Mitsubishi Tokyo, UFJ May Set Merger Plan This Week

Reviewed by Hitoshi URABE

Article:
"Mitsubishi Tokyo, UFJ May Set Merger Plan This Week"
Bloomberg
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Comments:

One of the most closely watched candidate in the last Sunday's Upper House election was Mr Takenaka, who had already served as the Minister in Charge of Economic and Fiscal Policy, and then with the added responsibility as the Minister in Charge of Financial Affairs, for a total of three years in the Koizumi cabinet since it was formed. Initially, Mr Takenaka's background as an economics scholar was expected to play a part in revitalizing Japan's economy which at the time still was stagnant. But he became a stronger figure after being assigned the task of reforming Japan's financial system, exhibiting a tough stance toward financial institutions by demanding them to rid of bad assets and perform their roles as financial intermediaries in supporting the economy to regain health.

Japan adopts a parliamentary cabinet system, and as such, the Ministers are normally chosen from the members of the parliament. The Constitution stipulates that the Prime Minister must be a parliament member and requires more than half of all the Ministers to be chosen from diet members. There are cases where certain expertise is deemed to be required when someone from outside the diet is nominated, but as such the Minister so chosen is expected to simply exercise his/her skills rather than debate and formulate the policies for the land. Mr Takenaka, thus in order to acquire more authority in his policy pursuits, ran for the election and won, gathering more votes than any one else in the ruling LDP. As Mr Takenaka has been reinforced with the additional power to wield, some anticipate he is set to vigorously proceed with structural reform supporting Mr Koizumi.

Although the news of the possible merger of MTFG (Mitsubishi-Tokyo Financial Group) and the UFJ Group was truly significant, it was not received by astonishment. It has been rumored for a while that UFJ was having problems in cleaning up its assets, and accused of bad management. The bank had to post a huge loss for the last fiscal year after the banking regulators forced it to increase provisions against problem loans. In fact, the regulators are still considering whether to seek criminal charges against the bank.

On the other hand, MTFG, although the third largest in terms of assets among Japan's banks, has been considered to be the best managed, in terms of asset quality and profitability. It is the only major bank without government money supporting its capital base.

The proposed merger does make sense on first glance. Adding up the numbers indicates the combined operation to become the world's largest bank in terms of assets, superseding the currently largest Citigroup, which by itself would be a large selling point to many potential customers. MTFG's strong relations with large corporations and extensive international operations could fit comfortably with the UFJ Group's strength in consumer and small to medium-sized enterprise loan business. In addition, where the domestic branch offices of MTFG is heavily concentrated in the metropolitan Tokyo area, UFJ has a broad network in Osaka and Nagoya areas, the second and third industrial regions in Japan - which is in fact obvious as UFJ is the offspring of the merger of two large banks used to be based one in Osaka and the other in Nagoya.

The concern would be, then, in the gap of the qualities of the two institutions. Understandably the people at MTFG have made only cautious remarks on the real possibility of the merger beyond that they are to seriously consider it. Critics observe that the success of the merger, if it were to go forward, would rely on to what extent UFJ could be cleansed before amalgamation. Analysts at rating agencies have been reported to comment that the proposed merger may not be considered favorably for the MTFG in the short-run.

Asked about the possible merger, Mr Takenaka did not go into any specifics and said only in a general tone that it could help improve the Japanese economy by improving managements of banks. He did not indicate that there had been any involvement by the government on the proposed merger. It is possible, however, that his strengthened stance due to becoming a lawmaker himself, and that with a large public support, had affected the decision of the UFJ executives.