METI Will Make Takeovers by Foreign Companies Easier


METI plans to amend the Industrial Restructuring Law in order to make it easier for foreign companies to purchase Japanese companies undergoing reconstruction. Provided that the foreign firm meets criteria listed in the Law, they will then be able to takeover Japanese firms using their stock, i.e., through stock swaps. Stock swaps were approved for domestic company mergers and acquitisions in October 1999. This allowed companies to issue stock and then swap it with the target company to convert the company into a fully-owned subsidiary. However, foreign companies have so far been precluded from using stock swaps in takeovers of Japanese companies. As a result, the US government had been pressing Japan on the issue, which they considered a non-tariff barrier. The issue should be addressed through an amendment in the Commercial Code, but this could take as long as three years. As a result, METI has come to an agreement with the Ministry of Justice to amend the Industrial Restructuring Law with a "special exception". Specifically, foreign firms will be able to establish a 100%-owned Japanese subsidiary which would be used to merge the Japanese firm, and an exchange of the foreign company's HQ stock for the Japanese company stock would be allowed. However, each proposed takeover will still have to be submitted to METI for review. In addition, METI will request to the Ministry of Finance that assets of the Japanese target be valued at book values, thereby allowing corporate taxes on the transaction to be deferred.


Heretofore, such impediments to foreign takeovers have resulted in a very low level of out-in M&A activity. For example foreign direct investment in the US in 2000 was 32.4%, in the UK, 32.4%, but a mere 1.1% in Japan.

New Listings Dry Up on Japan's Emerging Markets


The number of new listings on Japan's new markets for venture companies is dropping sharply, and the total number of companies listed this year is now expected to drop under 100 for the first time in three years. The number of new listings on JASDAQ, NASDAQ Japan and the TSE Mothers has braked sharply from July to 17 companies, or one-third year-ago levels. The initial traded prices of newly listed companies has also been weak. Between January and June of this year, the average first traded price compared to the IPO price was 63% higher, but more recently it has been essentially flat.


In addition, the number of companies delisting from these markets is on the rise, because of group company consolidations and mergers.

Can Japan's New Finance Czar Heizo Takenaka Up to the Task?


As Prime Minister Koizumi reshuffled his cabinet, he has handed the hot potatoe of Japan's banking mess to Heizo Takenaka, who will now have two ministerial portfolios–head of the Economic and the Fiscal Advisory Councils. After having expectations raised by the BOJ's unconventional move to purchase cross-held stocks directly from the banks, the Koizumi Administration and the Japanese government is under tremendous pressure from within and without Japan to speed up the pace of reforms and to get Japan's economy back on a credible recovery track. As Mr. Takenaka is disliked and even despised by many of the old guard in the LDP, many wonder whether he has the political muscle or the authority to push through drastic banking reform measures. The Koizumi Administration's track record is not good, as his other reformist lieutenant, Nobuteru Ishihara, has run into many brick walls in his effort to slim down Japan's public corporations, particularly the Road Corporation. As a non-politician, Mr. Takenaka is supposedly free of vested interests. His biggest obstacle could be sabatoge from within the LDP and the FSA.


Meanwhile, the move produced no cheer in the stock market, which renewed a 19-year low. The BOJ's Tankan points to an economic slowdown in the economy and the government's policy shifts as the source of uncertainty in businesses. However, this is a natural occurance, for the wrong reasons. In most countries, financial market discipline causes inefficient companies (losers) to go bankrupt. Japan however is a "losers' paradise", where inefficiencies are rewarded by bank and government coddling, loan forgiveness, zero-interest rate loans, "arranged marriages", and where necessary, reversing prior accounting rules and other laws/standards to prevent large bankruptcies.


Mr. Takenaka's "comprehensive" scenario is basically what Japan should have been doing all along, and is anything but rocket science. Basically ,it is to;


1) Conduct a more stringent assessment of the loan books so the government can get their arms around the true extent of the NPL problem


2) Move to accelerate bad loan disposals


3) Inject additional capital into "saveable" banks where necessary


4) Promote the collapse of the worst of the dud borrowers, by forcing the banks to cut them loose


5) At the same time, push through industrial and financial reform


The quid pro quo for this hardline approach would be to put the restoration of caps on savings account insurance on hold for the time being, at least until the financial system is stabilized.

