at higher-paying hedge funds." (Harris, 2008)

I. BANKS in JAPAN

However, the financial sector crisis in the United States has resulted in a change occurring and it is reported "....investors willing to take the risks may be able to get in what amounts to the ground floor of the next boom in the Japanese investment banking industry." (Harris, 2008) Growth at Japanese megabanks has been slow in recent years and ADRs in Mitsui UFJ are going at $8 which is the same price as in 2004. Additionally reported is that Mizuho is "trading around half its 2004 valuation; after a brief lift-off, ADRs in Nomura are back at 5-year lows." (Harris, 2008) According to Harris this can be attributed to "perceived hostility to foreign investment among Japanese companies, at the same time as China's big banks have opened the floodgates to American and European fund managers looking to get a slice of the Asian growth equation." (Harris, 2008) the following facts are reported by Harris that demonstrate change on the horizon:

1). In recent days Japanese banks have shown uncharacteristic savvy and aggression in competing for the U.S. assets of their market counterparties. Making the headlines was Mitsubishi UFJ's $8.4 billion acquisition of around 20% of Morgan Stanley (MS). That makes Mitsubishi look decidedly savvier than China's private sovereign fund (earlier in the year, China Investment Corporation, a $200 billion acquisition giant, snapped up 10% of the bank for around $5.5 billion).

2) Nomura is picking at slices of Lehman Brothers, days after Barclays looked like it was the only international investment bank in the bidding, with a $1.75 billion offer for the U.S. business. Sumitomo Mitsui Financial, which invested $901 million in Barclays (BCS) in July, is also said to be sniffing around the Lehman carcass.

3) Mizuho Financial is strengthening ties with the new Merrill-BoA conglomerate, after having invested $1.2 billion in Merrill (MER) in January this year. (Harris, 2008)

Harris reports that buying a cluster of Japanese banks "at valuations close to, or at 5-year lows - looks like a savvy buy right now...[and] may be the only safe and effective way for U.S. financial institutions to get a spread of risk in an ultra high-growth regional economy. Japanese banks have benefited from increasing synergy with their U.S. competitors, while they arguably understand the risk management side of the business better than anyone else today." (Harris, 2008)

III. RESPONSE of JAPAN to CRISIS

The work of Martin Schulz (2008) entitled: "The Globalization of Boom and Gloom: The U.S. Financial Crisis and its Impact on Europe, Japan and Asia" published by the Fujitsu Research Institute examines the financial crisis in the United States and what has resulted which on the part of Japan and Europe was to simply wait "hope that the storm would simply pass" According to Schulz, Japan "...did not even get scared enough to blame anybody. After its own experience with a finance/real estate driven bubble and crisis, policymakers and companies felt comparatively comfortable in the knowledge that Japan's finance had already taken the medicine the U.S. is now about to swallow, and that Japan's painful decade-long internal restructuring might have insulated her companies from external trouble." (Schulz, 2008) Schulz states that there was a mistake made in relation to having underestimated "the extent of global integration not only in finance, but also in production and consumption that has emerged during the last decade. In the old days, during the U.S. S&L crisis or Japan's financial crisis of the 90s, the direct impact of a financial crisis would have been more or less contained to the originating country, with some staged spillovers into the economies of partner countries, including related rescues of financial institutions." (Schulz, 2008)

IV. JAPANESE ECONOMY

Schulz relates that the conditions in Japanese corporations are "...facing a fast and severe deterioration of their business environment. It is not only exports to the U.S. that are faltering. With Europe heading towards recession and a looming financial crisis almost simultaneously with the U.S., overseas demand takes a big hit, which is bad enough in an economy that has been flat or shrinking on the domestic side for almost a decade. The real danger now looms in Japan's (in the meantime) most important East Asian markets. Fast growing, developing countries and corporations depend on healthy export markets and on cheap, readily available credit and finance. And both are simultaneously under threat now." (2008)

It is also reported that the companies and banks are hurting in all economies that are "dollarized" economies" or those in which devaluation of the Dollar is occurring in recent years. While high Dollar inflows first drive growth and production, the capital inflows tend to hurt banking profitability when governments try to "mop up" excessive liquidity and sterilize Dollar inflows in exchange for low-yielding government bonds. China's banks, for example, are already getting a raw deal on their Dollar assets because the government forces them to accept low-yielding, negative real interest government bonds in exchange. When recession strikes, these banks will become even more unwilling to provide credit to their ailing (export industry) customers. Unfortunately, even if the Dollar gets stronger, as is often the case during a global crisis, falling domestic currencies might easily deepen a looming crisis of confidence - as they did during the Asian crisis." (Schulz, 2008)

