Japanese Bank Mergers—Bigger, Not Better

By Bill Tabb

Japan will boast the largest bank in the world once the merger of three of its already very large — but weak — financial institutions is completed. Bank regulators will have one of the world’s biggest headaches as they oversee the three-way marriage of the Industrial Bank of Japan, Dai-Ichi Kangyo, and Fuji Banks, announced in September 1999.

Bank officials will also oversee the world’s second largest bank, is emerging from the coupling of Sumitomo and Sakura Banks, announced in October 1999. This new bank will be very close in assets to the new Deutsche Bank, which just swallowed Bankers Trust.

Driving the consolidation of the financial sector in Japan, as elsewhere, is the desire to survive in an increasingly liberalized and globalized financial sector. In this new world, depositors, borrowers, and investors have greater choice about where to put their money. In Japan, the situation of the banks is particularly desperate. After years operating under the Ministry of Finance’s administrative guidance, these behemoths are unable to cope with the new deregulated environment in which they now must live.

The mergers won’t make their job any easier. For example, there is no plan for any of the three present heads of the Industrial Bank of Japan, Fuji or Dai-Ichi Kangyo, to step aside. As one senior executive says of this three-headed monster, "When you’re being pulled in three directions, it’s hard to move forward." Nor has the huge amount of taxpayer money solved many problems. The Japanese government used $180 billion of the funds it laid out during the current round of bailouts to buy preferred stock in the banks. The banks then use the money to buy government securities. The securities pay the banks more than the bank pays the holders of preferred stock, including the government. Little of the government money flowing to the banks, then, makes its way into the rest of the economy, and so does little to spur growth.

In addition, since the government started dealing with the banking crisis a few years ago, it has spent over $700 billion to write off bad loans. Thirty percent of this bailout has gone to just these three banks.

Once the banks are forced to make an honest accounting of their balance sheets in the next few years, their situation might worsen. By March 2002 the banks are legally required to write off the $300 billion or so in nonperforming loans on their books. They also must value their own assets including stock holdings at real market value rather than the artificially higher value they now claim. Many of these stocks are in other Japanese companies which are for the most part members of their keiretsu or corporate family.

The weakened position of Japanese banks has meant they are unwilling to take the risk of lending new money to corporate borrowers. As a result, these borrowers are increasingly taking their business to foreign financial institutions. Western investment banks are also finding new opportunities in the corporate restructuring, spin-offs, mergers, and acquisitions taking place in Japan with increased frequency.

These industrial reorganizations are shaking up corporate family life in Japan beyond the banking sector. For example, the Sakura-Sumitomo merger unites a Sumitomo Group bank, which lends to other Sumitomo companies in its family — Sumitomo Chemicals, plastics, steel, and so on — with Sakura. Sakura, in turn, is affiliated with the Mitsui group, another of the handful of keiretsu which have long dominated what was once known as Japan, Inc. (Toshiba and Toyota are aligned with the Mitsui group.)

Today such companies are increasingly going their own way, each looking after themselves and disavowing group responsibility and loyalty. And the banks are no longer covering up or shouldering the problems of the corporations to which they are linked. For instance, the merger of Dai-ichi Kangyo, Fuji, and the Industrial Bank of Japan will leave the world’s largest bank holding over 10% of all the stock in ailing Nissan Motors. Nissan’s troubles will increase as the bank tries to reduce its Nissan holdings, throwing them onto an already depressed stock market. At the same time, in the new climate Japanese banks are using their stock holdings to force industrial corporations into mergers, sometimes with foreign companies, which these firms have not been eager to enter. Fuji and the Industrial Bank had told Nissan it would receive no new credit from them and pushed the car company to find capital from a foreign partner. As a result, Nissan sold a 37% stake to Renault, the French auto maker.

Both industrial and bank restructurings will lead to sizable layoffs at a time when Japan already has a postwar record high unemployment rate (of 4.5%). This acceptance of further unemployment is as momentous a shift as the erosion of loyalty among keiretsu. Both megabank mergers are expected to cost at least 15,000 jobs as duplicate operations and unprofitable divisions are closed. It will be very hard for these downsized white collar workers to find new jobs since Japanese businesses tend to recruit for these positions among recent college graduates and they tend to promote age cohorts together. Despite this hard "medicine" cutting to the core of the Japanese system, it is not clear that either the Japanese banking sector or economy will regain their health any time soon.

Bill Tabb teaches economics at Queens College and is the author, most recently, of Reconstructing Political Economy.