JAPANESE FINANCIAL REGULATION ENTERS NEW
--- by Jon Choy
Japan's top financial regulatory body suffered another blow to its reputation July 30 when Financial Reconstruction Minister Kimitaka Kuze resigned under a cloud of suspicion that the benefits and the fees that he had received over seven years from Mitsubishi Trust & Banking Corp. and in 1991 from condominium builder Daikyo Inc. had influenced his judgment (see JEI Report No. 30B, August 4, 2000). Counting Mr. Kuze's successor, the Financial Reconstruction Commission has had four chiefs in less than a year, two of whom have left in disgrace.
The musical chairs-like changes in the FRC's chairmanship have led many analysts to question the organization's effectiveness and the Liberal Democratic Party-led coalition government's commitment to financial reform. These doubts have surfaced at a critical time. To begin with, the Financial Services Agency still is in the start-up phase after being formed July 1 through the merger of the Financial Supervisory Agency and the Ministry of Finance's Financial System Planning Bureau. Moreover, the new agency is scheduled to combine with the Financial Reconstruction Commission January 1, 2001 as part of a complete reorganization of the central government bureaucracy. For these reasons alone, some observers worry that decisions that will affect the banking industry for years to come are being made in an extremely unsettled environment.
The FRC's first chairman, Hakuo Yanagisawa, administered the tough medicine needed by the banking industry to begin to overcome its nonperforming-loan problems. The appointment of Economic Planning Agency head Michio Ochi as the FRC's top official in October 1999 was welcomed by bank executives but questioned by reform advocates (see JEI Report No. 39B, October 15, 1999). Mr. Ochi was forced to resign last February after a recording of the remarks he made to a group of local bankers led some lawmakers and analysts to doubt his commitment to the FRC's mandate (see JEI Report No. 9B, March 3, 2000). Sadakazu Tanigaki, a well-respected senior FRC official, then had the chairmanship until Prime Minister Yoshiro Mori formed his second cabinet in early July and appointed Mr. Kuze Financial Reconstruction Minister.
The 71-year-old Mr. Kuze seemed to be an odd choice from the start. While currently a member of the upper house of the Diet, he formerly worked in the Ministry of Home Affairs. Mr. Kuze is an expert in local administration and government streamlining, having written many books on these subjects and chaired the ministry's Local Autonomy College. While his mild manners and studious ways made him an ideal career bureaucrat, these traits were not seen as positives in his new job as head of the FRC.
Mr. Kuze's shortage of political acumen became apparent when it was revealed that he had accepted payments from Mitsubishi Trust & Banking for years and then from Daikyo without perceiving any conflict of interest. The former FRC chairman cannot be assigned all the blame, however, since he claims to have reported the relationships to senior LDP officials, who agreed that they were legal and aboveboard. Not surprisingly, opposition party members roundly criticized Mr. Kuze and the prime minister for their lack of judgment.
Mr. Mori chose Hideyuki Aizawa, a LDP member and, like Mr. Ochi, a former EPA director general, to replace Mr. Kuze a selection that also drew heavy fire from analysts. Mr. Aizawa is on record as opposing actions that would subject banks to the discipline of market forces, including reimposing a ceiling on deposit insurance liability and allowing nonfinancial firms to enter the banking business. The new FRC head has been quoted as worrying that a deposit insurance cap would "exert a large impact on smaller financial institutions." That leaves open the possibility that regional banks might petition him for a delay beyond the current one-year postponement in the reapplication of a ¥10 million ($90,900 at ¥110=$1.00) limit on deposit insurance coverage (see JEI Report No. 2B, January 14, 2000). Mr. Aizawa's cautious stance toward opening the banking arena to nonfinancial firms also has created a buzz since the FRC and the FSA have just finalized guidelines on this subject.
With the support of the LDP, the two financial regulators have drafted rules governing the formation or the purchase of banks by nonfinancial corporations. The FRC published the proposed regulations in late May, initiating a public comment period that lasted until the end of July. They feature five basic guidelines:
Based on this foundation, the following rules have been suggested:
The proposed rules will require changes in several laws. Such amendments are of some urgency since several well-known companies already have made it clear that they want to take the plunge into the banking business (see JEI Report No. 24B, June 23, 2000).
Sony Corp., for one, is focused on providing retail banking services via the Internet and its wildly popular PlayStation2 home videogame console. The deep penetration of Sony's Internet-ready game unit combined with the company's powerful brand name and significant financial resources give its application instant credibility. Sony says that it will target consumer financing to complement sales of its electronic products, but it easily could expand beyond this niche.
Come September 1, when a partnership led by Softbank Corp. now is scheduled to complete the purchase of nationalized Nippon Credit Bank, Ltd., the long-term industrial lender will be reborn as an Internet-focused bank. While it likely will provide on-line services, the institution's main purpose, according to Softbank officials, will be to finance Internet start-ups. The sale of NCB to Softbank and its partners has proved controversial since the contract includes a bad-loan buy-back clause similar to the one Tokyo gave the American-led consortium that purchased failed Long-Term Credit Bank of Japan, Ltd. Activation of this provision by LTCB's new managers triggered a chain of events that resulted in the bankruptcy of department store chain Sogo Co., Ltd. and political embarrassment for the Mori administration (see JEI Report No. 28B, July 21, 2000).
Japan's second-largest supermarket operator, Ito-Yokado Co., Ltd., has applied for permission to create a bank that specializes in paying bills via a network of automated teller machines located in its nationwide chain of Seven-Eleven Japan Co., Ltd. convenience stores. Some analysts say that the proposed rules for banks without branch networks were written specifically with Ito-Yokado's plan in mind.
Finally, Japan Net Bank, Ltd. hopes to start operations at the end of September. The Internet-based bank hopes to attract ¥1 trillion ($9.1 billion) in deposits and to have 1 million accounts after three years. With ties to NTT DoCoMo, Inc.'s 9 million iMode wireless Internet customers, these goals seem well within reach. The new lender's capital will be provided by eight backers: 50 percent by Sakura Bank, Ltd., 10 percent each by Fujitsu, Ltd., Nippon Life Insurance Co. and Sumitomo Bank, Ltd., and 5 percent each by Mitsui & Co., Ltd., NTT DoCoMo, Nippon Telegraph and Telephone Corp. and Tokyo Electric Power Co., Inc.
Besides the challenge of regulating these new kinds of banks, the FRC and Mr. Aizawa must contend with a traditional banking industry that remains haunted by nonperforming loans. The failure of Sogo has ignited worries that banks easily could be set back by bankruptcies in the construction, real estate and retailing sectors. To overcome these fears, the FRC and the Financial Services Agency are tightening rules on capital/ asset ratios and accounting procedures.
A major development, for example, is the FSA's proposal that smaller banks exclude latent stock portfolio profits from their capital bases. This would lead to major changes in the balance sheets and the asset distributions of these domestically focused banks. As for the tougher accounting rules, the pain they might cause can be judged by the pleas from smaller banks and insurance companies for waivers and delays. In the coming weeks, Mr. Aizawa will have ample opportunities to disprove the charges of his critics that, like former FRC head Mr. Ochi, he is too conservative and operates under the thumb of financial services providers.