The official debut last week of the Mizuho financial group is a fresh reminder of the large-scale bank mergers and tie-ups now in the works in Japan. The group brings together Dai-Ichi Kangyo Bank, Fuji Bank and the Industrial Bank of Japan under the umbrella of Mizuho Holdings Inc. Two years from now, the three banks and their affiliated brokerages and trust banks will be consolidated into a retail bank, a wholesale bank, a brokerage (serving also as an investment bank) and a trust bank.
As size goes, Mizuho Holdings, with total assets of about 152 trillion yen, is the world’s largest bank group, surpassing such foreign giants as Deutsche Bank and Citigroup. At an inaugural press conference, Mr. Katsuyuki Sugita, DKB president and joint chief executive officer of the holding company, said, “We are in a position to lead the Japanese financial industry, plus we have in our hands the ticket to position ourselves as a formidable player among the world’s top five banks.”
What is happening here is that major Japanese banks are joining hands to stake out an advantageous position in the increasingly competitive arena of financial services. Already, the Mizuho initiative, announced in August last year, has touched off a spate of consolidation plans, including linkups between Sanwa and Tokai Banks and between Bank of Tokyo-Mitsubishi and Mitsubishi Trust & Banking Corp., as well as a merger between Sakura and Sumitomo Banks.
These moves, which cut across traditional business alignments, are prompting alliances in other financial sectors, such as life and nonlife insurance. All this attests to the huge impact that the creation of the Mizuho group is having on Japan’s financial-services industry. Still, the financial-sector shakeup now under way is only part of the big picture — globalization — that is fast changing the face of corporate Japan. Indeed, economic globalism is spurring mergers and tie-ups across a broad spectrum of industries here and abroad, including communications and auto manufacturing.
Probably the biggest factor contributing to the Mizuho merger — and other bank linkups — is economies of scale. As vast sums of money circle the globe in search of profit, banks stand to gain substantially from an expanded scale of operation. Indeed, “bigger is better” seems to be the slogan of the day. With sectoral barriers disappearing, banks can also benefit from “economies of scope,” by expanding into new business lines.
Japan’s financial markets have long been protected by thickets of regulation, restricting the flow of money to and from this nation. In 1996, inspired by the fear that Japan might lose its status as Asia’s financial center to Singapore and Hong Kong, then Prime Minister Ryutaro Hashimoto launched a “Big Bang” program of financial deregulation. Since then, the markets have been liberated in stages. With that program scheduled for completion next year, Japan’s markets are now almost as free as other financial hubs in the world.
Thus the setting seems right for Japan’s megabanks. The question is whether these banks, including their brokerage arms, will be able to compete in world markets in ways that make them great, not just big. Will they be able to become world-class international players that are as competitive as their foreign peers? The answer seems to be no.
One reason for this is the relatively narrow earnings base. The Mizuho group, for one, aims at becoming one of the world’s top five banks, but the main source of its integrated financial services is likely to be the domestic market. In terms of net operating profits, the group is rated fourth in the world. Weak earnings power seems to be a problem, in varying degrees, with other banking groups as well. It appears that they are looking inward to compete mostly with domestic rivals, instead of looking outward to play on the world stage.
In fact, international expertise is one thing that they need badly to compete with U.S. and European megabanks. They need, for example, analysts and traders with global perspective and experience, as well as finely calibrated strategies for cross-border mergers and acquisitions — an area that promises to generate huge profits. Their capacity for international competition also seems to be severely restricted, at least for the time being, by the still-heavy burden of bad debts.
In the absence of international strategies, one suspects that Japan’s megabanks may be trying to build defenses on the home front in order to protect themselves against the onslaught of foreign competitors. But big does not always mean strong. The real test for Japan’s financial giants will be whether they can match their size with strength, or quality. For that, they need an offensive strategy aimed at the global market, not a defensive policy geared to the domestic market.
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