Reforms Threaten Japanese, Buoy US Firms

Deregulation opens the door to trillions in investor dollars

'For the American financial community," says Jesper Koll, an economist at J.P. Morgan in Tokyo, "Japan is the land of opportunity."

This enthusiasm is not the sort of sentiment heard from analysts of the Japanese economy in recent years, but Prime Minister Ryutaro Hashimoto's ambitious program of financial-industry deregulation - the "Big Bang" - is starting to take hold.

This process will give international investment firms access to the huge pool of Japanese savings - an unfathomably large amount of money available to invest, some 1.2 quadrillion yen ($10 trillion) or about six times the US government's annual budget.

The Big Bang reforms will make it easier for foreign firms to compete for the opportunity to manage that money.

But the Big Bang promises other benefits, as well.

The inevitable shakeout among Japan's inefficient banks, brokerage houses, and securities companies will make some more competitive and perhaps a good buy for investors. In recent years, only Japanese manufacturers, such as Sony, Toyota, and Matsushita, have attracted serious attention among international investors.

"Because the government, through Big Bang, is going to force restructuring of [the financial] sector, it offers the best potential upside in Japan," says Michael Hartnett, Merrill Lynch's senior economist in Tokyo.

"This is an opportunity to actually buy into fundamental change in the Japanese economy," adds Mineko Sasaki-Smith, chief economist at Credit Suisse First Boston Securities (Japan)

Don't buy too soon, though. Analysts see a wave of bankruptcies and mergers ahead, perhaps for as much as a third of Japan's banks, brokerages, and insurance providers.

The Japanese have heard talk of shakeouts before, but there seems to be reason to believe that real change is really coming.

The economy has been moribund for most of the 1990s, a period marked by routine promises of recovery and faltering improvements. There is growing consensus that the traditional pillars - export, careful bureaucratic oversight, and personnel practices such as lifetime employment - no longer work in an increasingly globalized economy.

Many Japanese realize that they must act or stagnate.

The economy looks bleak. During the second quarter of this year, it actually shrank at an annual rate of 11.2 percent.

And in a largely failed effort to stimulate growth through public spending, the government has racked up enormous debt.

The stock and real estate markets have yet to recover from their crash of the late 1980s. And while the big exporters such as Sony and Honda build record profits, analysts say they can no longer drive the rest of the economy and, indeed, are the exceptions. Nippon Credit Bank, one of the country's largest, for example, recently needed a government bailout to stay afloat. Other banks have been allowed to fail.

If growth rates fall as the society continues to age, Japan "will become a miserable place full of old people," warned Kazuaki Harada, the head of a think tank, in an article in the Yomiuri newspaper this summer.

Consequently Mr. Hashimoto has outlined six major areas of reform, with finance topping the list. The Big Bang package is intended to revitalize Tokyo as a financial center, much as deregulation revved up New York and London.

Leaders are acting quickly, hoping to complete the program by 2001. Among other things, the reforms would allow banks, brokers, and insurers to compete for one another's businesses. Other changes will break down barriers and laws that inhibit foreign financial firms from doing business here.

Deregulation proposals would allow anyone to trade foreign currencies; firms could set their own commissions on large transactions; and a tax on the sale of securities would be scrapped.

"For Mr. and Mrs. Watanabe," says J.P. Morgan's Mr. Koll, citing a hypothetical Japanese couple, the Big Bang "will revolutionize the way they manage their savings." For one thing, the reforms will give them the opportunity to buy shares in an American-managed mutual fund or deposit money in a full-service financial company, institutions that do not yet exist in Japan.

US firms are rushing to get ready. J.P. Morgan has expanded its staff in Japan by 25 percent, Koll says. Already, in the last 15 months, the share of Japan's pension pool managed by US firms has gone from 2.5 percent to 5 percent.

Foreign financial firms are also setting up ties with Japanese banks and brokerages, and analysts recommend that investors look for an American firm with a large presence in Japan or a local partner to take advantage of the Big Bang. Well-placed companies include Merrill Lynch, Morgan Stanley, Goldman Sachs, and Salomon Brothers.

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