Japan’s major banking groups all achieved their fiscal 2004 target of halving their bad-loan ratios, which had been considered a stiff hurdle to their recovery of sound management. All of them expect to make a profit in the current fiscal year, ending in March 2006. The disposal of the legacy left by the collapse of the bubble economy certainly appears to be nearing an end.

The stagnation of Japan’s economy in the “lost decade” of the 1990s was largely due to Japanese banks devoting almost all of their efforts to ridding themselves of nonperforming loans. During that period, financial institutions around the world carried out rigorous reorganizations that transcended national borders while launching a struggle for supremacy. Moves to integrate financial conglomerates that offered a diverse range of products covering insurance, securities and the credit-card business made headway.

Moves toward managerial integration have taken shape in Japan as well. Among the four main megabanks, Mitsubishi Tokyo Financial Group Inc. and UFJ Holdings Inc. announced a merger in October, and Sumitomo Mitsui Financial Group Inc. and Daiwa Securities Group appear to be heading toward one. Because of a delay in legislative measures, however, managerial integration that transcends the walls of securities, finance and related products are only just beginning.

The reason that Japanese banks, which were loaded with money and looked ready to conquer the world in the 1980s, were shut out of international financial markets lay in the sharp cuts delivered to their ratings. Recently, though, leading rating agencies have been revising upward their outlooks for Japan’s main banks. This return of ratings to levels that existed before the financial crisis of 1997 shows that confidence in Japanese banks is recovering.

Compared with their past peaks, though, the current ratings of Japanese banks are still low because of: (1) the heavy burdens of bad-loans, (2) the small size and comparatively poor quality of equity, and (3) low earning power. Today, with disposal of nonperforming loans coming into view, the first reason has been eliminated. But the second reason is still valid.

Although the capital-adequacy ratio of the megabanks exceeds 10 percent, above the 8 percent level recommended by the Bank for International Settlements, the figures include “apparent equity” — latent profits on stocks as well as deferred tax assets that have been calculated with the approval of the authorities since the financial crisis in order to inflate equity.

In terms of revenue, the megabanks’ net business profit, which indicates earnings from their main businesses, declined in total for the fiscal 2004 settlement. As interest-rate competition intensifies, the style of bank management, which so far has depended on profits from loans and from the use of deposits, is apparently reaching a limit.

Under their new medium-term management plans, the megabanks aim to greatly increase their gross market-price stock value after they completely repay, within two or three years, the public funds they borrowed. For this purpose, they plan to strengthen their earning power by increasing handling-charge revenue from retail banking (for individual transactions) and by expanding business with small and medium-size companies. They also seek to establish subsidiaries specializing in individual asset services.

This future image is modeled on the example of financial conglomerates like Citigroup in the United States, which has responded to the elimination of the fence between banking and securities by offering a wide range of financial services. However, as the business of Japanese banks has revolved around loans to large corporations, they lack experience and knowhow in financial services intended for individuals, such as asset management, pensions, insurance and credit. The existence of separate legislation for each section of business, such as banking, securities, insurance, and consumer finance, is also an obstacle to product diversification.

The Financial Services Agency has set about the task of revising the system toward the realization of financial conglomerates, but the work has only just begun. The agency must decide, for example, whether proper supervision can be provided so that the interests of customers are not damaged by the concentration of personal information.

Although Japanese banks are looking to U.S. financial circles as a model, the fact is that American conglomerates themselves are now reconsidering their please-all approach and have started concentrating their efforts in more efficient fields. Once again, Japanese banks are a lap behind the overseas front-runners. It’s time to do some serious catching up.

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