In 2014, the International Bankers Association of Japan (IBA Japan) celebrates its 30th anniversary. For thirty years IBA Japan has represented the international banking community in Japan. Starting with 12 founding members in 1984 there are now just under 60 banking members from 22 countries and over 25 associate member firms.
In a speech at a meeting commemorating the anniversary, Haruhiko Kuroda, Governor of the Bank of Japan, mentioned the significant role foreign financial institutions played in Japan’s economy. However, relations between the banks and their host country were never free of tensions and compared to other world financial centres their influence is smaller than many believe – and in decline.
Foreign banks in Japan have a varied past. Their beginnings were rather modest and opaque. As Norio Tamaki wrote in his book on the history of Japanese banking: “It is very difficult for the banking historian whose only source of information is the advertisements in the local newspapers to trace the business of western banks in Yokohama before 1868 [the year of the Meiji restoration].”
Isezakicho Dori, Yokohama, Japan, 20th century.
According to one source I mentioned in my book on The Japanese Foreign Exchange Market, the first foreign bank in Japan was the British Hong Kong and Shanghai Bank which came to Yokohama in 1865 opening a branch one year later with other activities in Kobe, Nagasaki and Tokyo (1924) following. Tamaki referring to another source dates the activities of the first foreign banks to early 1863, when the Central Bank of Western India and the Chartered Mercantile Bank of India, London and China – which had been acquired by the Hong Kong and Shanghai Bank in 1859 – arrived in Yokohama.
Other financial institutions followed, for example
- the Commercial Bank of India in September 1863,
- the Bank of Hindustan, China and Japan in 1864,
- the Oriental Bank Corporation in 1864,
- and the French Comptoir d’Escompte de Paris in 1867.
Chartered Bank established its Yokohama office in 1880 focusing on silk trade. It was only in 1949 that the Ministry of Finance granted it a business license to conduct banking operations.
Sailing ships in the Japanese port of Yokohama, circa 1865.
Why Yokohama? To quote the Encyclopedia Britannica: “Yokohama was only a small fishing village when in 1854 Matthew C. Perry arrived with his fleet of U.S. naval warships at the harbour of the neighbouring town of Kanagawa. Five years later Kanagawa was designated Japan’s first port under the Harris Treaty (1858) where foreigners could reside and trade. However, Kanagawa was an important post station on the Tōkaidō, Japan’s main east-west road at the time, and the Japanese government did not want foreigners to have access to it. Instead, it established the port at Yokohama, which was isolated from the highway and had a deepwater harbour superior to that at Kanagawa.”
Finance followed trade. Besides western bankers “did not immediately see any profitable business in Japan” as Norio Tamaki noted. In these early years, activities were limited to accepting deposits, granting advances, and, above all, to foreign exchange services, which domestic money exchange houses (ryogae) were unable to offer as they lacked the worldwide net of branches, agencies and correspondents of Western banks.
The first US bank which established a branch in Japan was the International Banking Corporation (IBC) which opened in October 1902 in Yokohama. In 1915, IBC was acquired by Citibank which much later became one of the biggest and most active foreign banks in Japan.
Activities were restricted to business with foreigners. Tamaki found no evidence for business connections with Japanese merchants in those early years. He wrote: “As far as Japanese financial arrangements with the foreigners in Yokohama were concerned, the bakufu [government] ordered that they would be done exclusively through Mitsui. For western bankers, there would not be any chance of contacting Japanese merchants directly, particularly concerning their domestic demands.”
Conditions improved, but even these days the closeness of Japan’s market for foreign banks is still an issue. Tokyo, meanwhile a global financial centre besides New York and London, is still perceived to be a difficult market in which to do business. In 2012, the Financial Times quoted a foreign fund manager saying that “Japan is not open; it doesn’t encourage people to come here. New York and London are genuine multicultural melting pots. Tokyo is not.”
View of Shinjuku from the Tokyo Government Building.
IBA Japan was established to represent the needs of the foreign banking community in Japan. As it wrote in its historic overview, however, in the early days it did not have an explicit advocacy role: “There was a concern amongst members that taking a collective approach would weaken individual firms’ relationships with the Ministry of Finance, who were the regulators at the time, and that the Association’s leadership would be exposed to unacceptable levels of risk.”
