Japan has financed $100 million worth of investments by the Southern California Edison Co. through bonds issued in Tokyo. Oregon issued $720 million in bonds for the state's general revenue, with guarantees from eight Japanese banks. France and Britain will obtain $2.4 billion from Japan to help build a tunnel under the English Channel. And Japanese purchases of U.S. Treasury bonds have reached a level that affects interest rates in the United States.
These and similar developments underscore the fact that Japan, known until now as factory to the world, also has emerged, virtually unnoticed, as banker to the world.
Because it maintains the world's highest savings rates at home and the largest surpluses in trade abroad, Japan has become the world's leading supplier of new capital. And now American banks and securities firms are facing the same kind of fierce competition from the Japanese previously experienced by U.S. manufacturers.
Some American banking institutions already have been eclipsed by their Japanese rivals. No longer are American banks the world's largest. No longer are American banks' balance sheets the soundest. No longer are American banks' foreign assets the biggest.
Japan is now tops in all those categories, thanks to an unprecedented concentration of wealth in Japanese hands in the last three years.
Japan's burgeoning economic power raises serious questions. Will the developing nations of the world be able to rely upon Japan for the financing that until now has largely been provided by the United States and Europe? What is Japan's plan for using these vast resources? What strategy will it adopt?
"These are all questions which demand attention," said Mark E. Buchman, executive vice president of the Union Bank, in a Los Angeles interview. "Japan's going to be calling the shots. People will be surprised by the things which will be decided by Japan."
Some experts say Japan's emergence as a financial giant has just begun.
The Industrial Bank of Japan, in a 1983 projection, said Japan was likely to accumulate $400 billion in current accounts surpluses (the sum of both trade and non-trade transactions such as shipping, insurance and tourism payments) in the eight years through 1990--the same amount the Organization of Petroleum Exporting Countries accumulated in the eight years after the 1973 oil crisis.
The actual results for the first three years, however, overshot the bank's projection by $32.6 billion, and this year's current account surplus will far exceed the projection too.
For fiscal 1986, the bank originally projected a $43.3-billion current-account surplus but now expects a $68-billion surplus. Even with the recent steep yen appreciation, which cuts into export profits, the bank still expects the current-account surplus in fiscal 1987 to amount to nearly $58 billion.
"There is no way that Japan can be left to build up that kind of surpluses, which constitute a very major global imbalance," said a World Bank official, who asked not to be identified. "Japan has become a country sucking in whatever savings the entire rest of the world has to offer in consumption. The result is that it is affecting investment decisions in other countries."
Better Bottom Line
Although the size of the United States' international balance sheet still dwarfs Japan's--$915 billion in accumulated assets versus $341 billion at the end of 1984--Japan's bottom line now tops the United States'.
At the end of 1985, Japan held an estimated $120 billion in net foreign assets, the highest in the world. By comparison, the United States went into the red by about $70 billion at the end of 1985, according to the Japan Economic Research Center.
The Nomura Research Institute predicted that Japan will hold title to $558 billion in net foreign assets in 1995 and become "the largest creditor nation in history."
The international financial system and the standard of living in the United States, which depends more and more on Japanese funds, face challenges arising from Japan's new financial power.
Although American and European banks find themselves holding most of the debts of financially troubled developing nations, it is Japan that now has most of the money. So far, however, Japan has shown no willingness to provide greater leadership, or to bear a greater burden, in tackling the problem of debtor nations.
The Industrial Bank, in its 1983 report, declared that "it goes without saying that Japan, as the world's largest capital-exporting nation, finds itself in a position in which it should fulfill an extremely large role in international finance." The bank also said Japan must assume "considerable leadership in enlarging international financial institutions."
Asked if he thought Japan was doing so, Hideo Ishihara, managing director of the Industrial Bank, said no, because Japanese don't feel rich "as people," however rich their country has become.
