JapanÆs banking sector is a mixture of the three æmega banksÆ (almost indistinguishable from each other in their mammoth size and uniform product offering); one ægiga bankÆ (the Japanese Post Office, which will be privatised over several years); a raft of ætrust banksÆ who engage in a somewhat eccentric range of activities, from real estate brokering to asset management and traditional banking services; and scores of small regional banks.
JapanÆs banking sector is more similar to ChinaÆs banking sector than AmericaÆs in terms of sophistication. Japan may have the second largest economy in the world, but thatÆs not due to the prowess of its banking sector.
ôI once tried to set up a website showcasing the advertising skills of the various banks. The idea was to give investors an idea of the creativity of certain banks. I had to abandon the idea after I realised that the banks did very little advertising, and that when they did advertise, it was awful,ö says one brokerage analyst in Tokyo.
ItÆs also a sector riddled with opacity. Take the consumer finance sector. You can talk to æpolitically correctÆ analysts at the ratings agencies and investment banks for as long as you like and not a get a satisfactory answer to why the Japanese banks historically allowed the lucrative consumer sector to be dominated by a plethora of stand-alone finance companies such as Acom, Aiful, Promise and Sanyo Shinpan Finance.
Some banks, like Shinsei Bank, did the obvious thing, at least in the eyes of its foreign management. They acquired several of these consumer finance companies (CFCs) as a way of locking into the high interest rates that these companies could charge their customers. They have since suffered grievously as the government has clamped down on the activities of these players, in the form of the Money Lending Business Law passed in December 2006, which restricts annual interest rates to a maximum of 18% by 2010, from 29% currently.
The interest rate ceiling is a clarification of two previous pieces of legislation which stipulated different interest rates û the so-called ægrey zoneÆ which the CFCs used in the knowledge it was not 100% illegal. The CFCs will also be subject to more rigorous controls and punishments.
The true role of the CFCs is somewhat mysterious. They will bill their customers at any address they require, in plain envelopes. And several analysts emphasize that the loans did not go to the Japanese æsubprimeÆ sector û a percentage did, but not the majority of the loans.
That secrecy means that the loans are reputed to fund the activities of individuals who want to retain their privacy û for example, by not telling their spouses. Conveniently, as there is no credit information sharing between Japanese banks and the CFCs, the clientÆs bank credit record is protected by his æoff balance sheet' borrowing.
ôConsumers will have one credit card for shopping, sure. But they will also have a CFC card for other loans,ö says one bank analyst in Tokyo.
That privacy and convenience comes with a cost. Originally, these interest rates were as high as 106% per year, but they have steadily come down, to around 29% now. The reason why they have come down is an interesting one, and says a lot about the blurring of financial and political barriers in Japan.
ôThe thing to remember about the CFCs is that they are dominated by Japanese-Koreans. After World War II, the Japanese government allowed this sector to be dominated by the Koreans, some of whom had come to Japan as slaves before and during the war. It was a compromise: by allowing these usurious interest rates, the Japanese government bought off the Korean lobby (in Japan and overseas) from applying too much pressure for an apology for the war,ö says on senior Japanese banker.
According this source, the reason for the secrecy surrounding the CFC is because of the link to Pachinko. Pachinko is a game whose appeal is incomprehensible to outsiders, but the key thing is that itÆs a form of gambling. Like the CFC sector, pachinko in Japan is also traditionally dominated by Japanese-Koreans.
But while the CFCs and pachinko parlour operators grew fat in the post-war years, former prime minister Koizumi had other ideas. For a start, the Japanese electorate was incandescent with rage over reports that the North Koreans had kidnapped Japanese citizens (including several children) from Japan itself in the 1960s and 1970s.
Secondly, Koizumi reportedly preferred the subject of war guilt to be handled in a more open manner û through diplomatic exchanges and academic forums. The result was that it became unnecessary to permit the CFCs to charge such high rates of interest û especially if any portion of that money was flowing back to North Korean coffers.
The result is well known: a slow but sure erosion of the interest rates which CFCs are permitted to charge their clients. The damage does not stop there. In a move which can only be described as punitive, the new legislation concerning interest rates is retrospective û for a period of up to ten years.
ôSome companies will take a huge hit. But nobody knows quite how much, because (given the secrecy surrounding the sector) itÆs not clear how many people will step forward to claim the money,ö notes one bank analyst.
This bizarre situation does have one upside. The æregularÆ banks will now be able to exploit a market which was closed off to them - although thatÆs assuming the anti-Korean feeling in Japan doesnÆt trigger a crackdown on Pachinko parlours, as well as on the CFCs.