Euromoney, December 4 2019
Squeezed by negative rates on one side and an ageing population on the other, Japan’s banks have never had it so tough. Euromoney examines their potential to break free from these constraints
There were times in the 1970s and 1980s when Euromoney’s coverage of Japan could occupy more than a third of a single edition.
It was a mesmerizing market to report on. Through the 1970s we watched the country’s international standing as a financial centre grow, the emergence of its capital markets and the utility of its currency. Through the 1980s we studied the strategies of its banks, state and private, as they merged at home and began to take on the world. We even pictured a future in which Japan took over the IMF.
And then we were there to follow the bursting of the bubble and everything that followed. The famed ‘lost decade’ has actually lasted for three – and counting.
Japan’s rise and fall, in market terms, has been reflected by the changing attitude of international banks towards it. There was a time when the Asian HQ for most foreign investment banks was Tokyo, and everyone was there. Today, the big deals are largely carved up among the Americans.
Meanwhile, Japan’s own banks, now 20 years into the megabank era, cannot catch a break. There’s nothing they can do about the demographics, with an ageing and shrinking population. They can at least ask the Bank of Japan to do something about the negative interest rate environment, but it’s not changing anytime soon and the banks have had to learn to live with it.
So, is it all lost? Is Japan just a bare shadow of its former market glories? Not necessarily.
The foreign investment banks that have stayed the course are unusually cheerful right now. It’s certainly not because of ECM, the usual driver of fees – that’s moribund in an environment where everyone has too much capital. It’s thanks to M&A, driven by a combination of the international ambition of cashed-up Japanese corporates seeking to buy growth – and something newer.
The arrival of international standards of corporate governance and stewardship in Japan over the last five years has been one of the most pivotal developments in the 50 years we have been writing about the country. As Japanese companies have started listening to their investors (and rather less slavishly to their bank creditors), they have finally started to shift from the conglomerate model to something more focused and streamlined. That means divestments, which is great news for private equity and for bankers.
For domestic banks the picture is tougher, but at least they have ideas. Japan’s chief executives are marshalling long-term plans to digitize, to focus and to look around for advantage amid the torpor.
They know what the answer is: Japan’s ¥1,850 trillion ($17 trillion) of household assets, of which more than half just sits in bank accounts earning less than nothing. The one true potential game-changer in domestic Japan is to get that money – largely held by the elderly – to work and to advise on it on a fee-generating holistic basis rather than use the product-pushing brokerage model that has held sway for decades.
The other option is to push out into the world, with two typical priorities: the US, with its market size, sophistication and the opportunity for dollar funding through bank ownership; and Asean, with GDP growth rates and consumer stories that Japan can only dream of these days.
One of the interesting nuances of Japan is the difference in the approaches to these opportunities, with MUFG favouring bank acquisitions, Mizuho the organic expansion of the network it already has, SMBC somewhere in between, Nomura refining a model that already sees the US provide more wholesale income than Japan and Daiwa trying to build a global boutique mid-market M&A advisory practice.
It would help if Japan was a little more accepting of digital banking; anyone who has navigated the legendary complexity of a typical ATM is familiar with the local love of cash.
Again, this is partly demographic. Octogenarians won’t embrace smartphone banking like an Indonesian 20-something, and it’s foolish to expect otherwise. But the arrival of Rakuten Bank, whose most recent million digital accounts came in only 10 months, suggests that there is a belated chance for digital sophistication in Japanese banking and it must be embraced.
None of the attempted paths to growth for Japanese banks is going to be easy, but at least there’s a plan. And things could be worse: Japan is still the third-largest economy in the world, with great individual wealth and an educated population that just happens to be older on average than anywhere else. It is a democracy with the rule of law and trusted courts and regulators.
Three lost decades might have seen Japan drop behind the rest of the pack in growth, but it never went away and there is still potential here.
This is the introduction to a comprehensive study of Japanese banking. Read about:
Japan’s wealth managers face a problem for the ages here
Five approaches to taking on the world here
Governance brings an M&A bounty here
And interviews with:
Seiji Nakata, Daiwa here
Tatsufumi Sakai, Mizho here
Kanetsugu Mike, MUFG here
Kentaro Okuda, Nomura here
Jun Ohta, SMBC here
and J Christopher Flowers here