NEWS ANALYSIS : Bank Merger May Lend Japan Aura of Headquarters Nation

The announcement this week that Japan would give birth to a banking Goliath was electrifying to the nation’s debt-strapped banking community, but analysts believe its greater long-term effect may be to position Japan as the leading regional center for Asian trade.

The merger of Bank of Tokyo, Japan’s strongest foreign trade bank, and Mitsubishi Bank, a centerpiece of the Mitsubishi keiretsu, or corporate group, would create a savvy global financier with the domestic clout to promote Japan as the “headquarters economy” for Asia, according to longtime observers of the Japanese economy.

Such a move could also bolster Japan’s efforts to build a regional economic alliance that can counter what it regards as a rise of protectionist sentiment in Europe and North America, where governments are creating regional trading blocs through the European Union and the North American Free Trade Agreement.

The merger would create the world’s largest bank--probably to be called Tokyo Mitsubishi Bank--with assets of more than $814 billion. The union, which requires government approval, is expected to take place next April.

In the near term, analysts are divided over the extent to which the merger would resurrect a Japanese economy still burdened by anywhere from $450 billion to $700 billion in bad loans, depending on who is counting.

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The loans are left over from the collapse of the 1980s “bubble economy” that precipitated a dramatic fall in the value of Japanese stocks, real estate and land and slammed the brakes on the nation’s longest post-World War II expansion.

The creation of a megabank is expected to hasten a financial restructuring that has already seen the merger of several of Japan’s major banks and the bailout of others. The most prominent example was last fall’s acquisition by Mitsubishi Bank of a $2-billion controlling interest in Nippon Trust Bank.

Tom Hill, head of research at S.G. Warburg Securities (Japan) Inc., said the cleanup of problem loans would free up capital for investment overseas and slow the voracious appetite for yen that has driven the dollar to record lows. The dollar hit a new postwar low of 86.60 yen on Friday.

The double whammy of the strong yen, which raised export prices, and the domestic recession prompted Japanese manufacturers to launch a massive cost-cutting program that included modernizing factories, closing inefficient operations and shifting labor-intensive production overseas, primarily to low-wage countries in Asia.

In 1993, for the first time, Japan’s trade with Asia surpassed its trade with the United States. That year, Japanese manufacturers invested $3.7 billion in Asia, representing a third of the nation’s overseas investments, according to the Ministry of Finance.

For example, electronics company Aiwa now manufactures 80% of its audio-stereo components in Malaysia. Matsushita Electric has moved all of its air-conditioning production outside Japan.

But observers say Japan’s efforts to build a regional network in Asia have been hampered by the over-regulation of its financial markets, which have lost players and business to Hong Kong and Singapore.

The merger of two powerful banks with close ties to the Ministry of Finance could increase the pressure for greater reforms, according to Takeo Hoshi, an associate professor specializing in Japanese finance at UC San Diego.

“This bank will have more influence with Japanese bureaucrats,” he predicted.

The merger would also provide a deep-pocket source of capital for Japanese manufacturers seeking to expand into China and Southeast Asia, where double-digit growth rates are fueling an explosion in demand for everything from color televisions and airplanes to airports, according to Chalmers Johnson, president of the Japan Policy Research Institute in Santa Monica.

He said Japanese banks are able to tie up large chunks of capital in projects that don’t provide an immediate return because they are not beholden to powerful institutional investors. Alicia Ogawa, director of equity research at Salomon Bros. Asia Ltd. in Tokyo, believes a driving force behind the merger is pressure from the Mitsubishi keiretsu that would like to have stronger overseas services from the group’s own bank. For example, Mitsubishi Bank does not have offices in Vietnam or Thailand, where Bank of Tokyo has branches.

Ogawa said the international operations of Japanese banks fulfill a similar role to trading companies. When Japanese companies go into new countries for investment, they want someone there to “make introductions, find local funding (and) data about all kinds of things, from housing for employees to local rules and regulations,” Ogawa said. “That’s the kind of thing banks provide.”

James Abegglen, president of Gemini Consulting in Tokyo, said the creation of a powerful Japanese international bank could accelerate the move toward a yen bloc in Asia, as countries with large outstanding loans to Japan are forced to protect their foreign reserves by shifting from dollars to yen.

He quoted a recent report that the dramatic uptick in the yen had cost Indonesia an additional $3.5 billion in yen indebtedness because of the decline in value of its dollar holdings.

He said Indonesia now reportedly has more than 35% of its foreign reserves in yen.

“It’s self-defense,” Abegglen said. “If your loan positions are in yen, you have to cover them with reserves in yen.”

We may see a shift in Asia towards an increasing use of the yen as reserve currency away from the dollar.”