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No. 358, July 1999

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American Companies in Japan


FINANCIAL SERVICES

An electronic stock market modeled after the NASDAQ automated quotation system will be operating in Japan during the fourth quarter of 2000. At least that is the hope of the NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC., the manager of NASDAQ, and SOFTBANK CORP. They set up equally owned NASDAQ JAPAN PLANNING CO., LTD. to get the project off the ground. The envisioned over-the- counter market, which will be open for business around the clock and which will make extensive use of the Internet, will give Japanese investors the chance to buy and sell many of the world's high-growth stocks at the click of a mouse button. NASD and Softbank anticipate that local investors will have access to the more than 5,000 stocks listed on NASDAQ and to such indexed products as the NASDAQ-100 Index Tracking Stock as well as to Japanese companies that choose to list on NASDAQ Japan. The latter option has a flip side that NASD and Softbank also are touting: NASDAQ Japan will help Japanese start-ups and small companies raise equity capital. A number of major obstacles stand in the way of NASDAQ Japan's launch, however. The Japan Association of Securities Dealers, which runs the JASDAQ OTC market, and the Tokyo Stock Exchange are certain to oppose NASDAQ Japan because of the business they would lose. Regulators also might oppose the strict, U.S.-style disclosure rules that NASDAQ Japan plans to impose for fear that they might undermine confidence in other Japanese exchanges. Moreover, NASD and Softbank must line up a minimum of six market makers among Japanese and foreign securities firms.

The first on-line investment banking firm in the United States also will have that distinction in Japan. WIT CAPITAL GROUP, INC. is forming a company with MITSUBISHI CORP., which has a small stake in the Manhattan-headquartered firm (see Japan-U.S. Business Report No. 350, November 1998, p. 5), and TRANS COSMOS INC. Once the joint venture receives a securities license, it will give Japanese consumers the opportunity to invest in public offerings and venture capital funds by going on-line. Wit Capital's Japanese affiliate also will provide a variety of investment banking services to Internet and Internet-centric companies in Japan, including underwriting for public offerings, private equity services, advice and research.

The complete deregulation of brokerage commissions coming October 1 has lured another American financial services heavyweight into the Japanese market. CHARLES SCHWAB & CO., INC., the top discount broker as well as the number-one on-line trading company, has agreed with TOKIO MARINE & FIRE INSURANCE CO., LTD. and several other local investors to establish a full-service brokerage firm to serve individual investors. Due to be in business this fall, CHARLES SCHWAB TOKIO MARINE SECURITIES CO., LTD. initially plans to offer trading in U.S. stocks and bonds and Japanese and offshore investment trusts (Japanese-style mutual funds) via a Web site as well as through a 24-hour telephone service center and a branch office in Tokyo. Trading in Japanese stocks is expected to start in early 2000. Schwab will have a 50 percent interest in the joint venture and will manage day-to-day operations. Tokio Marine & Fire, Japan's biggest nonlife insurer, will own 35 percent of the partnership, with BANK OF TOKYO-MITSUBISHI, LTD., MEIJI MUTUAL LIFE INSURANCE CO. and MITSUBISHI TRUST & BANKING CORP. each having a 5 percent stake. E*TRADE GROUP, INC. and a DONALDSON, LUFKIN & JENRETTE INC. affiliate also will begin on-line trading once commissions are deregulated.

The first year of running a nationwide, full-service retail brokerage in Japan proved to be even rockier than MERRILL LYNCH & CO., INC. had anticipated when it started this operation by taking over much of bankrupt YAMAICHI SECURITIES CO., LTD.'s branch network and staff. However, the giant brokerage house remains upbeat about the Japanese market despite a loss of $206.6 million or so in the 12 months through March 31, 1999. Over the next two to three years, Merrill Lynch expects to boost its payroll to about 3,000 people from the current total of 2,100, including 1,100 financial consultants, to expand business. It now has nearly $5.4 billion in client assets through 46,000 accounts.

ADVISORTECH CORP., which provides back-office support for financial planners over the Internet, has brought its services to Japan. The San Francisco company, itself a start-up, formed a pair of companies, one of which will help independent financial planners through such work as information on investment vehicles, portfolio planning models and account maintenance. Japan now has roughly 40,000 independent investment advisers compared with less than 5,000 in 1995. Although this subsidiary is focused on independent advisers, Advisortech reports that interest in its services from financial institutions is quite strong.

Ten months after it tied up with MITSUI TRUST AND BANKING CO., LTD. to offer investment trust products to individual investors, PRUDENTIAL INSURANCE CO. OF AMERICA is ready to provide asset management services for Japanese defined benefit pension plans and especially for the defined contribution plans that are expected to be the norm in the future. It will develop, market and distribute pension products through PRUDENTIAL INVESTMENT ADVISORY CO., LTD., which until now primarily has served U.S. retirement plans and mutual funds investing in Japan.

The investment management units of METROPOLITAN LIFE INSURANCE CO. and ASAHI MUTUAL LIFE INSURANCE CO. have formed a previously announced company to manage money for institutional and individual Japanese investors (see Japan-U.S. Business Report No. 354, March 1999, p. 19). Boston's NVEST COS., L.P. has a 49 percent interest in ASAHI NVEST INVESTMENT ADVISORY CO., LTD., with the balance owned by partner ASAHI LIFE INVESTMENT MANAGEMENT CORP. The joint venture will start off by managing roughly $1 billion in assets for ALIMCO, although Nvest is expected to make most of the decisions about how this money is invested.

