Prime Minister Shinzo Abe’s economic policies and regulatory regime are overturning long-established practices in the Japanese financial system.
Japan’s banking culture has long been criticized for its apparent insularity to best practices and “jobs for the boys” approach to personnel decisions. However, recent developments suggest that a fundamental shift is underway in the Japanese financial sector.
At Japan’s largest local banking conglomerate Concordia Financial Group, the long-standing practice of giving plum positions to members of the Ministry of Finance after they leave government is being terminated. After a fight between ensconced former civil servants and career bankers, the decision was made in early April to lay off two former members of the Ministry of Finance with their resignations to take effect in June. This reorganization coincided with the rollout of a new policy that will see the group and its main banking subsidiaries — Bank of Yokohama and Higashi-Nippon Bank — led by career bankers rather than former government employees.
Shinz Abe, leader of Japan’s Liberal Democratic Party and Prime Minister since 2012 |
The turn away from tradition and nepotism in Japan’s banking sector is a response to the stress caused by the radical economic policies of Prime Minister Shinzo Abe dubbed “Abenomics.” Abenomics ushered in an ultra-low interest rate policy alongside quantitative easing with the aim of inducing inflation in an economy crippled by deflation for over a decade. Abenomics hit Japan’s banks as a triple-whammy: it led to a 25% devaluation of the yen, pulled yields on short-term debt into negative territory, and crimped returns on long-term bonds where yields of around 0.5%-0.7% are available at maturities out to 20 and 30 years, respectively. As a consequence, banks have seen carry income on their fixed-income portfolios evaporate.
The impact of Abenomics extends beyond bank balance sheets — it has ushered in a new mentality among the players in Japan’s financial sector. “There is something of a wake-up call occurring in Japan’s financial system. The old ways are perceived as not fit for purpose and a shake-up is underway. Underlying all of this are the fundamental dictats of Abenomics which have seen bank profitability put under great strain. Nothing will be the same again,” said a Tokyo-based debt syndicate head.
And Abenomics is not the only change agent at work in the Japanese financial system. The Financial Services Agency (FSA) — the country’s financial services regulator — appears determined to end the long-entrenched “convoy system” that protected regional banks from the discipline of market forces.
“There is a new mindset emerging in Japan which is all about shredding the status quo and finding a new way of doing things. It extends from the employment policies of the banks and finance companies but also to their investment approach as well. Abenomics has forced the need to look outwards,” said the syndicate head.
Japanese lenders are venturing into other markets in their quest for yields exceeding the parsimonious returns available in the local yen government and corporate debt markets.
For example, Nippon Life is engaging in a full-scale focus on offshore project finance markets that encompasses traditional project finance, leveraged buyouts and hybrid financings with the aim of investing ¥1.5 trillion (US$13.77 billion) over the next four years. Nippon Life has engaged in project finance business in US, Canadian and Australian dollars and in euros and Pound Sterling in an effort to beat the razor-thin yields available in Japan, with projects stretching from Europe to the Middle East.
