Crisis Will Forge a Leaner, Meaner Japan

By Mellyn, Kevin; Mitchell, Arthur M. | American Banker, February 2, 1996 | Go to article overview

Crisis Will Forge a Leaner, Meaner Japan


Mellyn, Kevin, Mitchell, Arthur M., American Banker


The last days of 1995 had a flavor of deja vu all over again for the world's banking industry: Just as the Resolution Trust Corp. finally phased out, Japan's Ministry of Finance announced the formation of a similar entity, the Jusen Resolution Organization, to deal with the mountain of bad debts incurred by the nation's eight housing loan banks.

It is destined to be a noisy spring in Japan as an outraged public demands accountability for the losses, and banks and insurance companies with share holdings in the Jusen expect to be targets of shareholder suits, a recent import from the U.S. legal system. The noise will be magnified by this year's Japanese electoral politics.

America should take note, however, that beneath all the fury and recriminations a profound if far more subtle revolution is under way in the overall structure of the mainstream commercial banks in Japan that will have tremendous impact on the U.S. financial services industry.

What most view as an overwhelming debt crisis crippling Japan's huge -but slow and conformist - banking system is more likely to produce a streamlined and innovative banking industry eager and able to challenge America's dominance in the global market.

Japanese banks are not down for the count. Instead, the current upheaval is similar to the series of U.S. banking crises in the 1980s, which laid the groundwork for a far more resilient and competitive American banking system.

The Daiwa debacle was, in fact, a blessing in disguise for Japan: a timely impetus for much-needed revolution in the country's protected and complacent financial services industry.

On Dec. 22, Japan's Financial System Stabilization Committee - an advisory organization to the Ministry of Finance charged with developing a comprehensive plan for dealing with the bad-debt problem - called for the Ministry of Finance to officially abandon its policy of guarding the business affairs of the banks by switching to a policy of objective regulatory oversight.

A few days later, the minister of finance outlined new reforms that will force banks to operate along more competitive lines subject to greater disclosure and reporting.

In Japanese terms, these announcements amounted to a revolution. The committee's recommendation effectively repudiated the antiquated and stifling "convoy system" that has governed Japanese banking for almost a century.

The convoy system, like the naval strategy which calls for vessels with differing capabilities to travel in close formation at the speed of the slowest ship for the safety of the entire fleet, has its origins in the late 19th century, when Japan felt that the outside world was too dangerous and Japanese enterprises and institutions were too fragile to allow much competition within Japan. In modern times, this has meant that all Japanese banks offer essentially the same financial products and services at the same prices.

Thus, for the first time, the growing legion of informed and influential insiders willing to recognize that the convoy must be scrapped had their views put forward as a public policy recommendation.

If it can be sustained, this victory of the reform party signals the broader defeat of the established forces of the old "iron triangle" of bureaucrats, senior corporate executives, and bankers, and their political allies - who believe that with adjustments at the margin the post-cold-war system for a "managed market" economy can be preserved.

The reform-minded members of this same elite believe that Japan must become a more efficient and equitable modern market economy in order to maintain its place in the global economy.

The series of embarrassing incidents last summer and fall (Hyogo, Cosmo, Kizu, and Daiwa) has clearly tipped the scales toward those forces that favor systematic reform. Japan's reformers argue that the antiquated banking system should be replaced by "cautious Darwinism," which would accelerate regulatory liberalization based on clearly understood rules of the game within which banks will compete on distinctive competencies or skills - that is, the ability to add value. …

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