Japan has taken the first steps towards reform
With Japan's big banks reporting strong results and the postal privatisation process moving forward, the government's ambitions have moved beyond the original goal of stabilising its financial system. The country is striving to become an internationally oriented, high-technology financial services nation. Given the progress over the past few years, there is every reason to believe that it can and will achieve these goals.
Reasons for optimism include the commitment of Junichiro Koizumi's administration to change and the positive role Japan's regulators are playing in financial system reform. The growing strength of Japan's financial institutions and the powerful impact of the privatisation of the post office and other government-affiliated financial institutions will add to market vitality.
Although the big-bang reforms of Ryutaro Hashimoto, former prime minister, in 1996 marked a first step in the process of liberalising financial markets, the financial position of Japanese banks continued to deteriorate as a result of the failure to reduce non-performing loans. Mr Koizumi was elected prime minister in 2001 on the basis of his commitment to achieving greater structural reforms.
The establishment of Japan's Financial Services Agency (FSA) in the same year created a body with the ability to implement effective policy. Mr Koizumi's appointment of Heizo Takenaka, chief architect of change, as minister for financial reform in September 2002 gave the effort sharper teeth.
FSA regulators forced banks to reclassify loan portfolios, recognise bad loans on their books and then dispose of them. As a result, the ratio of non-performing loans at all banks in Japan, which peaked just below 9.0 per cent, declined precipitously to about 4.0 per cent by March 2005. Now, some banks-including regional banks - are upgrading the quality of loans after successful corporate restructuring at borrowers. The FSA is focusing on three objectives: rules to protect customers; information technology; and internationalisation. These are the right priorities. The FSA has already made significant progress on the regulatory and legislative front to ensure that individual investors are protected. The new investment services law will build upon this.
As a result, investors should increasingly have the confidence to join the booming number of day-traders in the markets. New legislation that allows banks and the post office to sell insurance and investment products will also increase the accessibility of these products.
With the FSA's encouragement -- and big stick if they get things wrong Japan's big banks are investing heavily in IT. These investments will not only improve customer experience and security, they will reduce transaction costs and ultimately give customers access to a wide variety of new services. These investments should further support the banks' profitability.
The regulators are also making progress toward internationalisation. Over the past three years, they have clarified rules and brought them into line with global practices to ensure an even playing field for foreign and domestic firms. Going forward, a high level of regulatory transparency and an active dialogue between regulators and the regulated will be important to the development of Japan's markets.
Privatisation of the post office and other government-affiliated banks is critical to Japan's lofty goals for the financial sector. With $3,000bn in assets in postal saving accounts alone, there would be a huge potential benefit from the flow of these assets into higher-performing products and the securities markets. Such a shift will ultimately lead to more efficient use of capital, more vibrant capital markets, increased returns for all and higher tax revenues for the government.
The comprehensive approach to financial reform will provide a supporting framework for these privatisations. As a result, assets are likely to be put to more productive use and they should contribute to the government's goal of stimulating a broader shift within Japan from a savings to an investor economy.
In addition to significant foreign capital inflows, individual investors have started to return to the markets. Confidence, however, remains fragile. The development of a thriving domestic investment culture will be essential for Japan to become a financial service nation as has been the case in the US and the UK. While it is still early days, there are reasons for optimism that this goal can be achieved.
The writer is branch manager of MoMan Stanley Japon Limited.
— FT Syndication Service