The nation of a thousand clocks

Some see in JapanÆs big bank mergers an intricately designed plan to create a handful of world-beating financial powerhouses. DonÆt start sweating yet.

"A few years ago,” wrote Taichi Sakaiya, a career bureaucrat, novelist, and lately the Japanese cabinet minister responsible for economic planning, “a French journalist asked me if Japanese have some kind of national goal that motivates them to sacrifice their living standards for economic and corporate growth. I responded to his question with a metaphor.

"A jet has a lot of different parts, like wings, a cockpit, a fuselage. These components all look different, they use different materials and require different levels of precision in their workmanship. Each performs a distinct function, but as a whole they have a single purpose: to fly. Now, countries like America and France are similar to jet aircraft … Japan on the other hand is more like a thousand clocks. All the clocks look the same, all mark time, but each is a separate machine that runs to its own rhythm.”

You wouldn’t read about it in an analyst’s report. It would never come up in polite conversation. Yet there is a view, nonetheless, that the recent industry-reshaping bank mergers in Japan have a master puppeteer – a brain so canny and so clever that, by tugging a string here or pulling one there, it can choreograph the banking industry’s merger dance.

This extraordinarily wise and sentient being is thought to work not for the Financial Supervisory Agency, the new banking regulator, but for the finance ministry, the traditional seat of power in Japanese finance. This being Japan, the master puppeteer plays a long game. In fact, he has been fiddling away behind the scenes since the mid 1980s, when a group of young turks from the finance ministry and the central bank resolved to consolidate Japan’s banks and insurers into a handful of European-style universal banking groups, big and diversified enough to take on the strongest western competitors.

Three hundred moves ahead

One well-respected Tokyo analyst likens the process to a game of go, Japan’s version of chess. In the opening moves, a player’s strategy is unclear, even to the expert observer. Only after turn 300 or so is his hand unavoidably revealed.

japan bank mergers

By this reckoning, the finance ministry mandarins must at last be coming to their end game. Two big mergers last year laid the foundations. The announced marriage in August between Industrial Bank of Japan (IBJ), Dai-Ichi Kangyo Bank (DKB) and Fuji Bank brought together the Fuyo and Dai-Ichi Kangyo keiretsu, the name the Japanese give to the six big corporate groups that dominate the economy – and which have, at their centre, Japan’s most powerful banks.

The planned merger announced in October between Sumitomo Bank and Sakura Bank combined two more keiretsu, Sumitomo and Mitsui. Interestingly, all five banks got highly generous terms on the preferred shares they sold to the government last year as part of a Ñ7.5 trillion ($70.6 billion)  bailout of the big banks. The government has not explained why it gave some banks better deals than others. Some now suggest there were secret undertakings by the best-treated banks to merge.

Two more mergers in March have filled out the picture. Bank of Tokyo-Mitsubishi plans a marriage with Mitsubishi Trust, an inter-keiretsu deal. And Sanwa has announced it will merge with Daiwa and Tokai banks in what could be the first big step in the consolidation of the regional banking industry.

That still leaves loose ends. One is Japan’s rotten life insurance companies. The Bank of Japan’s super-easy monetary policy has helped to lift the banks off the rocks. Like American lenders during the banking crisis of the early 1990s, Japan’s banks have been recapitalizing themselves by borrowing short and buying government bonds. Low interest rates, meanwhile, have kept bad debts from spiralling out of control. At the same time, though, Japan’s easy money policy has sunk the life insurers. Their policies pay out, on average, about 4%. But their assets are badly mismatched.

Typically, the life insurers write 30-year policies. But the long end of the government bond market is underdeveloped. The finance ministry issues little paper with maturities longer than its beloved 10-year JGBs. So, the life insurers’ high-yielding assets have been maturing and reinvested in JGBs with coupons of 2% or less. As long as this yield gap persists, the life insurers will grow more sickly. Some are so poorly capitalized already that they appear to defy gravity altogether. Moody’s gives three insurers – Kyoei, Chiyoda and Daihyaku – a rating of Caa1, indicating “very poor financial security”.

