The lead held by foreign banks over their Japanese counterparts in areas such as derivatives trading will probably erode in five to 10 years, Brian Metcalfe, a professor at Brock University Business School, said Thursday.

Competition from domestic banks was listed as one of the least difficult issues for the 34 foreign banks and securities houses Metcalfe interviewed between February and March under the sponsorship of the professional services firm PricewaterhouseCoopers.

At the moment, Metcalfe said Japan’s banks suffer from a lack of product innovation, which he described as “a knowledge problem, not a quality problem.” But he said, “In five to 10 years, this picture will change.”

As Japanese currently hired at foreign firms, after accumulating expertise, will probably move back to domestic branches, the knowledge gap will eventually reach equilibrium, he said.

Meanwhile, competition among a larger number of foreign players is forcing institutions other than the biggest — including as Morgan Stanley, Goldman Sachs and Merrill Lynch — to narrow their services and products.

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