Japan’s Banks Hit for Shunning Third World

The bulk of Japan’s capital outflow is to the United States and Western Europe, not to the developing countries whose capital needs are highest.

“There is a lack of attractive environment for investing in the developing world,” said Toyoo Gyoten, director of the international finance bureau of the Japanese Finance Ministry.

Yoshihiko Ando, managing director of the Long-Term Credit Bank of Japan, said that his bank sees future financial flows centering upon the United States, Western Europe and Japan, not the developing world.

Besides the fundamental strengths of the American economy, the United States provides a unique attraction to Japanese investors, Ando said. As the Finance Ministry proceeds with gradual deregulation and liberalization of Japan’s own financial market, the United States shapes up as “a classroom” for Japanese financiers, he said.

“What we do in the United States now will likely be what we do in Japan in the future,” Ando said.

However, there has been an upturn in Japanese lending to the Asian nations of the Pacific rim. Countries such as China, South Korea, Thailand, Indonesia and Malaysia “are now coming to tap the Tokyo market as the first place to meet their external borrowing needs,” Gyoten said.

“In addition, when they want to finance big projects, they are increasingly consulting with Japanese trading companies, banks, and securities firms to organize syndications of funds--a big change compared with five or 10 years ago,” he added.

Last July, a consortium of 66 Japanese financial institutions headed by the Bank of Tokyo put together an unprecedented $2-billion commercial loan to China.

John F. Loughran, senior vice president of Morgan Guaranty Trust Co. of New York, said Japanese banks approve loans to foreign firms even if there is the possibility that the foreign competition will damage domestic affiliates of the banks.

One large Japanese bank, whose steel firm affiliate vehemently opposed helping South Korea build its first integrated steel mill in the early 1970s, today is lending money to the Korean rival, Pohang Iron & Steel Corp. Indeed, Japan’s loans to South Korea, one of its most formidable rivals in a wide variety of manufacturing fields, are huge.

It’s a different story in Latin America, where Japanese have virtually halted new loans.

Risk is the major dissuader. But the Finance Ministry has reinforced disincentives by forcing banks to keep reserves against loans to risky nations and then taxing 80% of the reserves, complained Hideo Ishihara, managing director of the Industrial Bank.

Taxed for Lending

“We have to pay new taxes to provide loans to Latin America,” he said.

Japan’s share of debts to the most heavily indebted nations is estimated at about 15%, compared to 30% for the United States and 35% for Europe. Since 1982, Japanese banks have increased their loans to heavily indebted foreign countries, an official of the International Monetary Fund in Washington said. “But they haven’t assumed a major role,” he added.

Support of international financial institutions, however, has been substantial.

Once a major recipient of World Bank loans, Japan today regularly provides 20% of the bank’s operating funds. The bank would like to expand borrowing in the Japanese capital market “significantly,” a senior World Bank official said.

Yen loans make the Japanese currency the World Bank’s third-most-important currency. It will soon surpass the Swiss franc to become the bank’s most-important currency after the dollar, bank officials said.

Japan also provides 43% of the funds used by the Asian Development Bank for loans to its members, as well as 21.9% of the funds of the Inter-American Development Bank and 27.4% of those of the Africa Development Bank.

International banking authorities focus most of their complaints on the pattern of Japan’s capital outflow.

“For its own future, Japan would be far better off investing in productive facilities in Asia rather than in real estate in the United States,” the senior World Bank executive said. Transfer of more Japanese technology and capital to Asia, this official said, could transform East Asia from a group of a nations “cutting their own throat” by over-emphasizing exports to the United States into a “very powerful regional market . . . that could take off economically like the U.S. economy did between 1890 and 1910.”

One step toward such a development would be to make yen the trading currency of Asia--”but Japan is not doing it,” he added.

Takehiro Sagami, adviser to the president and chairman of the Sumitomo Bank and a former vice minister of finance, noted that Japan surpassed West Germany in the size of its gross national product in 1968 but that the yen today still carries only about a third of the weight of the mark in international finance.

“Internationalization of the yen would decrease the burden of the United States, but Japan hasn’t assumed that responsibility,” Sagami added.

Japan’s yen currency finances only a trickle of total world trade. Indeed, only 40% of Japan’s own exports and a mere 3% of its imports are financed in yen.

One of the reasons the yen has not yet become a major international currency is that Japan’s capital market offers a limited variety of investments, nearly all of which are regulated by the Finance Ministry.

Slow to Change

Substantial Japanese financial liberalization is not expected until 1988, at the earliest.

Financial frictions already have erupted with England and West Germany. And Loughran of Morgan Guaranty Trust cited a growing Japanese penetration of the commercial loan market in New York, Illinois, and California as the reason Congress passed the International Banking Act of 1978, which placed limitations on interstate banking by foreign banks.

Some foreign bankers are disgruntled with what they call Japanese banks’ willingness to lower margins of profit on loans to secure larger market shares.

“When we came in to Japan, we called on all the Canadian companies here. But our success ratio was very low,” said Vincent Sophia, general manager of the Tokyo office of the Royal Bank of Canada. “Japanese banks lowered their profit margins to hang on to the customers.”

Yet even Sophia said he did not foresee major financial frictions in the future. “Big banks are a big club. Japanese will have to get involved in countries where they don’t want to, or the American banks would boycott them. They can’t really say, ‘We’ll just take the prime slices.’ They have to play the game,” he said.

Long years of cooperation between American and Japanese banks in putting together syndicate loans, Loughran said, “tend to defuse a lot of frictions.”

“The effect on the thinking of Japanese from their experience in international finance comes much faster than in industrial internationalization,” Sagami said.

Already, unlike Japanese industry, a majority of the presidents of 13 major national banks, called “city” banks, came from the ranks of executives with foreign experience. One of them even has a degree from the Harvard Business School, he noted.

“I’m surprised at the freedom Japanese banks have in investing in debt, equity and real estate,” Eugene H. Rotberg, vice president and treasurer of the World Bank, said. “They (Japanese) don’t buy U.S. products but they do make the investments. I thought they would treat (finance) the same as they do industrial goods. But they haven’t.”

The one possible friction Sagami foresaw could occur if American bankers demand complete reciprocity in Japan. As an example, he noted that eight Japanese banks operate without trouble in California, gathering deposits not just from Japanese and Americans of Japanese ancestry but from other Americans, too.

“But an American bank which comes here cannot do that,” he said. Even more remote is the possibility that a U.S. bank could buy out a Japanese bank, although no legal restrictions stand in the way. “It’s a cultural gap with a melting pot nation.”

“Only wholesaling banking activity is possible for American banks in Japan,” he said.

Sagami said he “did not exclude” the possibility of “a quarrel with Wall Street,” which he called “the most fearful thing that could happen--far more serious than quarrels over trade. Finance is the heart of economics.”