Almost all the life insurers are mutually owned. So they need to demutualize before they can recapitalize themselves. Unfortunately, their prospects seem so dim that a public auction of shares may not be possible. A government bailout is also very difficult. The public stomached the use of taxpayers’ money last year. But that was in the middle of a financial and economic crisis. The whole financial industry is deeply unpopular for its corrupt links with politicians and its tardiness in cleaning itself up. The arbitrary and unfair bank tax that populist Tokyo governor Shintaro Ishihara introduced in April for big banks domiciled in Tokyo was probably the single most popular piece of legislation for many years in Japan.

The solution could lie in the finance-ministry blueprint for universal banking in Japan. The banks themselves have little cash to spare. But Japan’s non-life insurance companies are in good health. If the new financial groups that have begun to coalesce can get their hands on the non-life insurers’ cash, the life insurers could then join the merging banks and so put the finishing touches to the finance ministry’s plans with no need for more public money. When Bank of Tokyo-Mitsubishi and Mitsubishi Trust announced their merger, their presidents publicly called on Tokio Marine & Fire, the Mitsubishi group’s non-life insurer, and Meiji Life, its life insurance company, to join them.

Pulling the strings

Is there a secret pupeteer? For all the damage that the 1990s inflicted on Japan’s elite bureaucrats, in the popular imagination they still wield enormous influence, especially over the coddled finance industry. In truth, though, their powers are fading with financial deregulation. Increasingly, it is market forces, not the finance ministry, that Japan’s bankers have foremost in their minds. This makes them unruly. As they begin to compete with each other, the old solidarity is fading and the bankers’ association, through which the finance ministry wielded much of its influence, is itself losing power.

If financial consolidation in Japan seems chaotic and without pattern, that is because for the most part it is: banks, trust banks, life insurers, non-life companies and securities houses are all feeling their way in an unfamiliar and unpleasantly competitive environment. Mitsui Marine & Fire’s dithering is typical of this new era. Last year, the company said it was turning its back on the Mitsui keiretsu and merging with two other non-life insurers. Now, though, it has changed its mind and plans to merge with Sakura Bank, the Mitsui house bank.

Even supposing there has been some rare coordination at work – in Sakaiya’s words, Japan’s thousand clocks ticked together, for once – should the world tremble at the birth of these new monsters? On the evidence so far, the answer has to be no. Even if the master puppeteer had the resources to bring the banks together, there is a limit to its powers of micromanagement. It will be up to the banks to make the mergers work.

As a veteran of the Ministry of International Trade and Industry, Sakaiya’s insights into Japanese psychology shed some useful light on the problems facing the banks. Both the banks and the elite ministries recruit from the same source – the old imperial universities of Tokyo and Kyoto. These universities, in turn, recruit from a handful of elite high schools, the high schools from middle schools, the middle schools from junior schools and the junior schools, even, from elite-track kindergarten. Even more so than Britain’s old public school system, members of the elite are constantly reminded from a very early age that they will become Japan’s future leaders. The gulf between themselves and ordinary Japanese is huge.

As a group, however, they are equally elite. Only age determines hierarchy. When this combines with Japan’s group ethic and seniority-based employment system, it creates massive managerial problems – both at the banks and in the government ministries. Consider: each division (bu) in each bank is headed by a manager (bucho) who, by his education and age, ranks exactly equal to every other bucho in the bank. Each section (ka) in each division has a section manager (kacho) who counts as his exact equal every other kacho in the division. Every board member counts every other as his equal, including even the president, who is only a bit more equal than the others.

The group orientation of Japanese society, meanwhile, binds each equally weighted group within the bank in mutual, inward-looking solidarity. Interestingly, the most powerful bonds form among the smallest building block – the ka – because group politics quickly become unmanageable as the numbers swell. In exceptional circumstances, however, bigger groups do come together under a single purpose. This might happen, for instance, if a bu is threatened with restructuring; or if outsiders threaten the entire bank. It is this equality which – in both the elite ministries, the banks and, to a lesser extent, elsewhere in Japanese society – creates the nation of a thousand clocks.

Not as equal as others

The problems this throws up for the merging banks are huge. The boards of each bank are equally elite, so at the top of the bank there has to be a meticulous show of equality, at least in public. Absurdly, DKB, Fuji and IBJ plan three chief executives, two chairmen and one president for their new bank, which will be called Mizuho.

