Bank­ing in Ja­pan

Banks in Ja­pan have chal­lenges and op­por­tu­ni­ties. The shrink­ing pop­u­la­tion is a chal­lenge, but prof­itable in­ter­na­tional busi­ness is a ma­jor op­por­tu­nity:

Banking Frontiers - - News - Mo­han@bank­ingfron­

The Ja­panese bank­ing sys­tem had faced a ma­jor cri­sis in the 1990s as sev­eral large banks failed for the first time in coun­try’s post-war his­tory. The cri­sis con­tin­ued till 2003. One way out of the sit­u­a­tion was merg­ers and amal­ga­ma­tions of the weaker banks. In fact, the merg­ers were to avert fail­ures due to a lack of cap­i­tal and one of the out­stand­ing re­sults was the con­sol­i­da­tion of 19 ma­jor banks into three mega banks.

What is unique about Ja­panese bank­ing sys­tem is the re­la­tion­ship be­tween cor­po­rates and their banks - un­til re­cently, a Ja­panese com­pany rarely changed its pri­mary lender, al­though it would con­sider bet­ter credit ar­range­ments. Banks are of­ten large share­hold­ers in pub­licly traded cor­po­ra­tions (al­though most of the banks are in the process of re­duc­ing their to­tal eq­uity hold­ings now), have close re­la­tion­ships with both lo­cal gov­ern­ments and na­tional reg­u­la­tory agen­cies and of­ten play a co­or­di­nat­ing role among their clients. In sim­ple terms, Ja­panese com­mer­cial bank­ing sys­tem is more re­la­tion­shipori­ented than trans­ac­tion-based. To a cer­tain ex­tent, this helped Ja­panese banks to able to avoid the di­rect im­pact from the global fi­nan­cial cri­sis.


Ja­panese banks of­fer reg­u­lar and time de­posits and check­ing ac­counts for busi­nesses. Cheques are ne­go­tiable in­stru­ments that are in ef­fect payable to the bearer. How­ever, most pay­ments are made by elec­tronic bank trans­fers. Per­sonal check­ing ac­counts are vir­tu­ally ab­sent in the coun­try as most in­di­vid­u­als use elec­tronic bank trans­fers to set­tle ac­counts. Cash set­tle­ment is also com­mon, and the post of­fices are used for pay­ments by what is de­scribed as ‘cash en­ve­lope’.

To­day, the Ja­panese banks are among the largest in the world. But, the sec­tor is trans­form­ing with dereg­u­la­tion play­ing a key role. The dereg­u­la­tion process had started some 20 years ago, called the ‘Ja­panese Big Bang’. One ex­am­ple of this dereg­u­la­tion was the fa­cil­ity of­fered to large bank cus­tomers to shift from bank fi­nanc­ing to cap­i­tal mar­ket fund­ing. Large Ja­panese firms are now al­most in­de­pen­dent of bank fi­nanc­ing. How­ever, in­di­vid­u­als still de­pended on banks to de­posit their money and banks pri­mar­ily fi­nanced small busi­nesses.


Ja­pan to­day has 7 broad cat­e­gories of banks, be­sides the cen­tral bank. These are: (i) The city banks com­pris­ing 12 com­mer­cial banks of the large cities, which col­lect sav­ings and use the funds to pro­vide medium-term fi­nanc­ing for busi­ness, in­dus­try and agri­cul­ture. These banks dom­i­nate busi­ness fi­nance and they are not per­mit­ted to man­age trusts or pen­sion funds. The city banks in­clude the 3 mega banks.

(ii) The re­gional banks (63 in num­ber)

which of­fer fund­ing within the pre­fec­ture

(state) in which they are lo­cated

(iii) Sav­ings and loan in­sti­tu­tions (71 in to­tal), which lend pri­mar­ily to small re­tail, whole­sale and con­struc­tion firms (iv) In­dus­trial banks (there are 3 of them), which are the In­dus­trial Bank of Ja­pan, the Long Term Credit Bank of Ja­pan and the Nip­pon Credit Bank

(v) The trust banks (7 in num­ber), which are man­dated to man­age trusts, pen­sion funds etc. They raise about half of their funds by sell­ing two to fiveyear trust cer­tifi­cates. The rest comes from de­pos­i­tors and the in­come from man­ag­ing trusts. The big­gest trust banks are Mit­subishi Trust & Bank­ing and Su­mit­omo Trust & Bank­ing.

(vi) Postal Sav­ings Bu­reau, which is a sav­ings bank op­er­ated by the postal ser­vice through its net­work of post of­fices.

(vii) Nor­inchukin Bank, a co­op­er­a­tive bank serv­ing over 6000 agri­cul­tural, fish­ing and forestry co­op­er­a­tives and owned by farm and fish­ery co­op­er­a­tives em­ploy­ees


There are 198 banks in Ja­pan. The bank­ing

scene is dom­i­nated by Bank of Tokyo Mit­subishi UFJ, which came into be­ing fol­low­ing a 3-way merger dur­ing 19962006. Mit­subishi Bank was founded in 1880 by a for­mer samu­rai, Iwasaki Yataro, and was a core mem­ber of the Mit­subishi Group of com­pa­nies. It merged with the Bank of Tokyo in 1996 to form the Bank of Tokyo-Mit­subishi, which at that point was the world’s largest bank. The Bank of Tokyo had his­tor­i­cally fo­cused on for­eign ex­change busi­ness since its foun­da­tion as the Yoko­hama Specie Bank in 1880. Later, in 2006, the Bank of Tokyo-Mit­subishi merged with UFJ Bank to cre­ate the present be­he­moth. The bank em­ploys 140,000 staff and serves 12 mil­lion cus­tomers. It is present in 1200 lo­ca­tions in some 50 coun­tries.

