Japan Unveils Sweeping Financial Reforms

Deregulation blueprint designed to break down the walls among banks, brokers and insurers by 2001 and boost competition in the financial sector

Japan yesterday unveiled a blueprint for Big Bang reforms to break down barriers between banks, brokers and insurers, to boost competition and lure back business which has left for less regulated pastures.

The drastic programme, which has been compiled with lightening speed and much of which will be implemented two years ahead of the original goal of 2001, will force a major shake-out in the nations financial sector.

Some financial experts doubt Japans stodgy financial firms have the right stuff to become world-class competitors. And worries persist that the sweeping changes, unveiled as a high-profile financial scandal involving payoffs to a racketeer unfolds, leave glaring gaps in the realms of official surveillance, corporate governance and disclosure. Prime Minister Ryutaro Hashimoto has staked much of his reputation as a reformer on the deregulation agenda, which he first announced last November and which is modelled on Londons own 1986 Big Bang. Three government advisory panels yesterday announced their recommendations for reforms, among which were the following:

 

Liberalisation of stock broking fees in two phases, to be completed by the end of 1999

Lifting a ban on financial holding companies

Removal of limits on the range of business activities by securities firms trust bank subsidiaries and banks securities units in 1999/2000

Allowing trade of listed shares outside stock exchanges

Cross-entry into banking and insurance business by 2001

Consider abolishing taxes on securities transactions to cut trading costs to internationally competitive levels.

Reflecting worries about lax corporate governance and surveillance raised by a racketeer payoff scandal involving Nomura Securities and Dai-Ichi Kangyo Bank (DKB), the broking panel called for harsher penalties for illegal deals, more staff for the nations securities watchdog, and a shift in focus to preventive supervisory checks.

The scandal has thus far led to the arrests of 14 people, including eight DKB officials, a former Nomura president and the sokaiya corporate racketeer at the heart of the affair.

The banking panel similarly underscored the need for thorough supervision and urged the government to consider tougher penalties for illegal actions.

Experts lauded the speed with which the reform plan has been fleshed out, and the timetable for swift implementation.

I think that the Big Bang is much more fundamental...than most people anticipated three or four months ago, so its a step in the right direction and will give some strength to Tokyo as a financial centre, at the end of the day, said Takashi Kiuchi, chief economist at LTCB Research Institute.

However, immediate gains may not be so large, Kiuchi added, noting that many financial firms are still burdened by non-performing loans and that Fridays recommendations skirted the thorny issue of reforming public financial firms which account for a large chunk of the financial sector.

Whether authorities plan sufficient measures to prevent financial misdeeds from multiplying as the free-market mechanism replaces government guidance is also in some doubt.Whats missing? Corporate governance, better monitoring and greater disclosure, said Brian Waterhouse, an analyst at HSCB James Capel.

Some experts, meanwhile, say no more than a handful of Japans financial institutions have what it takes to beat global rivals in increasingly competitive world markets. I think youll have two or three (Japanese) players that will be globally competitive in three years time, but whether the rest will ever catch up is very doubtful, said Jesper Koll, chief economist at JP Morgan. in Tokyo.