Bank of Tokyo-Mitsubishi and Mitsubishi Trust have gone one step further. Their plan seems to be to use a holding company – a structure that was legalized in Japan only in 1997, supposedly to pave the way for businesses to restructure themselves – precisely in order to keep the two banks separate. Apart from some modest plans to cross-sell banking and investment-management services, the ‘merger’ promises almost nothing.

Not even Mitsubishi Trust’s commercial banking operations will be combined with Bank of Tokyo-Mitsubishi’s, the most obvious step to take. This seems to be by design. Speaking to Japanese journalists after the announcement, Mitsubishi Trust president Akio Utsumi said that what he particularly liked about his bank’s ‘alliance’ with Bank of Tokyo-Mitsubishi was that his bank got to keep its independence. According to insiders, keeping the two banks apart may be the most sensible thing to do because they reserve a special hatred for each other, called 'kinshinzoo' in Japanese, the animosity born out of kinship.

If you believe the stories circulating in Tokyo, naming the new banks has been especially difficult. One faction at Bank of Tokyo-Mitsubishi, for instance, wanted to call the new group ‘Mitsubishi Financial Group’. This angered old-timers from Bank of Tokyo, which merged with Mitsubishi Bank in 1996 to create Bank of Tokyo-Mitsubishi. Bank of Tokyo hands wanted their bank’s name in the title, so the next suggestion was ‘Tokyo Mitsubishi Financial Group’. Unfortunately, this upset the old boys on Mitsubishi Trust’s board, because the name sounded too much like Bank of Tokyo-Mitsubishi, suggesting, of all things, a takeover (called nottori, in Japanese, which translates as “hijack”). The banks finally managed to settle on ‘Mitsubishi Tokyo Financial Group’.

Sumitomo and Sakura have come up with a novel solution. The merged bank will be called Sumitomo Mitsui in English, reviving Sakura Bank’s keiretsu name, and Mitsui Sumitomo in Japanese, which ought to keep everyone happy. Wisely, perhaps, DKB, IBJ and Fuji Bank have steered clear of this controversial area altogether. The name ‘Mizuho’ was picked after a competition among the three banks’ employees for suggestions. One of the rules forbade mention of any of the three banks in the new name.

These sorts of balancing acts are likely to plague the banks for a long time. The Nikkei newspaper, Japan’s premier business daily, recently reported that Sumitomo and Sakura (which are, at least, planning a real merger) plan something called an ‘in-branch branch’ as a solution to the loss of face problems thrown up when they start to rationalize their branch networks. The Nikkei explains that, should Sumitomo close a branch, for instance, it can transfer its ATMs to the nearest Sakura branch, in which case there will be both a Sumitomo sign and a Sakura sign hanging above the ATM lobby. This, explains The Nikkei, “will be a whole lot cheaper than setting up something in the vacant lot where the Sumitomo branch used to be to house just the Sumitomo ATMs.”

Reality and unreality

Of course, there are ways around these thorny cultural problems. One clever Japanese invention is the distinction drawn between appearances and reality – tatemae, the formal reality, and honne, the real nature of things. Even if the formal reality satisfies strict cultural expectations about hierarchy and equality, there may be freedom to strike more sensible decisions behind the scenes. In fact, it is often the creation of a false, formal reality which supplies the freedom to act counter-culturally.

The three banks merging to create Mizuho, for instance, have gone to great lengths to demonstrate they are engaged in a traditional Japanese balancing of interests. Each of the more than 100 committees which are now working on the merger (why not rename them ‘teams’, suggest western consultants) contains equal numbers of bankers from each of the three banks. Also, each committee is run jointly by one DKB manager, one IBJ manager and one Fuji manager. Behind the scenes, though, it is IBJ and Fuji which are said to be clearly in charge of the merger. Sumitomo, meanwhile, is leading Sakura Bank.

How shareholders read the Mitsubishi merger, or, for that matter, the merger between Sanwa, Tokai and Asahi banks, is trickier. Like the two Mitsubishi financial firms, Sanwa, Tokai and Asahi seem to want to use the holding company structure to keep their banks separate. At a meeting of stock analysts after the news broke, Sanwa Bank president Kaneo Muromachi was asked about his vision for the merged bank in three to five years’ time. Muromachi said that nothing had been decided yet, adding that the three banks might decide to create three separate, specialist retail lenders.

