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Asia: Japan's Banks Undergo A Radical Change -- Deregulation

Prague, 10 March 1998 (RFE/RL) -- Japan is about to experience what is being called the Big Bang -- and many of the country's financiers and bankers are facing life after that event with a mixture of hope and fear.

That's because the Big Bang, which will happen on April 1, is the large-scale deregulation of Japan's long-protected finance sector. In fact, the "bang" could more correctly be described as a "wave", in so far as April first will be merely the high point of a process which started some time ago, and which will continue afterwards.

From April, the present divisions separating investment banking, commercial banking and foreign exchange dealings will disappear, and Japanese banks and finance houses will be able to operate across all sectors. That is what is known as universal banking, and it's now the standard practice in the United States and West Europe.

For Japan's ultra-conservative, even archaic banking sector, that represents radical change and a considerable challenge. For instance until now a strictly limited number of banks have been able to offer their clients an account denominated in a foreign currency. The Bank of Tokyo has been dominant in this field, having been giving the privilege of handling foreign currency accounts some 50 years ago. After the Big Bang, every bank in the country will be entitled to offer foreign currency accounts and transactions to customers, so that they can carry out business in any currency they choose. The field will also be open to foreign banks.

Such sweeping measures as this will revolutionize banking, as well as the financial brokerage and insurance sectors. As Adolf Rosenstock, chief economist in Germany for the Industrial Bank of Japan puts it, deregulation will wake up many of the Japanese financial institutions, and will "shake all those old, rotten structures, and bring back competitive thinking into the Japanese finance sector".

Rosenstock told RFE/RL that the Japanese have recognized that the old, regulated environment was no longer appropriate in the age of globalisation. He said the very weak banking sector, shielded for so long from competition, was one of the root causes of Japan's present economic "mess", as he called it.

The Japanese banking sector has been deeply shaken by the Asian crisis. Many Japanese banks ill-advisedly loaned out hundreds of millions of dollars to fuel the South East Asian building boom, and are now deeply exposed to bad debts, since Asian property prices have collapsed.

Japan, the world's second largest economy, is considered to be on the edge of recession. The government of Prime Minister Ryutaro Hashimoto has been criticized for timidity in introducing an economic stabilization package which most analysts say will not bring the necessary stimulation of consumer demand.

Rosenstock says that from the point of view of this overall picture, the Big Bang could not have come at a worse moment for Japanese banks. But the government is sticking to its plans, and any postponement of the Big Bang now would delay reform for several years. He says he expects that there could be casualties in the banking world -- not necessarily bankruptcies, but mergers designed to enable weaker institutions to survive.

Rosenstock cautions against seeing the deregulation in Japan as a victory for Western economic methodology over the Asian way of doing things. He says that only 10 years ago, many aspects of the Western banking systems were the same as Japan's today, and he's confident that Japan will convert to modern international standards successfully.

He notes that by contrast the Japanese manufacturing sector after World War Two developed in a fiercely competitive domestic market environment. Those companies which were able to survive and thrive at home were well equipped to tackle the international markets. And that's just what they did, making their country the world economic power that it is today.

Japan is also now undergoing a sweeping deregulation of another long-protected sector, namely domestic trading, both wholesale and retail. Rosenstock says this will further open the huge Japanese market to imported foreign goods, thus going some way to answering international criticism of Japan for running huge surpluses with their trading partners while keeping their own market shielded.