Hashimoto's Shocker

His proposed reforms would revolutionize Japanese finance

Glacial change. That was the expectation in Japan as Prime Minister Ryutaro Hashimoto formed the Cabinet of his new government in early November. After campaigning for reelection on a reform platform that few believed, Hashimoto packed his new Liberal Democratic Party Cabinet with old-line politicians who know money politics but have little stomach for taking on the country's bureaucrats.

But then Hashimoto made a bold bid to shatter the skepticism. On Nov. 11, the Japa-nese Premier ordered up a sweeping overhaul of Japan's byzantine financial markets by 2001. To give the plan some gravitas, Hashimoto even peddled the package as Tokyo's answer to London's Big Bang, a dramatic market transformation in 1986. "This is really heavy," gushed one senior Ministry of Finance official. "It's a revolutionary step."

DYSFUNCTIONAL. Not quite, since these ideas have been debated for years. And no one knows if Hashimoto is committed to reform or practicing a shrewd kind of public relations by promising the sort of change he knows the system will not permit. An overhaul of Japan's inefficient financial sector would also still leave much of the economy sheltered from foreign competition and burdened by high costs. Finally, Hashimoto has not made it clear whether he intends to curb the all-encroaching power of the Ministry of Finance, which many blame for the no-growth economy.

Yet the plan offers a tantalizing possibility of changing the financial establishment that lies at the heart of Japan Inc. Overseen by MOF, the system for decades has funneled Japan's huge personal savings into banks, which doled it out as loans to industrial giants. But it has also paid savers miserly below-market rates and protected Japan's banks and brokerage firms from aggressive foreign and domestic competition. In contrast, the Hashimoto plan would end fixed prices for brokerage commissions and many insurance premiums, allow banks, securities houses, and life insurers to poach on each other's turf, and open up more of Japan's $2 trillion pension fund market to rivals in the U.S. and Europe (table).

This may be the moment for Hashimoto to strike. Most Japanese are fed up with their dysfunctional financial system after living through the scary slide in equity and land prices in the early 1990s, and witnessing last year's bank runs and trading scandals at Daiwa Bank Ltd. and Sumitomo Corp. Tokyo's sky-high commissions and MOF's heavy hand have doubtless diminished Japan's status as a global financial center, while lower-cost Hong Kong and Singapore have emerged as fierce regional rivals. Some even think the yen's status as a major currency is threatened. Says David Hale, an economist with Kemper Financial Services Inc. in Chicago, "The Japanese are committed to making the yen a reserve currency, and that requires sweeping deregulation."

Truth is, Tokyo's financial markets are already being reshaped by global forces. Big international investors now bypass Tokyo by tapping offshore markets such as London to buy Japanese stocks at up to 40% savings on commissions. And in recent years, foreign multinationals such as Sears Roebuck, DuPont, and Walt Disney, fed up with high brokerage costs, have delisted from the Tokyo Stock Exchange. Angered by stiff costs, smaller investors are sitting out, too, which has contributed to the 50% drop in the Nikkei since its 1989 bubble peak.

An end to fixed commissions would probably increase the clout of the Big Four brokerages, led by Nomura Securities Co., at the expense of the smaller players. But it also would give a bigger edge to Wall Street and European competitors, which are better at creating sophisticated financial products and executing trades cheaply. "All the minnows will get squeezed out," predicts Neil Rogers, equity strategist with UBS Securities Ltd.

GRAYING MASSES. Unleashing real competition would certainly spell doom for the weaker firms. Japan's banking industry has too many players, almost all of them staggering under the weight of bad loans totaling $600 billion. If deregulation takes hold, four or five full-service banks would emerge and might lead Japan back into the global banking race and advance its push into Asia's booming markets. A number of Japan's second-tier brokerages, many now barely solvent, would go under. And there would be widespread layoffs, rarely seen in post-war Japan. J.P. Morgan & Co. economist Jesper Koll figures one-third of Japanese financial institutions would either vanish or be snapped up by Japanese and foreign rivals.

Hashimoto may be willing to risk such turmoil because of another crisis that needs attention. Japan's graying masses must be supported in retirement. For the necessary funds to materialize, the country desperately needs better returns on its $2 trillion in public and corporate pension assets. Investment rules dictated by MOF force Japanese fund managers to allocate certain amounts of capital into bonds. The result is such low interest rates that pension and mutual funds have failed since the late 1980s to reach their goal of annual 5.5% returns on assets. Hashimoto now promises to bring in foreign managers and loosen the investment rules to boost returns. If he's serious, "by the year 2001, the environment here will look a lot more like New York and London," says John R. Thomas, president of J.P. Morgan Trust Bank Ltd.

A Western-style financial system would also have profound implications for the corporate sector. Once unbound, pension managers would demand much higher returns from Corporate Japan. Forced to produce richer profits and a superior stock performance, Japanese corporations might start selling their subpar operations and shedding their unwanted stock positions. Japanese companies are now connected in a maze of cross-shareholdings, a system that stresses loyalty instead of focusing on return on investment.

The burning question is whether Hashimoto has the nerve to see his plan through. Powerful forces will try to stop reform, despite a popular yearning for change. Hashimoto has to become a statesman and stop being a mere politician--a tough switch. But in Japan, any revolution must start at the top.

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