Bullish On Japan

For Merrill and others, bank scandals have opened doors

Back in 1978, Merrill Lynch & Co. had big dreams of selling stocks, mutual funds, and financial advisory services to rich Japanese investors. But it underestimated how hard it would be to lure the Japanese away from local brokers despite their unscrupulous practices, sky-high fees, and dismal returns. Merrill also misjudged the willingness of the Ministry of Finance to allow foreigners into Japan's markets. Defeated, Merrill closed its six retail branches in 1993. But now it's back, betting that the failures and scandals shaking Japan's financial-services industry will finally give it an opening. Its aim, says Merrill Lynch Japan Inc. Chairman Hisashi Moriya, is to be "Japan's most trusted financial adviser."

To reach that goal, Merrill is spending up to $300 million to take over 30 branch offices and 2,000 brokers from shuttered Yamaichi Securities Co., until last November Japan's fourth-largest investment bank. By late summer, Merrill will offer domestic and global investment trusts--as mutual funds are known in Japan--plus convertible bonds and foreign currency investments.

GOOD BUZZ. Merrill is also counting on its reputation as one of Japan's top players in corporate bond underwriting and equity trading to help it expand its retail arm. "Scandals anywhere in the world are an opportunity," says Merrill Lynch International Chairman Winthrop H. Smith Jr.

They're an opportunity for more than Merrill. Fidelity Investments, GE Capital Services, and Citibank all want to grab a bigger piece of Japan's $10 trillion in private savings. With only 6% of Japanese people invested in equities, much of that money is languishing in bank or Postal Savings System accounts, where it earns less than 1%. But more than scandals are giving foreigners hope. For decades, they were effectively shut out of Japan by collusive ties between the MOF and Japanese banks and brokers. Now, even the Ministry realizes Japanese consumers must earn far greater returns to pay for a rapidly aging population. That's a big reason Prime Minister Ryutaro Hashimoto is pushing his "Big Bang" plan to promote more financial industry competition by 2001. While the plan is daunting to many cossetted local players, "the truth is, investors in Japan will be big beneficiaries," says U.S. Commerce Secretary William M. Daley.

The early buzz on U.S. competition is promising. Fidelity, which started selling investment trusts directly to the Japanese in 1995, now offers them six mutual funds. With $2.5 billion under management, Fidelity's assets are growing at a 50% annual rate. Last month, Fidelity set up pilot offices with Sanwa Bank, Sumitomo Bank, and Long-Term Credit Bank of Japan to familiarize Japanese bankers with its products. Fidelity hopes eventually to market its funds via lenders' branch networks. Fidelity has also launched a Japanese-language Web page (www.fidelity.co.jp) that will offer financial-planning tools, market news, and fund-performance data. Goldman, Sachs & Co. is also selling funds through Nikko Securities Co. and Kokusai Securities Co.

Citibank, meanwhile, is redoubling its efforts to woo the Japanese. Its automated teller machines now operate 24 hours a day, in contrast to Japanese lenders' terminals, which shut down at night. Citi expects to win Diet approval to link its 65 ATMs to the 20,000 terminals at post offices throughout Japan. In addition, Citibank is offering consumers something besides convenience--safety. As worries over the stability of Japanese lenders have mounted since the failure of Hokkaido Takushoku Bank Ltd. in November, consumers have been lining up at Citi's 20 branches to open accounts. In April, Citi will roll out a new credit card that will let holders take advantage of swings in the value of the yen by paying their balances in dollars, if they choose. Insurers are also in for foreign competition. GE Capital Services, General Electric Co.'s financial services unit, has set up a $1.2 billion joint venture with Toho Mutual Life Insurance, a debt-plagued insurer with a junk bond rating, to sell life and health coverage. The venture will be up against American International Group, which has hired 800 former Yamaichi employees to boost sales.

"FINE LINE." U.S. financial-services firms have reason to be optimistic. But they still face a tough slog. Merrill's Smith doesn't expect his new retail unit to turn a profit for three years. And teaching American-style practices to Japanese staffs won't be easy. Japanese brokers, for example, are judged by their commission volumes, not by how well they invest clients' money. As a result, Takuma Amano, a financial consultant and former Yamaichi executive, wonders whether Merrill will be able to impose U.S.-style compliance methods on brokers used to "walking a very fine line between the legal and illegal" to drum up business.

Still, the time is ripe to try. The Westerners are offering ordinary Japanese more choices and better returns. They also may end up teaching Japanese firms how to compete in an industry being thrown open by the Big Bang. A decade ago, Toyota and Honda shook the Detroit auto industry out of its complacency. Now, it looks like some American financial powerhouses are about to return the favor.

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