Outflanked In Asia?

As head of Sakura Bank Ltd.'s Asia division, Masao Umemura should be a happy man. After all, the bank's lending in the region is expected to rise by more than 10% this year. But Umemura is frustrated. While Asian capital markets are going into orbit, Sakura--like nearly all Japanese financial institutions--still is on the launching pad when it comes to underwriting the new flurry of Asian stocks and bonds. "Oh, yes, we're anxious," says Umemura. "We want to be a major player--and soon. We're thinking very hard about how to do it."

A funny thing is happening on the way to Asia's financial revolution: The Japanese are bringing up the rear. Although strong in traditional businesses, Japan's innate conservatism combined with a slowdown at home are holding its financial groups back from the hottest action in Asia's go-go markets. Schooled mainly in Japan's overregulated system, many Japanese are simply outflanked by savvy U.S. and European rivals. Others are wary of the durability of Asia's boom and see the overly aggressive Americans as "financial cowboys."

But Japan's reticence in the region suggests that, despite fears in Asia and the West, there's no "yen bloc" in the making. In fact, it is the Westerners who are helping draft the rules of the region's capital markets--and who are doubling and tripling their staffs and committing hundreds of millions of dollars to innovative financing techniques. With Japan preoccupied with refloating a badly shaken financial system, the concept of a yen bloc "is dead," says Hamish McLeod, Hong Kong's Financial Secretary. "The dollar is the international currency."

DOGGED YANKS. Japanese weaknesses show through even in areas of strength. They are still major lenders to big infrastructure projects, and that brings in margins of 2% or more, compared with 1% on commercial lending and fees. But Japanese bankers don't stray far from the track mapped by their big clients: Some 80% of project-financing deals involve a Japanese construction company or supplier in a key role.

Americans, by contrast, are beating down the doors of potential customers. The managing director of a major Hong Kong developer says executives from Goldman Sachs, Morgan Stanley, and Salomon Brothers are swamping him with fund-raising proposals. "So they get the deals and then hive off small positions to the Japanese," he says. "But the Japanese don't get the fees. They are pretty slow off the mark."

The Japanese are clearly uncomfortable with the complex deals currently sweeping Asia. Take the $392 million bond issue for Malaysia's north-to-south expressway, which was led by London-based Morgan Grenfell Group PLC. To fund the project, one of the biggest of its kind in the world at the moment, Morgan Grenfell sold the issue to local Malaysian investors by attaching an equity sweetener. The Japanese aren't even trying to do such deals. "In local markets, [the Japanese] are very unsophisticated," says Stephen N. Edwards, manager of Morgan Grenfell (Asia) Ltd.'s Singapore office. "They aren't even competing for advisory services."

It isn't just American salesmanship that has the U.S. leading the charge into Asia. American financiers can tap the billions of dollars of U.S. institutional money that's looking for good returns. "It's a big opportunity for U.S. companies like Lehman and Goldman to invest that money," says Rikio Takezawa, managing director of Sanwa International Finance Ltd. in Hong Kong. "We have had several years of terrible experience in the equities market." Japanese investors still are licking the wounds inflicted by the stock market crash since 1990.

RELATIONSHIPS. Of course, the Japanese can never be counted out. For one thing, Japanese manufacturers still are expanding in Asia, as cheaper labor beckons and the strong yen forces them to move production abroad, as Toyota Motor Corp. plans to do in Thailand. That alone will be good business, what with parts makers hot on the trail of their affiliates' Asian factories and all needing capital as they grow. And as the largest aid provider in the region, Japan has tremendous clout with governments across the region. Says Will Clark, head of Citibank's Global Asset Management in Sydney: "The Japanese want to make sure they can at least control their own trading bloc."

Will Japanese banks come roaring back in a few years, when Japan's burst bubble is a dimmer memory and the backload of bad debts is gone? Maybe. They could learn from the mistakes of Western financiers and take advantage of their own steady relationship-building. But if the bet on Asia pays off, the Japanese could find themselves permanent outsiders in the business of managing the region's wealth explosion.