Until very recently, Japan was a banker's paradise.
Interest rates for both loans and deposits were pegged by the government and, although the margin between the two was narrow, the government saw to it that the banks had nothing to worry about.
Regulation and self-regulation were so strict that all a bank could do was to be more polite or more convenient than its rivals. Every major bank in the country operated its cash-dispensing machines during precisely the same hours. Even the size of the paper used to print calendars given to customers when they opened accounts was regulated.
All the same, the average Japanese saved more than 20% of his disposable income and put almost all of his savings in the bank. Japan's large companies needed big loans and only the big banks could provide them.
In the last five years, however, the comfortable world of the Japanese banker has fallen apart. The average profit of the big 13 so-called "city banks"--which, despite their name, operate nationwide--plunged from $771 million in 1980 to $288 million in 1984.
Japan is showing signs of turning into what is increasingly being called a "casino society." Housewives now leave their extra money at cozy shops operated by securities firms near suburban railway stations, and corporations have become their own bankers.
Japanese, however, still are showing little enthusiasm for going into debt, thus depriving Japanese banks of the opportunity to expand their services into consumer loans.
The handwriting is on the wall for Japanese bankers. As Osamu Sakurai, president of the Sumitomo Trust Bank, told the Yomiuri newspaper: "Service at banks has been characterized by uniformity--like the hamburgers at McDonald's restaurants. From now on, we intend to use all our assets to provide financial services to compare with dishes served at Maxim's."
Although the menu of services is still to be determined, the desperation of the bankers to keep their enterprises going has become apparent.
Between 1970 and 1974, the average Japanese corporation relied on bank loans for 82.5% of its financing needs. By 1984, the banks' share of corporate financing plunged to below 40%.
But not only have the banks lost their corporate borrowers, they also are being abandoned by individual depositors.
Savings Pace Slows
Ten years ago, 66.4% of personal savings went into accounts either at banks or at the government-run postal savings system. By last year, that figure had dropped to 58.6%.
People still are leaving huge sums in their accounts, but the Japanese population is aging and the average Japanese is more anxious about his retirement now than he was 10 years ago. Increasing numbers of savers are looking for high-risk, high-yield instruments, which city banks are prohibited from offering.
Moreover, many Japanese families have saved so much they have exhausted the legal limit for tax-free bank deposits.
To add to the banks' difficulties, Japan's whole financial system is coming under pressure, both at home, as a result of a growing market in national bonds, and from abroad, where Japan's strictly controlled financial market is seen as giving Japan an unfair advantage in trade.
In the years after the 1973 oil shock, when petroleum prices soared upward, the Japanese government, previously relatively debt-free, began a series of massive issuances of national bonds.
Today, about $722 billion worth of national bonds are in circulation and a secondary market has begun to develop in which investors can obtain higher interest rates than the legal limit the banks can pay on their deposits.
So far, banks have managed to keep the wolf from the door by making sure that national bonds are offered in such large lots that individual investors effectively are prevented from obtaining them.
But now securities firms have started wooing away individual investors with mutual funds based on medium-term national bonds which are not only low-risk but also higher-yielding than bank deposits.
Pressure From Foreigners
Pressure also is coming from foreigners. The United States has been asking the Japanese government to open up its financial market, in general, and to issue, in particular, what diplomats have called "nice, clean" national bonds.
In other words, the bonds should come in small denominations and be available without red tape or a hefty withholding tax.
As David C. Mulford, an assistant U.S. Treasury secretary, put it during a recent trip here, "In the United States, buying a Treasury bill is as simple as buying a newspaper."
The U.S. motive in getting the Japanese to create simpler yen instruments is to make the Japanese currency attractive for investors around the world. The feeling in the United States and Western Europe has been that the yen was undervalued because foreign investors were discouraged from moving into yen. The low value of the yen, it was argued, gave Japanese exports a price advantage in foreign markets.
If Mulford has his way, Japanese national bonds may soon become attractive not only for foreigners, but for a growing number of individual Japanese investors as well. The result will be to drive depositors even further away from the banks.
The banks, however, are in a no-win situation. Unless they are allowed to raise interest rates, they will lose their deposits. On the other hand, if banks raise their interest rates, their costs will rise and their profits will decline.
That fact was driven home last Oct. 1, when the Finance Ministry decontrolled interest rates on deposits larger than the equivalent of $556 million.
Toyota Motors, perhaps Japan's most financially innovative company, asked banks to bid on such a deposit. About 60 banks made offers, all of them higher than the previously controlled rates, and Toyota finally chose an offer that paid it 0.3% above the rate it had been receiving on its certificates of deposit.
According to calculations made by professor Shozo Ueda of Osaka's Kansai University, if interest rates on ordinary bank deposits are freed, the interest payments of the 13 city banks will jump by just less than 11%.
"If that happens, 12 of the 13 banks will go into the red," Ueda said.
The Toyota incident was dubbed the beginning of the end of the "main bank system" and its implied expectations of loyalty between bank and client.
