Banking in Japan
Banks in Japan have challenges and opportunities. The shrinking population is a challenge, but profitable international business is a major opportunity:
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.
SHIFT TOWARDS RETAIL
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
THE LARGE THREE
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.
REGIONAL BANKS SHRINKING
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.
AI, ROBOTS TAKE ROOTS
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