As this seemed to be the situation before the merger took place, analysts left the meeting feeling a bit deflated. It is possible that this and management comments about the Mitsubishi merger are mere tatemae, designed to preserve the show of equality and independence while a real merger takes place behind the scenes. As outsiders, though, shareholders have no way of knowing the truth – an unfortunate side-effect of Japanese business culture.

Technical problems

Perhaps the most difficult task facing the banks is technical: merging their systems. In as much as this provides the rationale for the mergers in the first place – which, for shareholders at least, it does – this is the job on which success or failure will turn. Unfortunately, Japan’s thousand clocks tick loudly here as well.

One novel aspect of the mergers announced so far is the time they will take to complete: typically two years, and in some cases more. DKB, IBJ and Fuji, for instance, plan a complicated two-step process. In the first, due this autumn, they will set up a joint holding company. But, like the Mitsubishi merger, this will keep the three businesses separate, at least to begin with. Only by spring 2002 will the merger be complete, when the divisions underneath the holding company will have miraculously transformed themselves into separate business units – retail banking, investment banking and so on.

Why so long? The main reason is that it will take two to three years to merge the three banks’ separate systems. And the reason for this, ultimately, lies in the same business culture that creates such problems at the top of the banks.

Tick tock

The IT departments of Japanese banks tick to their own, peculiar rhythms.

As semi-autonomous, inward-looking bureaucracies, their first interest is naturally themselves. Whereas in well-run western banks decisions about what computer kit to buy often originate with those who use it, in Japanese banks all the power rests with the IT bucho. Unlike in western banks, his first concern is not software but hardware, because his procurement managers are intimitately entwined in well-nourished relationships with a single manufacturer. DKB is tagged a Fujitsu bank, for instance, and Fuji is IBM.

This reliance on a single manufacturer leads to a preference for closed, integrated systems. With his army of IT engineers in mind, the IT bucho also prefers to develop software in-house rather than buy ‘off-the-shelf’ products from specialist developers.

All of these things make it a nightmare to merge two bank systems in Japan, say IT experts. Because they are closed systems, the banks cannot readily add or subtract functions to or from their systems, meaning that they will have to merge them wholesale and keep running and maintaining redundant systems for many years after the mergers have been completed.

Because the software is developed in-house, meanwhile, it is unique. That means that millions of lines of computer code have to be rewritten during a merger so that, for instance, deposit account information is recorded in the same way. IT consultants say that American banks usually build open systems on which they run off-the-shelf software. As a result, they have typically taken between six months and one year to integrate their systems following a merger.

So tough is this job that some merging banks don’t seem to be approaching it with the necessary dedication. One Japanese journalist recalls interviewing Chuo Trust executives about the bank’s takeover of certain branches formerly belonging to Hokkaido Takushoku Bank, the main bank on the northerly island of Hokkaido, which went bust in November 1997. Why, asked the journalist, could Chuo Trust customers still not use Hokkaido-Takushoku branch ATMs. Simple, replied the executives. Hokkaido-Takushoku’s computer is in Hokkaido.

The difference in speed could be crucial. The snail’s pace of Japanese bank mergers invites the sort of infighting that already seems to be breaking out everywhere. Thanks to the ‘big bang’ package of financial deregulation that began in 1998, the industry itself is changing quickly. Non-banks like Sony, BMW and Ito-Yokado, a supermarket chain, are applying for banking licences. Razor-sharp consumer loan companies, such as Promise and Acom, are busy expanding into banking business, like credit cards. The big brokerages have their own plans for financial domination. The clear risk for the banks is that they will fall even further behind the pack as they become hopelessly caught up in the technical and cultural difficulties that bedevil their mergers.

To illustrate how the government is directing the consolidation of Japan’s banks behind the scenes, one conspiracy theorist suggests a Japanese version of the Blair Witch Project, an American horror film which has become popular in Japan. In the Japanese version, a bank analyst makes a trip to the finance ministry to discover the mandarins’ plans for global financial domination. He is never seen again. A year later, his laptop is discovered…

On the evidence so far, the contents of his laptop are likely to frighten only the Japanese taxpayer.

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