Today, the aims of IBA Japan are to act as an intermediary between foreign market participants and Japanese authorities as well as other – national and international – stakeholders, and to offer a forum for information exchange, communication and networking. But its members include a growing line of foreign banks that in recent years have been shrinking their operations in the world’s third-largest economy.
The number of international financial institutions in Japan had reached its peak during the financial liberalization that became known as the ‘Japanese Big Bang’ in the 1990s. In 1997, there were 97 foreign banks including 18 representative offices. But, as IBA Japan wrote, “many of these global banks subsequently merged which reduced the number of foreign institutions in Japan. Also a number of firms closed their representative offices.”
Aerial view of Tokyo Station Marunouchi side in the late afternoon.
The Financial Times observed that, in parts, the decline reflects a broader trend among western financial institutions to cut headcount, shrink overseas operations and focus resources on markets where they have competitive strengths. On the other side, there are also western institutions which increased their Japan business in recent years. The following table shows the resulting shifts in the Top Ten foreign banks ranked by assets between 2010 and 2014 (source: KPMG).
But, in particular in Japan, size does not tell much about profitability. Some banks at the top of the list experience declining earnings, and the list of the Top Ten foreign banks ranked by ordinary earnings (Table 2) indicates that there are smaller competitors which are more successful in their core business.
Thus, the overall impression is a mixed one. However, a glance at the foreign bank presence in other world financial centres indicates that indeed there are massive problems made in Japan. The “just under 60” foreign banks of IBA Japan are in strong contrast to the 120 foreign banks in Singapore, 191 members of the Association of Foreign Banks (AFB) in the UK or the more than 200 members of the Association of Foreign Banks in Germany.
In 2012, Paul Hunter, secretary general of IBA Japan, was quoted saying: “To be a global bank you have to be in this country. You can’t tell your clients you are a global bank and not be in Japan.”
Actually, a growing number of financial institutions seems exactly to be doing this.
Source: Bank of Japan
IBA Japan Members:
As of September 1, 2014 (Details on http://www.ibajapan.org/who-we-are/our-members)
Financial groups* (15)
* with commercial banking and securities entities in Japan
Bank of America Merrill Lynch (U.S.A)
Bank of New York Mellon Group (U.S.A)
Barclays Bank Group (U.K.)
BNP Paribas (France)
CréditAgricole Group (France)
Credit Suisse Group (Switzerland)
Deutsche Bank Group (Germany)
HSBC Group Japan (U.K.)
Royal Bank of Canada (Canada)
State Street (U.S.A.)
The Royal Bank of Scotland (U.K.)
UBS AG (Switzerland)
Commercial banks (29)
Australia and New Zealand Banking Group Ltd. (Australia)
Banco Bilbao VizcayaArgentaria S.A. (Spain)
Banco do Brasil S.A. (Brazil)
Bangkok Bank (Thailand)
Bank of Communications (China)
Bank of India (India)
China Construction Bank (China)
CTBC Bank Co., Ltd. (Taiwan)
Commerzbank A.G. (Germany)
Commonwealth Bank of Australia (Australia)
DBS Bank Ltd. (Singapore)
DEPFA Bank plc (Ireland)
ING Bank N.V. (Netherlands)
ItaúUnibanco S.A. (Brazil)
Korea Exchange Bank (South Korea)
Metropolitan Bank and Trust Company (Philippines)
National Australia Bank Ltd. (Australia)
National Bank of Pakistan (Pakistan)
Oversea-Chinese Banking Corporation Ltd. (Singapore)
Philippine National Bank (Philippines)
Portigon AG (Germany)
PT. Bank Negara Indonesia (Persero) Tbk (Indonesia)
Standard Chartered Bank (U.K.)
State Bank of India (India)
UniCredit Bank AG (Germany)
Union de BanquesArabes et Françaises (France)
United Overseas Bank Ltd. (Singapore)
Wells Fargo Bank, N.A. (U.S.A.)
