Japanese Banks Venture Forth Internationally

A Dex.TV interview of Raymond Mobrez, PhD, Asia Economic Institute:

What are Japanese banks doing amid the global financial crisis?

While the credit crisis has deterred the United States and European banks from lending, Japanese banks have become increasingly more prominent on the international financing scene.

In January, Mizuho (NYSE: MFG) [TYO: 8411], one of the largest banks in Japan, invested $1.2 billion in Merrill Lynch. The deal was the first major investment by a Japanese bank in a Wall Street firm since 1989. Mizuho received convertible preferred shares that pay a 9% annual dividend. Mizuho has also strengthened its collaboration with Merrill Lynch in the areas of of project finance, mergers and acquisitions, risk-sharing, corporate finance, and financial advisory projects.

Another one of Japan's largest banks Sumitomo Mitsui Financial Group [TYO: 8316] spent $998 million to take a 2% stake in the British bank Barclays. After losing more than $5 billion on assets in the subprime crisis, Barclays turned to Sumitomo to replenish its capital. Mitsubishi UFJ Financial Group is also considering investing in Western financial firms after the subprime crisis.

Minimal growth at home and relatively small subprime damage has also encouraged smaller Japanese banks to invest abroad. Japan's Shinsei Bank [TYO: 8303] cut a deal with General Electric to purchase GE Money, the Japanese consumer finance unit of General Electric, for $5.4 billion. Shinsei made the deal to expand its own consumer loan, mortgage, and credit card business. The deal gave Shinsei a lending business with 2,000 employees and 2.2 million customers.

Why are Japanese banks actively venturing forth internationally?

Japanese banks may be venturing forth because of cheap assets and a lack of competition from other lenders. United States and European financial institutions are facing a mortgage crisis that does not exist in Japan. In addition, Samurai bond issuers are starting to tap into the retail market where they have $7.3 trillion reserved in cash deposit accounts with insignificant earning. This year overseas issuers, such as the government in Thailand and Australian lenders, have sold a record $13.5 billion worth of bonds in Japan, and analysts expect that number to increase dramatically during the rest of 2008.

What are samurai bonds?

Samurai bonds were first issued in 1970 by the Asian Development Bank. They provide issuers with the ability to access investment capital available in Japan. The proceeds from issuing Samurai bonds can be used by foreign companies to break into the Japanese market. The issuing company also has the option of converting the proceeds into its local currency to be used on existing operations. In addition, Samurai bonds are not subject to Japanese withholding taxes, offering advantages to Japanese buyers.

Why are borrowers attracted to the Japanese bond market?

Borrowers have been drawn to Tokyo’s bond market because of low interest rates. The Bank of Japan (BOJ) has held its key interest rate at 0.5% for seventeen straight months. The negative impact from the rising cost of energy and raw materials has led to an economic slowdown in the country. In an effort to maintain economic growth, the BOJ will probably not raise the interest rate any time soon, making it cheaper for fund-raisers.

Investors have already begun looking into Samurai bonds because they offer premiums over Japanese rates. For example, Royal Bank of Scotland sold 141 billion yen in a four-part bond in June. Thailand sold 55 billion yen in Samurai bonds while the South Korean cable maker LS Cable raised 10 billion yen.

Why are the recent international ventures of Japanese banks significant?

In the past twenty years, Japanese banks have taken very little risk and have focused almost exclusively at home. Consequently, they have developed a reputation for being cautious. However, with the recent ventures of Mizuho and Sumitomo Mitsui Financial, Japanese banks seem to be on the brink of taking major risks, or at least calculated risks. But Tokyo banks are still recovering from a bad-loan crisis that led to widespread consolidation. Thus, they may be more likely to remain conservative. Although Mizuho seemed to have led the way in dabbling in international finance, the Merrill Lynch deal was more of a straight financial investment. Mizuho's $1.2 billion deal to receive convertible preferred shares which pay an annual dividend with a 9% yield is hardly a high-risk maneuver. Furthermore, the Japanese lender has no further plans for investment with Merrill.

Whether Japanese banks will continue to look abroad remains to be seen. It's clear that they the cash, ability, and credit on reserve. They may have their eye on United States markets, including Real Estate.

Disclosure: no positions