Clark:
Re: Japanese financial deregulation "Big bang"
See article below from Chicago Tribune, March 15
Also in news recently - Fidelity is opening investment office in Japan
Re: Asset values in Japan vs. world
There was an article in Barron's a couple months ago about the tremendous decline in Japanese real estate values . Loans are being foreclosed and American investors buying at 10-20 cents on the dollar.
This is an indicator of 1) the pain and suffering in Japanese financial circles that can be an impetus for financial reform, and 2) the fact that asset markets are global; investors around the world look at relative values.
Similar thinking applies to the stock markets.
These are a couple reasons why I think a Japanese crash is unlikely.
The Nikkei may go down some more. But I don't agree that a crash is necessary for reform or for eventual improvement in their markets.
BigShoulders
JAPAN HOPING 'BIG BANG' WILL TURN BUST INTO BOOM
By Michael A. Lev
Tribune Foreign Correspondent
March 15, 1998
TOKYO -- For decades, the United States has demanded that Japan remove trade barriers and open its huge but protected market to outsiders.
Sometimes the pressure has come from members of Congress smashing Japanese radios on the steps of the Capitol. Sometimes U.S. trade negotiators have threatened to levy punitive taxes on Japanese cars.
Rarely have the Japanese given in without a fight. Until now.
Japan is about to implement a sweeping plan to deregulate its financial industry that will unleash the forces of global capitalism there to an unprecedented level. The changes could irrevocably alter the way this nation does business with the world.
Instead of coming out of a nasty and protracted negotiating session, the changes appear to have been embraced out of self-interest by Japan's government. After nearly a decade in economic doldrums, Tokyo is so desperate to reignite growth that it is willing to set aside traditional practices and introduce a strong measure of free-market capitalism.
The deregulation plan, which the government has optimistically dubbed the "Big Bang"--the same name used to describe British financial deregulation in 1986--is designed to increase Japan's financial muscle by encouraging international competition.
If the plan works, Japan could find its traditional tight controls on the economy swept away by a tidal wave of money rushing into and out of the country. Americans could find themselves challenging the Japanese for dominance in investment banking and high finance, the linchpin of the economy.
"Markets taking the lead instead of the authorities--that's what this is all about and that's where our strengths lie," said Matthew Goodman, a Tokyo-based vice president with the investment house Goldman Sachs and a former U.S. Treasury Department official.
In theory, the effects of financial deregulation could cascade throughout the economy. Depositors will have new options for where to put their savings, and companies will gain access to new sources of funding for investment.
As banks there are forced to compete against global capital markets and profitability becomes key, the standards for lending will tighten. The result should be a shake-out, with strong players getting bigger and weaker ones failing.
"Everything is changing," said Hiroshi Nakagawa, a managing director at Merrill Lynch Japan. "We're going to have winners and losers, but in the end Japan will be healthier."
If the effort succeeds, the Big Bang might resolve one of America's great post-war conflicts: the battle to dismantle Japanese protectionism and convert this highly regimented, historically feudal society to the Western belief that the free market knows best.
If financial deregulation works, there would appear to be no retreat, and other industries might also move to be freed from government restraint.
Japan built its wealth--the world's second-largest economy after the U.S.--through a coordinated relationship between government and business that left very little to chance or the free market. Most aspects of the economy were planned, the weak were protected by the strong and foreigners were let onto the playing field grudgingly.
Given Japan's reputation as an economic bully who doesn't play fair and the fact that the system worked so well for so long, there was probably less skepticism about the Soviet Union's collapse and conversion to capitalism than about Japan's change of heart.
During a recent negotiating trip to Tokyo, Deputy U.S. Trade Representative Richard Fisher called Big Bang "a major step forward," but he suggested there were so many more trade disputes on the table--fights over access to the Japanese market for everything from American housing supplies and shopping centers to lawyers--that he was not willing to give the Japanese too much credit for financial deregulation.
"We'd like to see a Big Bang in goods and services as well," he said.
Big Bang is not yet being heralded as an economic equivalent to the Berlin Wall's coming down because nobody knows exactly what will happen.
The implications are enormous because there are trillions of dollars of Japanese household savings that have been trapped in the system, languishing in low-interest savings accounts because of a lack of competition.
If that money is freed to find its best use, it could mean a windfall for Japan-based institutions and a renaissance for the Japanese economy, or it could mean a slow financial hollowing out as investment rushes out of the country into more lucrative markets.
The possibilities seem bright enough to have set off a stampede of American and European investment houses into the market to get ready for the changes. In the last year, foreign financial companies have been beefing up their investments and starting joint ventures and other deals with Japanese firms to position themselves for the Big Bang era.
The dealmaking represents one of the fastest and most dramatic investment trends by foreigners in Japan. In one of the biggest steps, Merrill Lynch will create a new retail stock brokerage company, and it plans to hire 2,000 people from Yamaichi Securities, which failed last year.
The first step of the Big Bang comes next month, when controls on foreign exchange transactions will be relaxed. Theoretically, it means that individual investors and Japanese companies would be able to take their money out of Japan and invest through a brokerage in New York or anywhere in the world.
Over the next five years, the government plans to remove barriers and restrictions throughout the financial system to permit Japanese investors and companies the same freedom as Americans and Europeans to search the world for the best uses for their money.
Banks, investment houses and insurance companies--Japanese and foreign-owned--also will be freed from government control to compete as they do overseas. For example, brokerage commissions will be deregulated, banks will be allowed to sell mutual funds and innovative new investments like derivatives will be permitted.
The thinking is that if Japan opens the system to international competition, it will push the Japanese industry to become as innovative and efficient as overseas markets, and that will make Japan stronger.
The Japanese mutual fund industry could be one sector that mushrooms quickly. Japan has one of the highest savings rates in the world, but only 10.4 percent of household financial assets are invested in stocks, compared with 25 percent for Americans, because the financial industry there is overregulated and underdeveloped.
Along the way, the government also has committed to clearing away the secrecy and idiosyncrasies of the regulatory system. For example, accounting rules will be changed to the international system and it will become easier to get a full sense of corporate liabilities. That should make it easier for foreign companies to make acquisitions.
The Japanese government says it has pursued the Big Bang because it desperately needs to get its economy going again, and to do so it needs to make Tokyo a financial capital on a par with New York and London. The pressure is building because Japan is an aging society and it needs to finance the retirement of its Baby Boom generation.
In position papers and briefing sessions with reporters, Japan's Finance Ministry insists that it is committed to making the financial system "free, fair and global."
"It's a very, very major alteration to take this financial system that was so heavily protected and try to open it up to the world," said Walter Altherr, an analyst in Tokyo at Jardine Fleming Securities. "Japan's powers that be have decided they would rather have 60 percent of something than 100 percent of nothing." |