Other Firms Followed
Other big corporations have followed Toyota's example, so much so that a new word has been coined in Japanese-- zaitekku, a pun on high tech, using the Japanese character, zai, meaning financial.
About one-third of the corporations listed on the Tokyo Stock Exchange now make more profits from "financial tech" than they pay to banks in interest, according to the Wako Research Institute.
Other changes away from unique Japanese-style banking practices are expected.
Hirohiko Okumura, senior economist at the Nomura Research Institute, predicted that deregulation will change Japanese banking practice from the traditional relationships with customers based on long-term considerations of good will to more straightforward, businesslike transactions.
Changing "the rules of the game" will create a Japanese financial market "more like overseas financial institutions are accustomed to dealing in," he said.
Over-staffed banks, which are highly unprofitable by American standards, already are starting to trim expenses to get in shape for the expected future of more intense competition.
They have cut expenses in relation to the size of their deposits by 39% in seven years, Okumura said. They also cut personnel by 12% even while more than doubling their deposits, he added.
Two waves of computerization already have been carried out and a third wave has begun. It will focus on home banking and a worldwide information network.
Much of the trimming, however, remains to be accomplished. For example, an American banker said one Japanese bank, which he refused to identify, still maintains 1,500 automobiles for use of its executives. "One-tenth of its employees are chauffeurs," he said.
In a recent year, Morgan Guaranty earned $1.06 per $100 of loans outstanding, where Sumitomo, Japan's most profitable bank, earned only 36 cents for every $100 of loans outstanding.
With no competition on interest rates allowed, banks concentrated on pushing loans to industries. Loans to individuals were discouraged.
Reluctant to Borrow
For one thing, the average Japanese is reluctant to go into debt. And for another, banks judged that their efforts were better spent getting a small number of corporate clients than inducing a large number of individuals to go into debt.
"The Japanese banks are excellent when it comes to corporate finance," said Susan Ho, vice president in charge of private banking at the Bank of America's Tokyo branch.
"The moment a new instrument is out on the market, you can be sure a Japanese bank will offer it, too. In terms of individual banking, however, they have nothing."
Although there are signs that the present pinch is forcing the big 13 city banks to take notice of the growing individual market, plenty of cultural and bureaucratic hurdles stand in their way.
"We never phone the employer of a prospective borrower," explained Sanwa's Shikatani. "Maybe you do that sort of thing in your country, but not here in Japan."
Not only are banks unable to check on the truthfulness of a prospective borrower's statements, but they also lack the option of going to a central credit-rating bureau. In Japan, there are three such organizations and they do not exchange information.
Sanwa Bank, which in 1977 became the first bank to offer unsecured personal loans, last year still had managed to make only 0.63% of its loans to individuals, excluding housing loans. By comparison, about 22% of Security Pacific National Bank's loans went to consumers in the form of financing installment purchases through credit cards.
Credit Cards Different
Most credit cards in Japan do not actually offer credit in the sense that American credit cards do.
Although Japanese consumers have taken to the convenience of shopping with plastic, the greatest convenience offered by Japanese credit cards is allowing the consumer to shop without carrying around a lot of cash. They allow consumers to defer payment on purchases only until the end of the month.
Even if the cards did allow deferred payment privileges like American cards, it is not clear whether Japanese consumers would go for the idea.
"People over 40 still believe they should save first and spend later," said Fumiaki Shikatani, a spokesman at Sanwa Bank.
Although Shikatani stressed that the "under-30 group is just the opposite," so far the average Japanese is so reluctant to go into debt that 43.7% of them have taken out no loans whatsoever and the majority of the remainder only have mortgages.
Japanese banks are actively offering housing loans--even to the point of raiding each other's mortgage clients by going to local government offices, looking up the dates when houses were built, and figuring out what interest the owners are paying on their loans. If the owner still is paying a high rate of interest on an old loan, he will get a phone call offering a lower one.
But a recession in the housing industry and the easy availability of cheap, state-subsidized credit for prospective homeowners effectively prevent the banks from increasing their share of loans in the housing field.
Worse still, the low standard and high prices of all but the most expensive housing in Japan conspire to keep Japanese families out of debt. Many Japanese refer to their overpriced and undersized homes as "rabbit hutches."
Search for Borrowers
Shikatani said Sanwa is looking to "high-ranking firms not listed on the stock market" as the kind of borrowers Sanwa wants in the future.
But if the 13 city banks target small and medium-sized companies for loans, they will encroach on the territory of more than 1,000 much smaller lending institutions such as credit unions, mutual banks and regional banks.
When Sumitomo announced plans Feb. 15 to take over the ailing Heiwa Mutual Bank, the mass-circulation Mainichi newspaper reported, "The incident bears the heavy stamp of interest-rate deregulation."
Predicting "shrinking margins, just as in the United States after deregulation," keen competition, and a consolidation within the industry, the Mainichi concluded that "the Sumitomo-Heiwa merger has set an example for others to follow."