November 26, 2003

Psst. Over Japan.

Dear Reader, The technical problems of the last two weeks and the traveling schedule have conspired to make me a very bad blogger. I'm afraid it won't get a whole lot better until I'm back in Paris full time in December. But between now and then I hope to post at least once a day, even if it's just correspondence and field reports from my friends and contacts around the world. Today, I'm passing on a letter from my old high-school debating partner, Jason Kelly. Jason has written several books on the mutual fund industry. But he's always been fascinated by Japan. And he's lived there about as long as I've lived in France. He's got some insightful comments on the banking industry. If you want to find out more about him, go to Dan, Good work on the latest SI email. I was especially amused to know that it was composed in and sent from Estes. Your comments comparing Estes to Paris were funny. I'll be back on our home turf from December 22nd to January 11th. I wish our visits had overlapped. I'm glad you had a good visit home and hope that the elk bugles recharged you. I have a small contribution to make in my informal capacity as your man in Japan. There's been a lot of talk about Japan finally reforming itself under Koizumi. Specifically, the House Of Yen needs to get rid of the old guard and get some lean, mean businesses back at the forefront of the economy, instead of tucked behind dinosaurs that are propped up with bank money and kept on life support because letting them die would be dishonorable. The talk is becoming reality these days. It's always hard to know what's truly going on here because people will say nothing that would make someone lose face. However, in the past week, something significant has transformed from its ninja secrecy of the boardroom to an unmasked truth on the street. That something is the selling of Mizuho Financial's headquarters in Tokyo. Mizuho Financial Group is Japan's (and the world's) largest commercial bank, created in September 2000 by the union of Fuji Bank, Dai-Ichi Kangyo Bank, and the Industrial Bank of Japan. The result was a financial monster with outstanding loans to some 70% of Japan's publicly traded companies. The former headquarters of the three merging banks have a combined value of between 300 billion and 400 billion yen. That's $2.8 billion to $3.7 billion. The proceeds will go toward booking loan-loss charges and disposing of bad loans, a process that most Japanese banks claim to be doing. Last May, Mizuho reported that it's still swamped by 4.8 trillion yen ($44 billion) in bad loans. Is this a sign that Japan's financial circus is finally patching the holes in the tent? I think so. The bad loans here are legendary and even the tradition-bound Japanese culture can't continue ignoring them. In the U.S., great walls of fire sweep through the economy from time to time and consume the weak and bad companies. Banks write off the loans, adjust their systems, and seek to improve the allocation of capital going forward. Not so here, at least not in the past. Here, a zombie company is propped up for decades on cash life support because it would be indecent to mention to the respected president that his company is a failure and needs to change or die. Now that enough banks have died in that process, concrete steps are being taken -- or sold, in this case -- to fix the books regardless of who gets insulted in the process. It will take a while for healthy banking to become a reality and even longer for it to be trusted. Most people have suffered through at least one busted bank. People here still horde cash at home and divide deposits among three banks and the post office banking system. Bizarre anachronisms still persist, such as the imposition of age-old banking hours on ATMs. Imagine an ATM closing. In Japan, they do. The worst tradition in banking, however, is the propping up of those zombie companies at the expense of the bank's balance sheet. With Mizuho now leading the charge to remedy that in a very public way, perhaps some zombies will finally rest in peace. Sayonara, Jason