The Multinational Monitor

November 1988 - VOLUME 9 - NUMBER 11



By Samantha Sparks
JUST AS JAPAN rose quickly to become a world economic power and Japanese goods now dominate major segments of the international market, Japanese commercial banks are rapidly outpacing the banking giants of the West.

In recent years, Japanese banks have assumed a global role that includes the purchase of foreign commercial banks, many in the United States, and the development of a dynamic Euro-yen market. So far, though, their aggressive international stance has not included innovative action on Third World debt.

Japanese banks and the Japanese government would like to do more to ease Latin America's debt burden, and they have the resources to do so, analysts say. But neither Tokyo's politicians nor its bankers, for all their wealth, are ready to take the mantle of international political leadership from the United States.

Instead, Japan is seeking to increase its clout at the main international financial agencies, which it hopes will stimulate increased activity in the Third World. "Japan wants a larger role at the multilateral (agencies), and its money is the pre-condition for that role," notes Douglas Ostrom, an economist at the Japan Economic Institute (JEI) in Washington. Japan, the second most powerful member of the World Bank, is only the fifth biggest shareholder of the International Monetary Fund (IMF).

Negotiations are underway to bring Tokyo to second place at the IMF. A debt plan proposed by Finance Minister Kiichi Miyazawa at the Toronto Economic Summit in June showed the importance of the multilateral agencies to Tokyo. The still-evolving scheme involved using the IMF to guarantee commercial bank loans. Says Barbara Stallings, professor of political science at the University of Wisconsin, "Whether the Japanese private sector gets more involved [in Latin America] depends on whether the Japanese government and the multilaterals are willing to step in with something to reassure them [about the risks that would accompany deeper involvement]. I think that'll be really crucial."

One Japanese analyst in Washington agrees. "Even though the Japanese economy is large, the American economy is still much larger," he argues. "Without cooperation from the multilaterals and the U.S. and Europe, it would be very difficult for Japanese financial institutions to help solve the [debt] problem. If this cooperation is obtained, then Japanese banks will be willing to contribute something. Without that, they will be hesitant to lend, because of the risk."

The View from the Top
By any standard, the financial growth of Japanese banks is impressive. Seven of the world's 10 biggest banks by assets are Japanese. In the last five years, the assets of Japanese banks have grown by 80 percent in yen terms (200 percent in dollar terms); the banks now hold 35 percent of all cross-border assets. Their share of international loans has boomed, from 9.4 percent in 1981 to 23 percent in 1984 and 32 percent in 1986. Japanese banks outside Japan have over $1.2 trillion in their coffers--about double the amount held by U.S. banks abroad.

Loans to Third World countries, particularly in Latin America and Asia, have been an important part of the Japanese banking boom. Japan's share of loans to Brazil, for example, rose from 13 percent to 20 percent between 1982 and 1987, and Japan now provides roughly 15 percent of all loans to Latin American countries. Japanese banks are the Third World's second biggest private creditor, and in 1985 for the first time surpassed the United States in its share of international banking business.

The explosive growth of the banks is due to a combination of internal and external factors.

First, Japanese banks are one main channel for the country's cash, with net foreign assets of nearly $300 billion in 1987. Meanwhile, the rise of the yen against most major currencies has made it comparatively cheaper for Japanese banks to operate and buy new operations abroad. Until recently, tight government regulation of interest rates gave Japanese banks cheap access to the huge pool of domestic savings. And their large total reserves, combined with relatively few non-performing loans and the strong yen, make Japanese banks very creditworthy, reducing the cost of borrowing.

Second, Japanese regulators have permitted banks to maintain low capital-to-asset ratios, meaning they could make loans backed up by less cash than their European or U.S. competitors. (On average, Japanese banks have maintained a 3 percent ratio compared to 5 - 6 percent for Western banks.) This is partly because Japanese banks are cushioned by large "hidden reserves," mostly in the form of unrealized gains from stocks, which U.S. banks are not allowed to hold. Some analysts argue that new requirements from the Bank for International Settlements (BIS) on capital adequacy will dampen Japanese private bank loans to the Third World. The banks are expected to reduce the volume of loans--their assets--and raise cash, for example by issuing stock, to meet the BIS targets. According to one estimate, the banks will try to keep asset growth in the range of 7 to 8 percent a year, compared to growth of 10 to 12 percent in the past 10 years. Third World loans, already a low priority because of the debt crisis, are expected to slow even more as a result. "Loans to developing countries are likely to be put on hold," says Jon Choy, of the JEI in Washington.

Third, Japanese banks, until very recently, have been under less pressure from their shareholders to make a profit than are their competitors in the United States and Europe. Japanese investors tend to focus on longer-term capital gains, which they put into tax-free funds, rather than short-term quarterly dividends. Without shareholder pressure, the banks have been able to pursue the short-term strategy of winning a bigger international market share, even at the expense of profits. Returns on assets for Japanese banks are low, at 0.2-0.3 percent, compared to 0.6 percent for U.S. and British banks.

Fourth, Japan's commercial banks have gone overseas because of deregulation and dwindling demand in their domestic markets. Deregulation has increased both competition between banks and securities houses and the cost of retail banking. Rates being offered bank depositors are increasing, while tax incentives to save are down. Meanwhile, the amount of money that institutions are permitted to invest overseas has also increased, while most limits on Euro-yen banking and currency exposure were lifted in 1987. Domestic demand for loans is down due to the current weakness of the heavy industries. The strength and size of Japanese banks certainly gives them the potential to play an important role in the debt crisis of middle income nations, mostly in Latin America.

However, analysts say at least two things will have to occur before Japan becomes more dominant in dealing with the major debtor countries. First, a mechanism to reduce the financial risk of a greater role is needed. "Japanese bankers told me they would go back in [to Latin America] if it looks like a good thing to do from a banking perspective, global role aside," says Barbara Stallings. "If Latin America starts growing again, they will go back in," she notes. And Japanese banks, secure in their wealth, see Latin America as a potentially profitable market that has become less competitive now that U.S. banks, in particular, are pulling out of the region. At the same time, the Miyazawa plan showed that, even without renewed economic growth in the debtor nations, Japan is more willing than the United States has been to consider using the World Bank and the International Monetary Fund (IMF) to sweeten the prospect of lending to Latin nations. "The Japanese government wants Japanese banks and corporations to invest more money in Latin America, because that's what the U.S. is pounding on them to do," says Stallings. "What the banks and corporations are saying is that you've got to come up with some kind of guarantee" before they will do so. But the fate of the Miyawaza plan--it sank into obscurity after the U.S. publicly disapproved--demonstrates the second obstacle to a bigger Japanese role: the banks need more time to adjust to the political implications of their new financial might. Stallings asked Japanese bankers early in 1988 what would prompt them to increase their ties to Latin America. Stallings said, "...they didn't want to give up East Asia [their traditional market] for Latin America." The banks were not used to the idea that they were big enough to have both. Nevertheless, she believes, "As they get more accustomed to their own power, they'll begin to look around."