He is sitting in his office in a shiny skyscraper in central Tokyo, a symbol of Merrill Lynch’s aspirations in the land of the rising sun. In 1998, the US broker made waves when it acquired the failed Yamaichi Securities, one of the big four local brokerages. It looked as if a foreign bank had finally got an inside track in Japan’s securities industry. But, with the country’s economy in a tailspin, Merrill was unable to turn things around and was forced to lay off staff and close branches as losses mounted.
But, if cost remains a key issue for Merrill in Japan (as elsewhere), Mr Fujisawa is confident that the broker’s lean years are behind it, as the Japanese economy marches onward and upward. “There has been a very good recovery of the Japanese economy – and I believe it is a very firm one from a long-term viewpoint,” he says.
While doomsayers have pointed to some less optimistic figures in recent months, he argues that this is only natural. “This slowing-down is like reaching a landing on a staircase. In the short term, we could not continue with such a quick recovery. But I’m not pessimistic at all about the economy next year, or the years after.”
Consumer demand improves
Mr Fujisawa cites several reasons for his optimism, including the fact that companies are investing in equipment again and consumer demand is improving (good company results mean generous employee bonuses this winter).
For Merrill, it has meant good business across the board, whether in equity, the bond market or mergers and acquisitions (M&A) advisory business. “We hope we will continue to move ahead in all businesses as we did last year,” Mr Fujisawa says. He argues that this optimism is not just because of improving investment banking profits, but also because of fundamental changes taking place in the Japanese economy as the country starts to operate more like an Anglo-Saxon style, capitalist economy.
Take, for example, M&A. Merrill Lynch ranks third in the league tables, according to Thomson Financial data. A big driver has been the lifting of the ban on the formation of holding companies. The ban was a legacy from the post-Second World War US occupation that led to Japanese companies developing a complex cross-shareholding system. With that ban now gone, companies are rapidly unravelling cross shareholdings and forming Western-style holding companies. Such intra-company activity has been an important component of M&A activity, yielding some of the biggest deals of recent years.
“The way of thinking – the approach of Japanese corporates – has changed a lot,” Mr Fujisawa says. He also points to the new mark-to-market accounting rules and disclosure standards, which, he argues, make Japanese company accounts more detailed than their US counterparts in some ways. “This approach invites a change in perception in the top management of the company,” he says.
Lull in fundraising
Investment banking opportunities in Japan still bear many hallmarks of an economy that is suffering. In the debt business, for example, the bulk of Merrill’s profits has been from the securitisation of existing loans because heavily indebted companies have no need for new money. “Companies are actually trying to pay debt back, so there hasn’t been much fundraising,” Mr Fujisawa says.
Equally, much M&A business still concerns restructuring or helping companies that are in trouble. One such deal was announced last month: Merrill is buying $2bn in North American car finance loans from cash-strapped Mitsubishi Motors. It is also close to winding down a successful two-year joint venture with UFJ Bank, helping the Japanese institution to deal with problem loans.
However, a big change in the past year has been a shift to more positive activity. “There’s a new type of M&A appearing in Japan,” Mr Fujisawa says. “Last year, the M&A and financial adviser-type business was not forward-looking but rather about restructuring a company, about how to solve its problems. Now it’s also about positive tie-ups and alliances, a more forward-looking M&A business.”
He argues that the same is true in equity. While fundraising used to be more about maintaining capital ratios or perhaps a company buying or selling a cross-shareholding, these days companies are raising new money to try to build their businesses – whether new equipment, a new venture in China or a new research centre in Japan. “They need more money and so now equity is seen as an appropriate vehicle to raise it. So that’s changed, maybe 180 degrees over the past year,” Mr Fujisawa says.
It is an environment in which there are clear winners and losers, with some companies gaining market cap and others rapidly losing it. “The composition of the Nikkei index is changing a lot. So you probably should not invest in the index at the moment, but rather in individual names,” says Mr Fujisawa.
At number six in the equity league tables, Merrill Lynch lags behind both local powerhouse Nomura and Nikko Citigroup. But, says Mr Fujisawa: “We don’t simply focus on being number one in any one area or areas because the costs could outweigh the advantages of maintaining that position. And we are very cost conscious. But we would like to be in the top five in every key product area. So for some we are already there; for some we’re in the top seven – but that’s very close.” This echoes Merrill’s US strategy.
Although the market has improved, Mr Fujisawa is candid about the challenges facing foreign banks in the Japanese market, particularly with domestic financial institutions becoming more aggressive. In the past, foreign brokers have benefited from a greater ability to take risks than troubled Japanese financial institutions and were also able to offer a greater range of products. But he points out that, with Japanese financial institutions recovering, they are now more able to do both. “Competition is going to be much, much tougher than in the past,” he warns.
Global access
Still, one area of business in which Merrill and other foreign companies retain an edge is offering global access. That is important in a country where about 30%-35% of the stock market has ended up in non-Japanese hands in the past few years.
The key is to tap into the deep client base of the Japanese banks. Mr Fujisawa says Merrill is trying to take advantage of links with Japanese financial institutions, using their client network to distribute Merrill products. “That would create new opportunities for us and for them, so it’s a win-win game,” he says.
For example, since December 1, Japanese banks have been allowed, for the first time, to sell securities through tie-ups with securities brokers. “We and other securities companies have been trying to build distribution channels with banking institutions, to do those sorts of transactions for them,” Mr Fujisawa says; though he adds that it is not a high-margin business.
While he does not appear to attach much importance to the recent formation of the world’s largest bank by assets, with the UFJ-Bank of Tokyo Mitsubishi merger, at the same time he has no doubts that, in Japan, commercial banks retain the advantage over securities companies. That is because the country’s savers still prefer to keep their money in bank deposits. “People emphasise the importance of the securities market but ordinary individual investors are still hesitant to invest their money in securities,” he says.
That provides opportunities for the likes of Merrill Lynch to help banks, in turn, invest those deposits in securities, as ordinary banks effectively become institutional investors. But it is not necessarily a good way of making money.
“In terms of the size of the business, there’s a really big opportunity there,” Mr Fujisawa says. “But it’s not very profitable because commissions are thin. So, how to solve that situation is a challenge for us.”
Career history
2002-present: senior vice-president and chairman, Merrill Lynch Japan Securities; vice-chairman, Merrill Lynch International
2002: Joins Merrill Lynch as adviser
2000: appointed chairman of the board of directors, Industrial Bank of Japan (IBJ)
1996: becomes vice-president, IBJ
1992: promoted to managing director, IBJ
1989: appointed director and general manager, capital markets, IBJ
1988: becomes general manager, capital markets, IBJ
1982: managing director and CEO, IBJ International, London
1961: joins IBJ
1961: BA economics, University of Tokyo
