The Economist published this article on February 24th, 2011, prior to Japan’s earthquake and tsunami crisis, which occurred on March 11th, 2011. The article describes the relationship between Japanese banks and businesses, and the banks’ desire to take their business abroad. What makes this article interesting is thinking how it would have changed if written later.
Japan is home to three megabanks, Mitsubishi UFJ Financial Group (MUFG), Mizuho and Sumitomo Mitsui Financial Group (SMFG). All three banks are doing very well (MUFG has deposits of $1.6 trillion and currently is the worlds second largest bank). The issue Japanese banks are facing is a problem a person could only dream of; the banks haves tons of money, they just don’t know how to spend it.
Much of banks profits come form interest gathered on investments made to people or companies. The Japan’s banks aren’t the only ones who have found success; Japanese companies are sitting on a pile of wealth described by The Economist as a “hoard of around ¥200 trillion” ($2.45 trillion). Nearly half of Japanese firms have more actual cash than they do debt. Despite having so much money to lend, Japanese banks are having difficulties finding investment demand, which can largely be attributed to;
1. Japanese firms dislike Japanese banks after the 1980’s when the banks convinced bosses to take out loans they were not in need of.
2. When Japanese firms are in need of financing, more often they look to the market for assistance rather than the banks.
3. A majority of Japanese banks’ business is domestic (Japan’s volume of loans taken out has been declining for 14 months).
With money to spend, Japanese banks are looking for business in foreign markets, but continue to find their efforts stubbed.
The Basel Committee of Banking Supervision is an organization featuring members from around the world and is in charge of establishing global regulations for banks. In response to the Global Financial Crisis, the Basel Committee released its latest package of regulations, “Basel III.” Under Basel III, banks considered “global systemically important financial institutions” or G-SIFIs (applicable to Japanese magabanks) are required to hold more equity verses liability than before (increase in the Required Reserve Ratio). This increase puts Japanese banks’ plans to move abroad in a chokehold.
Also, in an effort to soften the blow from the Global Financial Crisis, the Japanese government forced Japan’s banks to comply with a new fiscal policy, which placed a moratorium (legal suspension in repayment of debts owed) for three years. Before Japanese banks can continue to move abroad, they are first going to have to work through some problems both globally and domestically.
My thoughts after the earthquake and tsunami crisis:
Upon reading this article, I felt that the relationship described by the article WAS completely true and accurate. At the same time though, in light of the recent tragedy, I feel a disaster of this magnitude, is something large enough to alter this relationship between firms and banks. The reason why I feel this is because now there is an investment demand (something lacking before). Firms and people across Japan now find themselves needing to rebuild lives. Loans will be needed and banks are begging to give them. Though the article makes several quality points, because of Japan’s new need to consume verses save, I’d like to argue that had this article been written 15 days later, it would have spoken a much different relationship and plan of action for the future.
http://www.economist.com/node/18233464?story_id=18233464
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