Thanks to deregulation, American financial services providers are giving institutional and individual investors alike a wider range of investment choices, although many of these vehicles involve a relatively high degree of risk. For instance, CITIBANK N.A. will offer accounts with interest rates tied to the ups and the downs of domestic and foreign stock exchanges. The huge bank also is the first such institution to be licensed to handle over-the-counter derivatives, including those linked to unlisted stocks. For its part, SALOMON SMITH BARNEY INC.'s asset management affiliate has a fund designed mainly for corporate and institutional investors on which the target yield is adjusted twice a year. KOKUSAI SECURITIES CO., LTD. is marketing the product. This major second-tier brokerage house also partnered with BANKERS TRUST CORP.'s local fund management unit to introduce the first investment trust product in Japan that invests in foreign over-the-counter currency, stock and interest rate options. The fund's riskiness is limited, however, since only 10 percent of its assets go into options; the rest is invested in conservative instruments.

The Tokyo branch of AMERICAN EXPRESS FINANCIAL ADVISORS INC., which opened its doors in March, has added four investment trust products to the two it initially marketed to AMERICAN EXPRESS CO. cardholders. At the end of May, AEFA had attracted 3,000 brokerage accounts from among AmEx's 1 million-plus cardholders in Japan.

Venture capital firm RIPPLEWOOD HOLDINGS LLC, which has made a name for itself as a corporate turnaround specialist, is organizing a $1 billion fund to invest in Japanese companies, mainly manufacturers, that are floundering now but have prospects for growth through better management and, ultimately, for going public and reaping capital gains for the fund participants. MITSUBISHI CORP. will be the lead backer of the 10-year RHJ Industrial Partners Fund, putting up $200 million of the capital. Ripplewood hopes to enlist other Japanese institutional investors as well as American and European ones. The fund plans to invest in one company a year. A recently formed Mitsubishi subsidiary will advise the fund's management team on possible targets. The trader has a 10 percent stake in New York City-based Ripplewood that it acquired at the start of 1996.

M&A INTERNATIONAL, INC. has brought into its global network of independently owned merger and acquisition and investment banking firms two local operations. The new members are KAMAKURA CORP., an international financial advisory company that is headquartered in Kanagawa prefecture, and the Tokyo office of New York City's MORGEN, EVAN & CO., INC., an investment bank that specializes in transpacific business relationships. With these additions, the M&A International team, which communicates with each other via a secure intranet, is better positioned to advise on M&As and joint ventures involving Japanese companies as well as to help Japanese clients divest businesses or otherwise restructure.

The recent surge in securitization in Japan and the concomitant need for experienced backup servicers to enhance the credit ratings of these issues have meant new business for at least two American companies. The hard-charging subsidiary of GMAC COMMERCIAL MORTGAGE CORP. (see Japan-U.S. Business Report No. 356, May 1999, p. 19) was named the backup to primary servicer SANWA BANK, LTD. on the country's first securitization of residential mortgages. The $450 million offering is collateralized by mortgages originated by the nationwide commercial bank on more than 5,000 single-family homes. In addition, a recently established alliance between a CHASE MANHATTAN CORP. affiliate and NIPPON SHINPAN CO., LTD., Japan's top consumer finance company, has won its first backup servicing job. The Chase unit is the official backup servicer, but Nippon Shinpan actually will handle collections and other functions should the unnamed primary servicer fail to carry out its obligations. The new partners see considerable potential in their tie-up, not just due to the growth in the market for asset-backed securities but also because of Chase's expertise in securitization and Nippon Shinpan's track record in collecting credit-card receivables.

In a move intended to make its Japanese auto leasing business more competitive, GE CAPITAL CORP. is rationalizing the operations of JAPAN LEASE AUTO CORP. and GE CAPITAL CAR SYSTEMS CORP. The financial services giant acquired Japan Lease Auto, which ranks number two in the field, at the beginning of 1999 (see Japan- U.S. Business Report No. 353, February 1999, pp. 16-17). It purchased an 80 percent interest in what became GE Capital Car Systems in 1996 and recently bought out the remaining shareholders to make the company a wholly owned subsidiary. After the consolidation, Japan Lease Auto will handle vehicle leasing for corporate clients, while GE Capital Car Systems will deal with small businesses and individuals. Some downsizing of the combined operation's roughly 650 employees is expected.

The second bank that Tokyo nationalized last fall also has chosen an American heavyweight to help it find a buyer for its operations. NIPPON CREDIT BANK, LTD. appointed MORGAN STANLEY DEAN WITTER & CO. to act as its financial adviser. GOLDMAN, SACHS & CO. serves in the same capacity for LONG-TERM CREDIT BANK OF JAPAN, LTD.

Giving new meaning to the term personalized service, AMERICAN EXPRESS INTERNATIONAL INC. and REPUBLIC NEW YORK CORP. are teaming up to provide home delivery of foreign currency and traveler's checks. People will be able to have cash in any of 36 denominations and traveler's checks denominated in nine currencies brought to their home or office simply by making arrangements at participating financial institutions and travel agencies. Republic already offers home delivery of foreign currency, but this service is a new one for AmEx.

An exchange rate of ¥121=$1.00 was used in this report. aaaaaa

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