Structural Change and Deregulation in the Japanese Financial Service Sector

Toyoo GYOHTEN (President, Institute for International Monetary Affairs)

Japanese Financial Institutions Cannot Compete Globally

For the last few years there has been a trend towards globalization and mega-competition in the economy in general and in the financial sector in particular. This may well be an irreversible movement, where financial institutions tend to become mega-sized, diversified, and multi-national due to the IT revolution and globalization.

It is doubtful, however, whether Japanese financial institutions will be able to compete as full players in this environment. They face a number of problems, particularly the difficulty of using English for daily business in Japan. Another problem is human resource management, including the need to reform traditional personnel systems and to completely deregulate the labor market. Also, the salary system must change.

The question is whether Japanese financial institutions can change themselves in an appropriate way. After all, Japanese financial institutions are restricted in terms of the options they have available. So it is unclear if they can participate in mega-competition in the financial service market.

However, Japan also enjoys some advantages. For example, Japan is the second largest domestic market after the United States. Furthermore, there is a tremendous amount of financial capital accumulation in the domestic market and this is a great plus for Japanese institutions in general.

Given these conditions, I think there are two key points regarding the Japanese financial service industry. First, it should adopt more complete risk management, and second, decide where to make money. Top American and European banks have advantages in certain business areas and focus their resources for service development and sales promotion fully in those areas. Japanese banks should do the same; it is as simple as that.

Fundamental Changes Will Occur In the Next Five Years

It is certain that the financial service industry will undergo fundamental changes in the near future. In Japan, we still tend to think in terms of reorganizing existing financial institutions, which are trying to survive, rather than attempting to strengthen their operations for global competition. It seems very difficult for Japanese banks to regain international competitiveness as there is a widening gap between Japanese and foreign banks in terms of capital, human resources, and brand names. Particularly, it is almost impossible for Japanese banks to compete with their foreign counterparts in the investment banking sector.

In fact, as outsiders are entering the industry things are changing more drastically than ever. A good example is Ito Yokado, which is moving from the retail sector into the financial service industry. As a result of the IT revolution the financial services system can now be divided into various segments. For example, Ito Yokado will be a clearing bank and not a regular bank which tries to collect deposits. A similar trend will be observed in Japan and overseas for other financial services such as asset money management.

Sooner or later mobile phones will become a universal tool combining the functions of TV and PC and phone, and then everyone will be in effect carrying a "mobile bank." This development will change the nature of the financial service industry completely, and I believe it is bound to happen in the next five years.

Introduction of New Technology Is Vitally Important

There is no doubt that the main characteristic of the IT revolution is speed. Once others control technologies or markets it is almost impossible to redress the balance. In the past, decreasing returns tended to limit the size of business activity, but not anymore. On the contrary, increasing returns will set in, and winners will remain winners and losers may never be able to come back.

In this kind of environment, we need revolutionary technology to reverse a current trend and win a losing game. The best we can do in the current situation is to introduce advanced technologies to develop a stronger and more competitive financial industry, just as we did to develop a formidable manufacturing industry in Japan in the past.

For this purpose, we need private efforts to restructure corporate organizations, management practices, and business culture, as well as public efforts to eliminate unnecessary rules, regulations, and guidance by the government.