The year ahead - Japan

Japan, Inc., Jan, 2003

Should the government buy common stock in Japan's major banks and make its voice heard when the banks make key management decisions? If it converted preferred shares it already holds, the government would have an average holding of 25 percent in every major bank but Tokyo-Mitsubishi, which has repaid all the public funds it borrowed, according to the Nihon Keizai Shim bun, Japan's leading economic newspaper. With further injections, the paper posits, the government could end up owning one-third of the outstanding shares in some of the banks, giving it veto power in strategic decisions like mergers and acquisitions in shareholders meetings.

But some economists doubt that the government is likely to take control of the nation's banks. "They would probably avoid that as much as they can," says Peter Morgan, chief economist at HSBC Securities (Japan). "They may well buy more shares, but they would probably stop short of nationalization unless it's absolutely necessary."

First of all, the government would have to find a new management team capable of running the nationalized banks. "Where are the new management teams going to come from?" Morgan asks. "Where are all these bankers who have different ways of doing things? There is no other management team available to take them over. It's slightly pointless to nationalize the banks."

Of course, the government could sell the nationalized banks to foreigners, like it did with the former Long Term Credit Bank, bought by US private equity fund Ripplewood Holdings and turned into Shinsei Bank. But Morgan says that option is politically unacceptable.''

"The government really didn't like that experience," he says. "Shinsei Bank is now more of a Western style bank; it doesn't play by the Japanese rules. The government, to a certain extent, regrets that and doesn't really want to repeat that experience."

BUYOUTS -- THE THIRD WAVE

As the government debates what to do with the banks, private equity funds are quietly debating their next moves. Last year, "buyouts" was a buzzword in Japan, but many in the industry say that the hype preceded the action. This year will be a more active one for buyout funds looking to invest in distressed assets or noncore assets of troubled companies, sources say.

One reason for the activity is that several Japanese funds are up and running. Traditionally, these buyout funds have been foreign players with names like Ripplewood and Lonestar. Early entrants have been in Japan since the late 1990s, buying up troubled golf courses and buildings built in the bubble period of the late 1980s and early 1990s. Industry sources say Lonestar, Cerberus, and Goldman Sachs, among others, have already bought up a major portion of the real estate used as collateral during the bubble era.

Phase two of buyout funds began at the turn of the century as the government sold two troubled banks -- Shinsei and Kansai Sawayaka Bank -- to foreign buyout funds.

In 2003, the industry is poised to accelerate purchases as the government shows signs of getting serious about its nonperforming-loan problem. And this time around, Japanese funds will be part of the picture. For example, Tokyo-based Phoenix Capital has launched two funds this year to "revitalize" Japanese businesses, including a [yen]47 billion "Nippon Revival Fund," financed by domestic banks such as Tokyo-Mitsubishi, Sumitomo Mitsui, and several regional banks. In the meantime, Mizuho Securities and NTT DATA, in collaboration with Bain & Copmany Japan, established Japan Industrial Partners Inc in November, to support Japan's "business reorganization, restructuring and reform." Other Japanese funds are emerging as well, although they tend to be smaller than the foreign funds -- domestic funds tend to be tens of billions of yen, while foreign funds are a full digit larger. As the market becomes more crowded, there's a good chance that some of the funds in play now won't be around to ring in 2004.