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No. 361, October 1999

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American Companies in Japan


FINANCIAL SERVICES

To the pleasant surprise of many analysts and observers, financial regulatory authorities gave a foreign consortium the right to negotiate the purchase of nationalized LONG-TERM CREDIT BANK OF JAPAN, LTD. The group is led by RIPPLEWOOD HOLDINGS LLC, a New York City specialist in corporate turnarounds. It has lined up a number of name American and European companies as possible participants in the buyout of the investment bank, which the syndicate hopes to finalize before yearend. Ripplewood officials believe that a now slimmed-down and partially cleaned-up LTCB, which sought government protection in October 1998 and subsequently received billions of dollars in public funds, can generate earnings of $463 million a year. They hope to achieve this target by focusing the "new" LTCB's operations on corporate pension plans, private banking and other potentially high-profit areas under a new management team that includes foreign executives as well as Japanese ones. No good estimate exists of how much money the consortium will have to put up in total, but it agreed for starters to add $1.1 billion to the bank's capital. Investors have some protection against their ultimate financial exposure because the government agreed that for three years after the sale went through, it would buy back LTCB's outstanding loans at book value if they fell 20 percent or more in market value. However, to win this open-ended guarantee, Ripplewood and its partners had to agree not to cut off any LTCB borrower for three years even if they are deadbeats. Some experts worry that this provision alone could slow the turnaround of LTCB's business.

October 1 marked the complete deregulation of brokerage commission rates as well as the launch of E*TRADE JAPAN K.K.'s financial services Web site. The joint venture between Menlo Park, California-based E*TRADE GROUP, INC. (42 percent) and SOFTBANK CORP. (58 percent) initially is offering Japanese equities and mutual funds. Until it gets a better feel for conditions in the on-line market, its fees — $23.15 per trade on orders up to $9,300 — will not be as low as some of the competition's. Nonetheless, E*TRADE Japan expects to have 100,000 on-line brokerage accounts by the end of the first year of operations. It believes that it can attract customers by offering such localized content on its Web site as news and stock quotes, mutual fund ratings reports, a proprietary mutual fund search engine and reports on publicly traded Japanese companies. Moreover, E*TRADE Japan already has an established customer base and customer service infrastructure through the late 1998 acquisition of OSAWA SECURITIES CO., LTD. (see Japan-U.S. Business Report No. 350, November 1998, p. 18).

GE CAPITAL CORP. already has its finger in many pieces of Japan's financial pie. In a year or two, another will be added. GE Asset Management, the investment services unit of GE FINANCIAL ASSURANCE CO., plans to offer as many as 30 mutual funds for individual investors, particularly those who take advantage of the 401(k)-type pension plan that Japan will introduce. In the meantime, GEAM launched the GE Japan Equity Focus fund, which has $55.6 million in assets.

Big mutual fund manager DREYFUS CORP. has added a third investment option for retail customers. Its global equity fund joins an international blended fund introduced in April 1998 and a global bond fund available since July 1998. All three are sold through traditional brokerage houses and the distribution channels of TOKYO-MITSUBISHI ASSET MANAGEMENT, LTD., a BANK OF TOKYO-MITSUBISHI, LTD. affiliate that cobrands them. However, Providence, Rhode Island-based Dreyfus says that it is exploring the possibility of marketing its family of funds through discount and on-line brokers.

After two years of discussions, insurance giant AMERICAN INTERNATIONAL GROUP, INC. and ORIX CORP., Japan's top leasing company, formed an equally owned business to develop new casualty insurance products tailored to the needs of corporate and individual customers alike. Sales of policies crafted by ORIX INSURANCE PLANNING CO., LTD., which had an October start date, will be handled by AIU INSURANCE CO., the Japanese property and casualty arm of AIG. Orix will participate on the sales side since its corporate client base will be a primary focus of the marketing effort. In time, the joint venture could have its own sales force as well as a broader portfolio of insurance products, including life policies.

The market for long-term disability policies in Japan is extremely underdeveloped, giving UNUM CORP. considerable room to expand its primary business. UNUM JAPAN ACCIDENT INSURANCE CO., LTD., which has sold these products through its own agents and smaller nonlife insurers since 1994, has enlisted a second major ally in this effort. MITSUI SEIMEI GENERAL INSURANCE CO., LTD. will market Unum's disability policies as part of the group coverage it offers. Its target customers are the some 7,000 corporate and government clients of parent MITSUI MUTUAL LIFE INSURANCE CO. The Portland, Maine company's disability products also are sold by CHIYODA MUTUAL LIFE INSURANCE CO. (see Japan-U.S. Business Report No. 355, April 1999, p. 19).

PHH VEHICLE MANAGEMENT SERVICES, the number-two global vehicle management company, formed a strategic alliance with SUMISHO AUTO LEASING CORP. to expand its business into Japan. Through the tie-up, mutual clients will have a complete range of products and services available in North America, Europe and Japan. Sumisho Auto Leasing, which has no operations outside Japan, operates 26 branches across the country. It has more than 126,000 vehicles under management. Hunt Valley, Maryland-headquar-tered PHH, which was acquired by AVIS RENT A CAR, INC. in June, provides vehicle-management services to 19,000-plus businesses in North America and Europe. Its fleet tops 700,000 cars and trucks. The new partners are discussing the possibility of working together elsewhere in Asia.

As early as June 2000, the subsidiary of TOYS "R" US INC. could go public on Japan's over- the-counter market. Already the country's largest toy retailer even though it has been in business for just eight years, the company plans to use the money raised through its initial public offering to help finance the construction of 10 more stores. Toys "R" Us now operates close to 100 outlets. The local unit had sales of nearly $1.1 billion in the year through January 1999, a gain of 17 percent, although pretax profits dropped to $25 million because of higher distribution costs and new store openings. MCDONALD'S CO. (JAPAN) LTD., which tentatively is planning an IPO on the local OTC in 2002, owns 20 percent of the firm.

An exchange rate of ¥108=$1.00 was used in this report.

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