Financial Sector

April 2004

New inspections of major banks' management of their large-lot borrowers are to be conducted by the Financial Services Agency. Major banks deemed to have problems with their management of major borrowers would be subjected to the new inspections to start next month. Under the new inspections, those banks found by the FSA's special audit, to have been too lenient in assessing borrower's financial assets likely will be urged to book higher loan-loss charges, prompting them to accelerate their disposal of bad loans. During the FSA's special audit conducted since February, the agency had difficulty with some of the 11 major banks surveyed due to differences in views over the evaluation and classification of loan claims according to the financial standing of large-lot borrowers. The agency has decided that it is necessary to tighten its inspection and supervisory functions on financial institutions to ensure that the target of having the ratio of banks' bad loans to their total lending is met by the next March. The FSA plans to target next month major banks deemed questionable in their management of large-lot borrowers. Factors to be checked include whether each bank has appropriately evaluated the financial and operational conditions of its large-lot borrowers, and the banks' role in the process of drawing up or reviewing the rehabilitation plans of borrowers. (April 29, the Yomiuri Shimbun, the Daily Yomiuri)

Acquisitions of Japanese companies surged in value to a record 519.5 billion yen in fiscal 2003, up 380%, according to a survey compiled by Mitsubishi Research Institute and ChuoAoyama Audit Corp. The survey highlights the greater role played by investment funds in corporate acquisitions in Japan. The number of deals jumped 72% to a record 67, of which 51 -- 34 more than in the previous fiscal year -- involved investment companies and funds. Deals valued at 20 billion yen or more numbered four, compared with zero in fiscal 2002, and the number of deals valued at 5 billion yen or more nearly doubled to 17. The acquisition of Japan Telecom Co. by U.S. investment firm Ripplewood Holdings LLC was valued at some 260 billion yen. Even if the Japan Telecom deal is factored out, corporate acquisitions in fiscal 2003 more than doubled in value. In a record six cases, companies recovered their investment by selling the acquired firms. The number was four in fiscal 2001. Acquirers typically take the acquired companies public and unload their stakes, but also choose various ways to recover their investment. In two cases last fiscal year, an investment fund sold the acquired firm to another investment fund. (The Nihon Keizai Shimbun; April 17 2004)

Fitch Ratings Ltd. on Wednesday upgraded its individual ratings on five Japanese banks, including Bank of Tokyo-Mitsubishi. Bank of Tokyo-Mitsubishi was upgraded from D to C/D, and the other four climbed from D/E to D. Bank of Tokyo-Mitsubishi and the other four -- Mitsubishi Trust & Banking Corp., Sumitomo Trust & Banking Co. , Bank of Yokohama and Chiba Bank (8331) -- will likely see stable profitability because of lower costs to dispose of nonperforming loans and are using retained earnings to strengthen their capital bases, Fitch said. The international rating agency assigns its individual ratings to banks to assess their financial strength. A rating of C denotes a relatively healthy bank, and a D rating indicates that a bank is associated with concerns over its profitability and the earnings outlook. A bank assigned an E is considered to have very serious problems. (The Nihon Keizai Shimbun; April 15 2004)

The net assets of Japan's investment trusts totaled 39.03 trillion yen as of March 31, rising 2.8% on the month and surpassing the 39 trillion yen mark for the first time since June 2002, according to the Investment Trusts Association, Japan. The capital flow, which is calculated by subtracting redemptions from investment trusts that were set up, saw a net inflow of 670 billion yen in fiscal 2003. This marks the first time in three years that the inflow exceeded the outflow, and is attributed to the end of a cycle of outflows for bond investment trusts. Stock investment trusts in fiscal 2003 saw a capital influx every month except July, and the total inflow was 3.05 trillion yen, thanks to an influx of funds mainly for monthly distribution-type funds, which are categorized as stock investment trusts. The net assets of stock investment trusts rose 2.7% on the month to 23.27 trillion yen. Bond investment trusts, which investors avoided because of low yields, had logged net outflows every month since November 2001, but have seen more months with net inflows since July of last year. In particular, money reserve funds -- bond investment trusts for cash management accounts -- saw a net increase of 900 billion yen in March, and the entire category of bond investment trusts logged a net inflow of 520 billion yen. The net assets of investment trusts sold through banks accounted for 28.5% of the total, and, when limited to stock investment trusts, were 40.3% as of March 31. The figures rose by 5.1 and 6.2 percentage points on the year, respectively. (The Nihon Keizai Shimbun; April 14, 2004) 

Personal spending is showing clear signs of recovery, according to April's Nikkei consumption diffusion index, with the percentage of firms seeing improved consumer spending demand outpacing those registering declines for the first time in eight years. The index measures the net balance of companies experiencing improvement or deterioration in such categories as sales, customer traffic and the business climate. The quarterly Nihon Keizai Shimbun Inc. survey, conducted between March 19 and April 7, covered 319 retail- and service-sector firms, 277 of which responded. The index for consumer spending demand, which had been negative since October 1996, rose 24 points from the January survey to 2. Travel agencies, such as JTB Corp., indicated that consumer spending demand was unchanged in January but reported improving demand in the latest survey. Reflecting the economic recovery in the Kansai region, Hankyu Department Stores Inc. and Daimaru Inc. similarly upgraded their consumer spending assessments. Forward-looking indexes forecasting the next three months also improved, with the sales index rising 15 points to 9 and the customer traffic index jumping 22 points to 20. The sales index returned to positive territory for the first time in 15 quarters. The business conditions index improved 12 points but remained at minus 26. Firms responding that conditions were good rose 2 percentage points to 7%, while 33% answered that conditions were bad, down 10 points. (The Nihon Keizai Shimbun; April 13, 2004)

