MW-85 -- A Green Light in Japan?

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J@pan Inc Magazine Presents:
M O N E Y W A T C H
Weekly Financial Commentary from Tokyo
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Issue No. 85
Tuesday, July 20, 2004
Tokyo

CONTENTS
@@ VIEWPOINT: A Green Light in Japan?

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@@ VIEWPOINT: A Green Light in Japan?

I was concerned at the beginning of last week that there was not a great
deal to talk about for this week's MW. The equity markets globally
have been quite stable, the Japanese markets have been maintaining their
range and the fixed income markets appear to be normalizing in a
reasonably steady fashion.

But suddenly UFJ and Tokyo Mitsubishi Bank (BOTM) came out with what
I think will be perceived as a watershed transaction.

From a macro perspective, this is quite remarkable, as it appears that
the FSA has had very little to do with engineering it. It's
too early to say conclusively that that is the case, but I have seen
nothing to suggest that the FSA has strong-armed anyone. There will be
a few revealing factors in the weeks to come -- most notably the price
paid by BOTM for UFJ. If the price is high, we can surmise the FSA is
hovering in the background, but if that's not the case, real economics
forces appear to be beginning to drive the Japanese banking sector.

To be clear, if the FSA has engineered this, then it is busines-as-
usual. That would not spell the end of the bull view -- but it would
create some serious soul-searching over the outlook.

If, however, this transaction is driven by economics (which I believe
to be the case), it will serve to reinforce the positive view of
Japan's future. The shareholders of UFJ should get a very low price
for their shares, many of UFJ's biggest lenders should be cut loose
(Daiei in particular) and BOTM should "take over" as opposed to
"merge" with UFJ.

The transaction viewed from the other side is equally encouraging:
This takeover will create the fourth biggest securities company in
Japan. It will be a serious force in the trust banking business and
will have significant scale in the asset management business. It
will be a truly national banking network for the retail client, not
to mention the biggest bank in the world in terms of assets. The final
point here is really not important; BOTM can see that by stripping
bad assets (which will probably be done before the merger) and
consolidating the businesses they will attain critical size to compete
with the top four of each sector they are involved in. This is a
commanding position driven not by the desire to be the biggest, but by
the need to grow the business and generate profits.

Whether we like it or not, Japanese banks have traditionally controlled
the economy in Japan. But this transaction will break some serious
taboos -- including the banks' traditional control over their client
companies. This will now be a green light for others to pursue ideas
that were previously thought "unacceptable," however economically
logical.

Regardless of what the press release says, this is nothing less than
a takeover that crosses the old kieretsu lines. Hopefully the equity-
holders of UFJ will be bought out at economic value, rather than at
a value the FSA thinks is politically expedient. Other managements
will be emboldened to think for themselves rather than worrying about
what the bank thinks or fussing about precedents in the market.

It would be remarkable if the Mitsubishi kieretsu could see the
ramifications of this transaction for themselves: Toyota eventually
buying Mitsubishi Motors. But we must wait for the final result of this
takeover before speculating.

-- John Charles-Decourcy

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STAFF
Written by John Charles-Decourcy (jcd@japaninc.com)

Edited by J@pan Inc staff (editors@japaninc.com)

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