The sec­ond top bank in the coun­try is Ja­pan Post Bank, which came into be­ing in 2006. The bank pro­vides var­i­ous bank­ing prod­ucts and ser­vices to re­tail and cor­po­rate clients. It em­ploys around 13,000 in­di­vid­u­als and op­er­ates through 234 branches and 23,879 post of­fices.

The third po­si­tion goes to Mizuho Fi­nan­cial Group, which pro­vides bank­ing and fi­nan­cial ser­vices in Ja­pan, the Amer­i­cas, Europe, and Asia/Ocea­nia. It op­er­ates through var­i­ous busi­ness seg­ments, in­clud­ing re­tail and busi­ness and has a work­force of 60,000 em­ploy­ees.

The other top banks are Su­mit­omo Mit­sui Fi­nan­cial Group, Nor­inchukin Bank, Res­ona Hold­ings, Con­cor­dia Fi­nan­cial Group, Fukuoka Fi­nan­cial Group, Chiba Bank and Hokuhoku Fi­nan­cial Group.


One of the ma­jor chal­lenges that the bank­ing sec­tor in the coun­try is fac­ing to­day is the strug­gle that some of the re­gional banks are wag­ing to stay in busi­ness. The coun­try’s pop­u­la­tion is shrink­ing, the busi­ness of lend­ing is suf­fer­ing and there is the over­all ques­tion of vi­a­bil­ity. Tra­di­tion­ally, re­gional banks had fo­cused on lend­ing but now there is shrink­age of busi­nesses to whom they could lend. The Fi­nan­cial Ser­vices Agency had said dur­ing the year end­ing March 2017 more than half of the re­gional banks lost money on their core busi­ness - lend­ing and fee. Over time, the de­plet­ing in­come could prompt some of the re­gional banks to look at merg­ers be­cause they now need to ex­pand their reach out­side their lo­cal ar­eas and in or­der to do that they need fi­nan­cial strength. This may mean a con­sol­i­da­tion in the re­gional bank­ing sec­tor, which has re­mained largely un­changed even as big city banks have con­tracted from 21 to 3.


The bank­ing sec­tor in the coun­try as a whole is very tech savvy. The banks have made ma­jor strides in dig­i­ti­za­tion to the ex­tent that the cen­tral bank is pro­mot­ing a pro­gram to move to­wards a dig­i­tal cur­rency built on blockchain tech­nol­ogy. Called the J Coin, the sys­tem is un­der de­vel­op­ment by a group of Ja­panese banks and is set for launch in time for the 2020 Tokyo Olympics. To­day, some 70% of all fi­nan­cial trans­ac­tions in Ja­pan use cash. The idea for J Coin is that it would sit along­side the Ja­panese yen, ex­changed at a one-toone rate, and be of­fered as a free ser­vice. In re­turn, the banks that op­er­ate it would get de­tailed data on how peo­ple use it.


All three mega banks are al­ready in ad­vanced stages of dig­i­tiz­ing their pro­cesses and op­er­a­tions. They have been mak­ing use of AI, ro­bots and ma­chine learn­ing to stream­line their op­er­a­tions. The Mizuho group has a ro­bot that can as­sist cus­tomers who visit branches with queries about as­set man­age­ment and other ser­vices. Su­mit­omo Mit­sui Fi­nan­cial Group has in­tro­duced pa­per­less op­er­a­tions at some of its bank branches. Cus­tomers can use touch­screen sty­luses and elec­tronic sig­na­tures to com­plete pro­ce­dures for trans­fer­ring and de­posit­ing money, rather than fill­ing out pa­per doc­u­ments. Mit­subishi UFJ Fi­nan­cial Group is adopt­ing AI tech­nol­ogy more widely, and plans to op­er­ate branches in which cus­tomers can use ser­vices with­out the as­sis­tance of bank em­ploy­ees.


Ja­panese banks face chal­lenges in the shape of flat credit de­mand, mount­ing cus­tomer ex­pec­ta­tion be­cause of the high level pen­e­tra­tion of the mo­biles and bank­ing sys­tems de­vel­oped on the mo­bile, a shrink­ing work­ing-age pop­u­la­tion leading to de­cel­er­a­tion in credit de­mand and de­creas­ing de­posit base. On the other hand, they have op­por­tu­ni­ties too be­cause Ja­panese in­dus­try is grow­ing and cater­ing to global de­mands, pro­lif­er­a­tion of Ja­panese busi­nesses across the globe, and a highly prof­itable in­ter­na­tional bank­ing.

Bank of Ja­pan head­quar­ters

A to­tally dig­i­tized branch of Bank of Tokyo Mit­subishi UFJ

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