Japan’s banks rebuilt

After more than a decade wallowing in debt and seemingly unable to turn themselves around, Japan’s banks appear to be looking to new products and client segments to rejuvenate their business models and spread risk throughout the system. Geraldine Lambe reports. For more than a decade, the Japanese banking system has suffered from painful indigestion – burdened by crippling levels of debt that the banks and the government were unable or unwilling to work out of the system. Whether we blame government policy, overly-cosy relationships between banks and borrowers or a lost decade of recession and deflation, Japan’s banks have for years failed to find a way to make themselves more profitable.

by Geraldine Lambe

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But the financial results announced in March brought hope that the banks may at last be escaping from the quagmire and that reform is well under way. Nearly all the major banks posted profits for the fiscal year ending in March 2004, revealing a significant reduction of non-performing loans (NPLs) from their books and low quality deferred tax assets from their Tier 1 regulatory capital.

The proposed merger announced last month between Mitsubishi Tokyo Financial Group (MTFG) and UFJ, two of Japan’s four “megabanks”, is another clear message that banking reform in Japan is entering its final stages. With a few operational provisos, analysts see this as a positive deal for both banks. UFJ has a weak balance sheet and was forced by the Japanese regulator, the Financial Services Agency (FSA), in June to make a series of earnings downgrades ahead of its results, subsequently posting massive losses. But it has relatively strong operations in retail banking and loans to small to medium-sized enterprises. MTFG has a strong balance sheet but is struggling to make money from its traditional areas of business, such as corporate lending.