Saturday, September 27, 2008

Japanese Go Bargain-Hunting

Japanese Go Bargain-Hunting On Wall Street

By Blaine Harden | 24 September 2008

TOKYO, Sept. 24— Major Japanese banks and investment houses, fat with cash and apparently largely free of toxic investments, are spotting opportunity in the global financial mess and snapping up substantial holdings on Wall Street. With U.S. financial institutions still desperate for capital, analysts here say more major purchases are likely in coming days and weeks as the financial crisis churns on. Nomura Holdings, Japan's largest brokerage house, announced Tuesday it would buy for an undisclosed sum the 2,500-person European and Middle Eastern operation of the failed Lehman Brothers investment bank— one day after it had picked up Lehman's Asia-Pacific franchise, employer of about 3,000 people, for $190 million. Lehman filed for bankruptcy protection last week.

This is a once-in-a-generation opportunity, Kenichi Watanabe, chief executive of Nomura, said in a statement. He added that "our ability to capitalize on this opportunity in spite of such volatile markets reflects our financial strength." Although Nomura has lost money in the past two quarters, it had assets of about $263 billion as of March 31, making the purchases relatively small.

Japan's largest bank, Mitsubishi UFJ spent about $10 billion in August to buy the remaining shares of California's second-largest bank, UnionBanCal. Meanwhile, Sumitomo Mitsui Financial Group, Japan's third-largest bank, is planning a possible investment in Goldman Sachs, the Kyodo news agency reported Wednesday, citing unnamed sources. Japan's chance to buy up investment talent that its banks and brokerage firms have long coveted is, in part, a function of turmoil on Wall Street, where investment firms are desperate to cover bad wagers on subprime mortgages and other failed speculation.

It is also the culmination of the slow, stolid recovery of banks and other financial institutions from Japan's market meltdown in the 1990s. "We didn't take part in the good growth of the worldwide economy in the 1990s and now we are not getting hit by the downward trend," said Oki Matsumoto, chief executive officer of Monex Group, one of Japan's largest online brokers. "Japan has huge reserves of capital. We are much safer than any other country."

Banks and brokerage houses here spent nearly two decades rebuilding, selling off bad debt and devouring each other in mergers. These mergers, as several weaker banks were digested by stronger rivals, account for the alphabet-soup names of banks like Mitsubishi UFJ. Banks here have also changed their credit culture. Before they lent money on the basis of assets, much as U.S. lenders still do. Now, many banks here analyze the cash flow of their clients before they extend large amounts of credit.

"They spent the last 18 years going to hell and then coming back," said Ken Courtis, former vice chairman of Goldman Sachs in East Asia. "It is now the U.S. banks and investment firms that are on the hellish road toward the bottom." As Japanese banks recovered over the past five years, their cash reserves grew at an astonishing rate, owing to the peculiarities of this country's investing culture and its continuing economic problems.

There are about $15 trillion in personal financial assets in Japan, about $8 trillion of which are on deposit in banks. Banks are stuffed with money from an aging population whose consumer spending has been declining for years. Supermarket and department store sales have declined for 11 consecutive years, while sales of new cars of all brands peaked 18 years ago and have been falling ever since.

In the past two years, millions of elderly Japanese have grown alarmed about the security of their government pensions. The government announced early last year that more than 50 million pension records had been misfiled. The problem has not yet been sorted out, and it has led to people stuffing even more savings into banks.

As important to the capacity of banks here to accumulate capital: The cost of keeping someone's money in Japan is close to zero. Most depositors receive less than 1 percent interest on their savings. The central bank in Japan keeps interest rates extraordinarily low (0.5 percent for overnight loans to banks).

In large measure, low interest rates are a function of the country's huge public debt burden. At 182 percent of the Japan's gross domestic product, it is the most onerous in the world. The government acquired much of this debt in the 1990s, when it bailed out troubled banks. If interest rates were allowed to rise substantially, Japan's ability to service this debt could be threatened.

Finally, cash-flush banks in Japan have few local opportunities for profit. The economy is contracting and a recession is likely. Export-dependent companies such as Toyota report flat or declining worldwide sales, and foreign direct investment in Japan is by far the lowest among the world's major economies.

As Watanabe, the president of Nomura, made clear Monday: Opportunities are mostly elsewhere. "It will significantly extend our reach in Asia," he said, referring to the purchase of Lehman's regional operation. We see immediate strategic benefits, delivering the scale and scope to realize our vision to be a world-class investment bank.



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