'Still a Poor People'
"In our hearts, we are still a poor people," he said. "Our grasp and feeling about Japan's position in the world is several years behind what it actually is."
"The consciousness that we are accumulating surpluses rivaling OPEC's has not sunk in," said Takehiro Sagami, adviser to the chairman and president of the Sumitomo Bank and a former vice minister of finance. "We became rich so suddenly that our thoughts and ideas are really not progressing in line with what is happening in reality."
The reality is that every month last year, Japanese purchased more than $24 billion in foreign securities of all kinds. Total purchases reached $291.3 billion. After sales were subtracted, the one-year increase in Japanese holdings amounted to $54.4 billion.
About $40 billion of last year's increase was believed to have been invested in U.S. Treasury bonds, more than held by any other foreign country. A third of those additional Treasury bond purchases were made by Japanese corporations, such as Toyota Motor Corp., which has amassed so much cash that Japanese have nicknamed it the "Toyota Bank."
Bomb on Trading Floor
"If the Japanese withdrew their holdings of U.S. Treasury bonds tomorrow, it would be like dropping a bomb in the middle of the trading floor" because U.S. interest rates would rise immediately, Buchman said.
Eugene H. Rotberg, vice president and treasurer of the World Bank, said in Washington that Japan could influence interest rates--and thus the standard of living--in the United States with even less drastic action.
"What would happen to the bond market if the Japanese decided not to participate in a (single) auction (of Treasury bonds)?" he asked rhetorically.
Already, the three largest banks in the world are Japanese, both in terms of assets and deposits. Two other Japanese banks rank among the world's top 10; only two American banks, Citibank of New York and the Bank of America, remain in those ranks.
Rotberg noted that not only the size of the capital accumulation in Japan but also its concentration gives Japanese bankers their extra punch.
Fewer Banks in Japan
While more than 14,000 banks exist in the highly segmented U.S. market, there are only 1,073 banking institutions in Japan. With fewer forms of financial investment open to Japanese, savings flow mainly to 13 nationwide banks, making pools of capital in Japan "big and concentrated," Rotberg said. These institutions have traditionally been called "city" banks, although they have branches throughout Japan.
These 13 "city" banks control a third of all private banking deposits and provide 29.7% of all private loans in Japan.
And the balance sheets of Japanese banks are healthier than those of most American banks.
While Moody's Investors Service gives only eight American banks a Triple-A credit rating, nine Japanese banks hold the top Moody's rating, even though the real strengths of the Japanese banks do not show up in their accounts.
Stocks of other corporations held by banks are listed either at par value or purchase value, a mere fraction of actual market value. (U.S. banks are forbidden to hold stock in other corporations). The value of the land on which bank branches sit is not included.
World's Largest Bank
John F. Loughran, senior vice president of Morgan Guaranty Trust Co. here, estimated that the assets of the Daiichi Kangyo Bank, the world's largest with $199.2 billion as of last November, would rise by at least "$9 billion to $10 billion" if the stocks of other companies it holds were evaluated at market value.
"I can't imagine what Daiichi Kangyo is worth with (the real estate value of) its 300 branches" added, Loughran said.
The high credit ratings mean that Japanese banks can raise money more cheaply than most American banks, Loughran said.
Japanese banks also have captured a large part of the bond guarantee business in the United States simply because their solid credit ratings enable local governments and corporations to issue bonds at lower interest rates than if American banks guaranteed them.
Japanese banks' overseas assets rose to $639.6 billion at the end of September, surpassing for the first time the foreign assets ($580.3 billion) held by American banks, according to the Bank for International Settlements, which collates banking data for central banks.
Far Lower Ratio
That feat was accomplished despite the fact that foreign operations for 12 of the 13 "city" banks bring in no more than 22.7% of total revenue--a far lower ratio than for most large American banks. Only the Bank of Tokyo, which before World War II specialized in foreign exchange transactions, has gone heavily international, with 84.4% of its revenue coming from foreign operations.