The housing boom in the U.S. drove production throughout the world and as well resulted in the longest period of expansion in Japan, which developed against the odds of a domestically flat or shrinking economy. Less obviously, the boom also resulted in an extraordinarily strong Euro that gained on concerns about U.S. stability. Investors favored the Euro despite strong concerns about its intrinsic vulnerability that is rooted in the lack of unified or integrated financial policy..." (Schulz, 2008)

The work of Fukao (2008) entitled: "The U.S. Sparked Financial Crisis and the Japanese Financial System" states that the impact of "...worldwide financial market turmoil and tumbling stock prices is clearly influencing Japanese financial institutions as well. A review of the condition of the Japanese banking industry shows that, while the gross profit of all banks nationwide followed a slow recovery through fiscal year 2005 (April 2005 - March 2006) as the domestic economy expanded, it declined for two consecutive years in FY2006 and FY2007. After the Bank of Japan altered its guidelines for market operations in FY2006, the effect of the higher lending rate began became apparent from FY2007, leading to some improvement in the yield on invested funds. However, with the impact of falling stock prices since last year and the full implementation of the Financial Instruments and Exchange Law in September of 2007, over-the-counter sales of risk products such as investment trusts froze up on the whole, and net income on fees and commissions eroded. Banks had been allocating more and more personnel until then with the economic expansion, but when the business cycle turned down, bank profits fell. " (Fukao, 2008)

While the major banks have practically completed all of their bad loan disposals there has been slower improvement in regional banks therefore should the deterioration of the economy continue "it is possible that bad loans will begin increasing again." (Fukao, 2008) Fukao states: "The breakdown of confidence in the financial system has not been limited to the United States. It has spread to Europe, where governments have stepped in to inject capital or provide financing support to several financial institutions. Underlying the global deterioration in the cash flows of financial institutions has been the fact that no one knows which banks are sitting on losses and to what extent, and this in turn has sparked fear and wariness, choking off the supply of funds." The following chart shows the 'estimated trend in capital adequacy ratios of Japanese banks' which has been adapted from the work of Fukao (2008).

Estimated Trend in Capital Adequacy Ratios of Japanese Banks

Source: Fukao (2008)

Fukao (2008) additionally reports "There are increasing concerns about the future of regional economies in Japan. Regional banks have gradually improved their finances both in terms of bad debt ratios and capital adequacy, but they have struggled in the face of narrowing net interest margins and deteriorating expense ratios. A look at each individually, however, reveals a widening gap between those banks that have been able to boost earnings and make steady progress in disposing of bad debts with the expanding economy over the past few years, and those which have not."

According to Luci (2009) the United Nations should "...address the global financial crisis....[and] build an international financial architecture to address the global financial crisis, gripping the rich economies, including those of the United States, Japan, and the European Union." (Luci, 2009) at least this is the opinion of Dr. Walden Bello, senior analyst at the Bangkok-based research institute Focus on the Global south and who is also the national president of the Freedom from Debt Coalition and professor of the University of the Philippines, said the UN is the "only legitimate forum," not the G. 20 countries to create such mechanism to mitigate the impact of the economic slowdown." (Luci, 2009) Luci reports that there is a debate set in April between Bello and "...Gert-Jan Koopman, Director General for Economic and Financial Affairs of the European Commission, on the issue on March 17 at the Residence Palace in Brussels." (Luci, 2009) the G-20 countries will meet in Brussels and according to Bello "The proper forum must be the United Nations. The process must be more inclusive. It is not appropriate that an informal group takes precedence in creating a new financial architecture for the world to meet the current crisis. We cannot keep on relying on some global institutions, particularly those that were part of the problem, to solve the problems of the global economy..." (Luci, 2009)

SUMMARY & CONCLUSION

Because of the highly interactive, integrated financial and economic environment which is globalized in nature there certainly is no way whatsoever for a country as large as the United States to enter in such a financial crisis such as it is presently in the midst of without other countries with trade and monetary alliances to go unaffected by that crisis. There is however, ways to mitigate such risk and this is likely to be the focus of much discussion and debate in coming months and years.