A Yen for better banking

0 Comments | Insight on the News, Sept 21, 1998 | by Willis Witter

Japan's financial troubles go all the way to the teller's window, where cashing a check can take hours. The fact is, Japan's banking system is the most primitive in the industrial world.

Cashing a check should be a simple task: Find the nearest bank branch, walk in with identification, walk out with money. Yet Japanese banks have managed to turn an elementary transaction into a Saturday Night Live skit.

At first glance, the difficulties in cashing a check in Japan would seem to matter little to Americans or other foreigners. But it illustrates firsthand the point critics are eager to make: Japan, despite its reputation as an industrial giant and an invincible exporter, operates what arguably is the most primitive banking system in the industrial world. That banking system now threatens the global economy.

Efforts by Japan's banks to clean up massive debt have had the perverse effect of cutting off credit to the nation's businesses, helping to make the country's recession its worst in five decades. A weak Japan blocks rebuilding efforts by other Asian economies. And a spreading Asian recession could undermine seven years of uninterrupted growth in the United States.

How primitive is Japan's banking system? Tokyo-based consultant Mark Schumacher found out when he tried to cash a 10,000 yen ($700) check. The check was drawn on Sanwa Bank, one of Japan's biggest, and Schumacher found a Sanwa branch near his home in the suburbs. But the bank would not cash the check until Schumacher first opened a new savings account, which took the better part of an hour.

"All this hassle to cash a check" says Schumacher. "How can Japanese banks be this bad?" He got his revenge by making an initial deposit of one yen, worth a fraction of a penny.

The ordeals faced by Japanese bank customers illustrate a vast gap between the country's financial institutions and those elsewhere. Interest rates on savings accounts remain pitifully low, between 0.1 and 0.25 percent, making banks only a marginally better option than stuffing money in a mattress.

Even with the introduction of modern technology, archaic rules limit convenience. A nationwide network of automated teller machines links major banks, for example. But ATMs close promptly at 7 p.m. on weekdays, earlier on weekends, despite that the nation has virtually no violent street crime.

Few are happy with Japan's banks, whether they are individual consumers stuck with low yields or global investors. Worse still, many of the nation's top 20 banks have become so weakened by bad loans that analysts fear they could drag Japan's economy further into the abyss. With the world counting on Tokyo to recover, stock and currency markets remain jumpy, fearful that the new government of Prime Minister Keizo Obuchi will fall short in its efforts to reform the system.

"If there's only one thing you could do, it would be to fix [Japan's] banks" says Clyde Prestowitz, president of the Economic Strategy Institute in Washington. "Banks have stopped lending, and small- and medium-size companies are being pushed to the wall because they can't get any money."

Japan plans to take over the sickest institutions with government-run "bridge banks" that will lend taxpayer money to creditworthy borrowers while attempting to clean up an estimated $600 billion in bad debts. This effort is part of a larger one to pull Japan out of its current recession with massive tax cuts and payments for new public works.

"The overall economy should improve in the next six months as the money starts flowing" says Richard Jerram, an economist with ING Baring Securities in Tokyo. But on the banking side, says Jerram, "it's still up in the air whether the government plans are going to be substantial enough"

The banking mess and government reaction to the crisis have shattered the image of a super-efficient Japan. Instead, Japanese banks look more like easy pickings for foreign competitors vying for a share of an estimated $10 trillion pot of private Japanese savings -- an amount greater then the entire U.S. gross domestic product.

With the passage of Japan's so-called "Big Bang" financial reforms last spring-- Japan's initial much-ballyhooed reform that lifted all foreign-exchange controls --banks, brokerage houses and insurance companies finally may get the chance they could only dream about in the past. By 2001, Japan's financial-services industry is to be as open as the one forged by Britain in the 1980s. If so, innovation and high-paying jobs should flow to Japan, and consumers finally will get a better deal.