Most of Japan's international activity actually is carried out abroad, not in Tokyo. Foreign institutions borrowed $23.3 billion in yen last year--$16.1 billion from Japanese banks and $7.2 billion in bonds issued in Tokyo--which makes Tokyo a far cry from the London and New York financial markets, although yen borrowings by foreigners nearly doubled in three years.
"The underdeveloped . . . internationalization in Japan's financial markets is, indeed, a glaring contradiction," said Hirohiko Okumura, senior economist at the Nomura Research Institute.
Biggest Yet to Come
The big spurt, Japanese bankers believe, is yet to come--some of it possibly even next month.
After April 1, Japan's 21 insurance companies, which now hold more than $31 billion in foreign securities, will be permitted to invest up to 20% of their assets, double the current 10% limit, the Asahi newspaper reported. The move was described as an effort to restrain the appreciation of the yen, which has gained about 25% in value against the dollar in the last five months.
The Finance Ministry confirmed only that it was studying an increase in the current ceiling. If approved, the change is expected to unleash an extra $27.8 billion in purchases of foreign securities.
Sumitomo Bank, whose expectations are typical, holds $169 billion in assets and has raised the proportion of revenue from foreign operations to 22.7% of its total. Sagami predicted that Sumitomo will soon be obtaining as much as 40% from overseas operations.
Newcomer to U.S.
The Long-Term Credit Bank of Japan ($104.9 billion in assets), which only three years ago was not even engaged in operations in the United States, had provided $4.7 billion in credit and loan guarantees in the United States by the end of last year. The bank expects its outstanding U.S. commitments to rise to $6 billion this year, said Yoshihiko Ando, the bank's managing director.
Starting from scratch in 1983, the Long-Term Credit Bank targeted Fortune 500 companies and now has succeeded in lining up 80 of them as customers, Ando said.
No single international strategy appears to have emerged.
Some banks, such as Sumitomo, Fuji, Sanwa and Mitsubishi, have purchased American and European financial institutions to move into overseas markets. Twenty-nine Japanese banks, for example, operate full banking branches in California, while eight Japanese banks own nine bank subsidiaries in the state.
Others, like the Long-Term Credit Bank, with huge funds but a small staff, are trying to transform themselves into wholesale banking institutions, handling only large-scale loans and guarantees.
"Japan is going into commercial banking, and the United States and England are getting out of it," Loughran said. "American banks are going to securities and the investment trust business--moving out of the old inventory financing and selling off their loan portfolios."
So far, the unfulfilled potential for Japanese contributions to world finance has attracted most of the attention. The potential for damage is still regarded as remote.
Buchman, for example, said he foresees no possibility that Japan might be provoked to suddenly stop purchasing U.S. Treasury notes. "Where would the Japanese put the money if they withdrew it?" he asked.
Toyoo Gyoten, director of the international finance bureau of the Finance Ministry, said he had never calculated the possible impact a cessation of Japanese buying might have on the yield of U.S. Treasury bonds.
Never Occurred to Him
"That means the issue has never come into my mind," he said.
The Industrial Bank of Japan, in its 1983 projection, however, said accumulation of $400 billion in current-accounts surpluses in the eight years through 1990 could have a "destructive influence on the structure of the world economy." The bank urged Japan to restructure its own economy, transferring manufacturing overseas through direct investment.
Japanese business has not heeded the advice. Very little of Japan's wealth has been invested in overseas manufacturing--indeed, very little even in long-term investments.
"Most of the overseas investment, in essence, is of a very short-term nature. I have great uneasiness over whether this kind of investment can be stabilized for a long period," Masataka Okura, president of the Japan Export-Import Bank, said last year.
Gyoten said the Finance Ministry shares the concern about the short-term nature of Japanese investments. His ministry is trying to encourage more direct investment overseas by supporting World Bank efforts to set up a global insurance system as well as by working out bilateral investment-protection treaties--with China, for one, he said.