The Bank of Japan policy panel left its monetary policy unchanged due to the widening recovery of the economy and relative stability in financial markets, despite the capture of three Japanese in Iraq by a militant group. The policy board decided to keep its target for the outstanding balance of current account deposits held by private financial institutions at the central bank in a range of Y30-35 trillion.　Separately, the nine member panel decided to introduce a system to offer part of its Japan's government bonds holdings to the market to help ensure availability of issues with low liquidity or issues that face sudden liquidity shortages. The system will ensure stability in the market for JGBs as policy makers have grown concerned that recent rises in long-term interest rates may exceed nominal economic growth rates. Japan is the only country among the group of seven major industrialized nations that has no securities-lending system. The decision on overall monetary policy was expected given growing confidence over Japan's economic recovery. Analysts expect that the bank will continue injecting ample liquidity into the financial system in an effort to combat deflation and ensure the ongoing economic recovery becomes sustainable. (April 10, Kyodo News, the Daily Yomiuri, the Mainichi Shimbun)

The nation's postal operations will be gradually privatized over a period of about 10 years starting in April 2007, according to a draft proposal of the interim report released Wednesday by the Council on Economic and Fiscal Policy (CEFP). Details such as giving the privatized Japan Post greater freedom in making business decisions will be determined during the 10-year transitional period, according to the blueprint. The draft was submitted by Heizo Takenaka, minister of state for economic and fiscal policy, at the CEFP's Wednesday meeting. The panel plans to put together an interim report based on the draft by April 26 and complete a final report this fall. Under the draft proposal, postal privatization will be carried out in three steps: a preparatory period lasting until April 2007; a transformational period of 10 years or so; and, ultimately, complete privatization. The degree of management control Japan Post will possess -- or the extent to which the government will be involved in its operations -- should be discussed in accordance with the privatization's progress, the draft proposes. The government will no longer fully guarantee Japan Post's deposits and insurance policies after April 2007, although state insurance for these products that was opened or signed before that time will remain in effect, according to the draft. The proposal also stresses the importance of enabling Japan Post to branch out into distribution services and start international operations for its mail business. It also states that the entity should be treated the same as existing private-sector financial institutions in the savings and insurance operations. The vast network of post offices should be kept intact so that it will be "available to the entire public," the draft proposes. But it gives no specifics on what to do with Japan Post's 280,000 workers, apparently out of consideration to Liberal Democratic Party lawmakers with vested interests in the postal business. (The Nihon Keizai Shimbun; April 8, 2004)

Under the draft proposal of the interim report released Wednesday by the Council on Economic and Fiscal Policy (CEFP), Japan Post will be stripped of its tax waivers and forced to compete on an equal footing with rivals, and this is expected to eventually help scale down the entity's savings and insurance operations. But the draft failed to spell out specific measures to deal with the organization's structure and 280,000 jobs, fueling concerns that the planned privatization may end up enlarging Japan Post's business -- and its payroll -- instead of downsizing them as originally intended. The blueprint calls for maintaining the uniform services provided at the 24,700 post offices nationwide and significantly expanding the lineup of products that can be sold there. This proposal was apparently devised to pacify independent contractors operating regional post offices, most of whom are big supporters of Liberal Democratic Party legislators with vested interests in the postal business. The post offices will "remain available to all citizens," the draft states, suggesting that offices in sparsely populated areas will stay open even after the postal services are privatized. Furthermore, the blueprint proposes easing or eliminating the rules on the types of products that can be offered at post offices to enable sales of products developed by other financial institutions, as well as household items and groceries in less populated regions. Such deregulation is aimed at transforming post offices into establishments similar to convenience stores, thus enhancing services for community residents. The proposal further states that Japan Post should be given greater control of its business, paving the way for deregulation that would enable the entity to branch out into new fields by acquiring company shares or entire businesses. Meanwhile, the draft proposes abolishing the special benefits that Japan Post has enjoyed as a government-backed entity. Specifically, the government will start providing partial instead of full guarantees on savings accounts and insurance policies that are opened or signed after the entity is privatized, just as it does with other institutions. Japan Post will also shoulder the same levels of tax and other burdens as its competitors, according to the blueprint. These measures, particularly the end of blanket guarantees, are aimed at making Japan Post's products less attractive. This is expected to prompt consumers to start looking into other institutions' products, eventually resulting in smaller savings and insurance operations at Japan Post. These steps for deregulating the postal entity and terminating its special treatment will be hammered out during a transitional period of about 10 years starting in 2007. But if deregulation measures are implemented first, this could end up helping to bloat Japan Post's business, critics say. Furthermore, the proposal failed to address the key issues of employment and structure. The CEFP apparently wanted to wait until after this summer's upper house election before spelling out any proposals that would lead to job cuts at Japan Post, a move that would surely anger the LDP lawmakers with special interests in postal operations. Currently, 80% of all post offices do not handle mail but depend on profits from the savings and insurance operations to stay open. So, if Japan Post is split into three companies after privatization, it would be difficult for a new mail company to keep all of its employees. At a news conference on Wednesday, Takenaka said "structural issues are not discussed at this point," suggesting that possible layoffs and other employment matters will not be debated for a while. (The Nihon Keizai Shimbun; April 8, 2004)