Heizo Takenaka Replaces Hakuo Yanagisawa as FSA Head, Keeps His Economic Minister Post


In a surprise move that signals to the markets that Prime Minister Koizumi is serious about bank reform, bank reform hawk and Economic Minister Heizo Takenaka has replaced Hakuo Yanagisawa as head of the Financial Services Agency, the agency that is responsible for policing the nation's banks. Speculation had been rife that Mr. Yanagisawa's job as FSA minister was on the line, because of his steadfast insistence that Japan's major banks did not need additional capital infusions. Koizumi kept most other ministers in place, including Finance Minister Masajuro Shiokawa, trade minister Takeo Hiranuma and Foreign Minister Yoriko Kawaguchi. Fukuda remains chief Cabinet secretary.


Big step ahead in the bank capital infusion debate. The move represents a big step ahead in the bank capital infusion debate. The issue now moves to indirect versus indirect use of public funds to bolster bank capital. Taku Yamasaki, LDP secretary general and PM Koizumi mentor, apparently favors a supercharged RCC, which would be required to raise the prices paid for NPLs from the banks, with any secondary losses incurred by the RCC being made up for with taxpayer money. If, as the former FSA minister had been negotiating for, the banks are required to increase their loan-loss reserves as a quid pro quo for getting higher prices for their NPLs from the RCC, the end result may be the same anyway--i.e., some direct bank capital infusions may still be needed. Despite Finance Minister Masajuro Shiokawa's apparent flip-flops at the G7 finance ministers' meeting in Washington over the weekend, he is also a bank recapitalization hawk, but also favors public funds to cover RCC losses. Mr. Hayami of the Bank of Japan does not look so favorably on public funds for secondary losses for the RCC. Rather, he apparently would like to see direct capital infusions in addition to the Bank's purchase of stocks from the banks as a means of pre-empting a possible financial crisis instigated by unforeseen "shocks" ostensiby from overseas. Stay tuned for a more detailed explanation of the BOJ's views, as they plan to release a report in October. The Chairman of the Japanese Banker's Association (and representing the banks) is passive on the issue of capital infusion publicly, but against privately because it implies bank management would also be under pressure to accept responsibility for the mess.


The worst case would be a) nominal purchases of stock from the banks by the BOJ (JPY1~JPY2 trillion), b) a supercharged RCC that would raise the price it pays for bank NPLs, but c) no stringent requirement for the banks to increase their loan-loss reserves or otherwise accelerate their NPL write-offs or liquidations. All that would be gained here is more moral hazard, with the surface of the problem just being scratched, and the banks being let off the hook yet again.

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The best case (but more painful short-term) would be; a) the BOJ buys as much stock as their balance sheet would allow--hopefull much closer to the JPY8 trillion which the banks are believed needing to sell before the 2004 cutoff which stipulates that they have to keep their stock holdings below the value of their capital. b) a more stringent (realistic) recount of the banks' loan book is made, causing a substantial migration of loans from "requiring close monitoring" to "in danger of bankruptcy", which would require significantly larger loan-loss reserves. This alone may push some banks to tap out their capital and require capital infusions, c) changing the law that prevents the government from implementing mandatory capital infusions, e) requiring those banks receiving capital infusions to come out with their own 5-year restructuring plans, and f) simply shutting down the weakest of the banks and transferring their assets/credits to other banks. Japan is simply over-banked, and a significant reduction of the number of banks would remove competitive pressures to continue offering less than profitable rates. As art of the banks' restructuring plans, force them to classify their weak borrowers as "viable" and "unviable" and move to foreclose on those dud borrowers that are no longer viable. Finally, have the government stand ready to offer as much liquidity and fiscal assistance to alleviate the drag from a major financial sector consolidation on the economy.


As the "best case" scenario indicates, repairing Japan's insolvent bank sector will be a difficult and painful task. Short-term, it will hurt Japan's economy, employment, the bond market, the stock market, and the yen. But Japan must inevitably cross this valley and climb up the other side in order to remove the structural albatross that has been plauging the economy for the last decade.