It may be premature at this stage (May 1998) to look for any dramatic effects from this April's "Big Bang" on the Japanese economy. In fact, the Nikkei Index is far from recovering even to the Y18,000 level of a year ago, despite the ruling party's 16 trillion yen (US$ 120 billion) economic stimulus package. Nevertheless, there is more to the picture than meets the eye.

The rationale behind the reformation of the Japanese financial system is very similar to that of the "May Day" reforms in the U.S. and the "Big Bang" in the UK - namely, to make the Japanese market an easier place for foreigners to invest, inevitably facilitating Japanese institutional and individual investment outside of Japan (Japanese consumers have been bedeviled for years by unprecedentedly low interest rates). It is also intended to make the Japanese market attractive to foreign investors, and thus the players in the financial industry must be reliable and sophisticated with expertise matching global standards. To that end, the Japanese government is trying to attract more foreign financial institutions by taking measures to deregulate the Japanese financial system and by increasing transparency. These measures include abolishing the notorious administrative guidance system (gyousei shido) by which the financial industry was forced to operate in an environment of constant fear that the bureaucracy's vast power might be wielded against them. For foreign financial institutions, the time has come to enter the Japanese market in force to compete with financially troubled Japanese financial institutions for the bounty of Japan's 1,200 trillion yen in individual financial assets. Many Japanese banks are still struggling to write off or dispose of bad debts while adhering to BIS' capital ratio requirements, and Japanese life insurance companies are suffering from anemic rates of return on domestic investments that are often lower than the returns they guarantee to the insured.

On April 1, 1998, GE Capital Edison Life Insurance Co. commenced operations in Japan with 7,000 sales representatives by establishing a joint venture company with Toho Life Insurance Co., which was suffering from a poor credit rating. Edison Life Insurance received an "AA" rating from Standard & Poor's and became a model for the "Big Bang" as the first launch of a substantial business operation in Japan by a foreign life insurance company. It has also been reported that American International Group is acquiring Aoba Life Insurance Co., a mid-sized insurance company which acted as "saucer" for the collapsed Nissan Life Insurance Co.

Merrill Lynch Japan has acquired the retail operations of Yamaichi Securities Co., Ltd., which closed its doors after a hundred years on March 31, 1998, and will commence retail operations in Japan this coming summer. Fidelity Group has begun selling mutual funds to individual investors by mail order, and Goldman Sachs is reported to be buying collateralized bad debts at about ten percent or less of the debt amount on the expectation that the real estate market in Tokyo will pick up shortly. Goldman Sachs also purchased all of the securitized interest in the principal offices of Daiwa Life Insurance Co. for Y60 billion (US$ 460 million). On the other hand, it has become common for Japanese financial institutions (e.g., Long Term Credit Bank, Nippon Life Insurance, Meiji Life Insurance, Nippon Credit Bank, Dai-Ichi Life Insurance, Chiyoda Life Insurance) to enter into cooperative relationships with foreign financial institutions to develop financial products and to form a joint venture, etc.

In conclusion, the "real" globalization of the Japanese financial markets has kicked into gear and its momentum is now irreversible. This will inevitably stimulate global competition within the financial industry, which will be more closely interwoven with world-wide competition in other industries. This is evidenced by the implications of the recent merger announced by Daimler-Benz and Chrysler the acquisition of Japanese Nissan Diesel by Daimler-Benz.

Because of the generality of this article, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

(c) Komatsu, Koma & Nishikawa 1997

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