Securities firms (6)
CIBC World Markets (Japan) Inc. (Canada)
Goldman Sachs Japan Co., Ltd. (U.S.A.)
Newedge Japan Inc. (France)
Macquarie Capital Securities (Japan) Limited (Australia)
Morgan Stanley Japan Holdings Co., Ltd. (U.S.A.)
Natixis Japan Securities Co., Ltd. (France)
Representative offices (6)
Banco Santander, S.A. (Spain)
CIC Banks (France)
Euroclear Bank (Belgium)
Landesbank Baden-Württemberg (Germany)RabobankNederland (Netherlands)
Associate Members (27)
(Firms with certain characteristics operating in the areas of law, accountancy, tax, credit rating, consulting,exchanges and IT who provide services to foreign banks are able to apply for associate membership. See http://www.ibajapan.org/who-we-are/faq)
Anderson Mori &Tomotsune
CME Group Japan K.K.
DTCC Data Repository (Japan) K.K.
Ernst & Young Shin Nihon LLC
Freshfields Bruckhaus Deringer
Herbert Smith Freehills
KPMG AZSA LLC
Mazars Japan K.K.
McLagan Partners Asia, Inc
Morrison &Foerster LLP.
Mori Hamada & Matsumoto
Nishimura & Asahi
NTT DATA Corporation
PricewaterhouseCoopers Co., Ltd.
Promontory Financial Group Global Services Japan, LLC
Standard & Poor’s
Tokyo International Consulting K.K.
Towers Watson K.K.
White & Case
One of the controversial topics in the debates of Scottish independence is the currency question. The other day, the Financial Times asked several economists to consider four options available to an independent Scotland: a currency union with the UK, sterlingisation (which would be the continued use of the pound sterling but without backing of the Bank of England), establishing a new Scottish currency, and joining the euro. Not surprisingly, opinions were divided.
However, strictly speaking, the choice is not limited to these four options. Besides, there are others which deserve a closer look as well in this context.
The other day, Charles Consult on Twitter drew attention to a fascinating paper by W. Brian Arthur on Complexity Economics.
At a time of never-ending financial crises and lasting imbalances when people are becoming increasingly aware of the shortcomings of traditional economics with its focus on equilibrium as the natural state of an economy, Brian Arthur presents a different approach, a nonequilibrium view of economic processes and structures. In his paper, in acting and interacting firms, consumers, investors and other economic agents collectively create an outcome and then adjust their strategy in response to what they see they have created. The result of these adjustments is another outcome which causes them anew to make revisions – and so forth.
As a consequence, the economy is constantly in motion. It is not “something given and existing but forming from a constantly developing set of technological innovations, institutions, and arrangements that draw forth further innovations, institutions and arrangements.” In this scenario, equilibrium is the exception, not the rule. As the author notes: “For highly interconnected systems, equilibrium and closed form solutions are not the default outcomes; if they exist they require justification.”
In a recent article, Felix Salmon summarized the key points of a widely noticed speech delivered by Nobel prize-winner Joseph Stiglitz on the problems of financial innovation in general, and high-frequency trading (HFT) in particular.
Stiglitz asked Are Less Active Markets Safer and Better for the Economy? and came to the conclusion that they are. His arguments revolved around three aspects: speed, costs and social value.
In the first part of this article, the speed aspect was discussed. This second part deals with the costs and social value of HFT.
Building bridges between scientists and the public in communicating research findings is one of the most rewarding activities of bloggers and journalists. Felix Salmon is an outstanding example in this respect. In a recent article, he summarized the key points of a widely noticed speech delivered by Nobel prize-winner Joseph Stiglitz on the problems of financial innovation in general, and high-frequency trading (HFT) in particular.
Stiglitz asked Are Less Active Markets Safer and Better for the Economy? and he came to the conclusion that they are. His arguments revolved around three aspects: speed, costs and social value.
The publication of Michael Lewis’ book “Flash Boys” renewed the general interest in high frequency trading and fuelled the debate about its potential use or harm. After finishing my first compilation of comments and reviews of the book I came upon further interesting and challenging contributions which I would like to share with you.
Since many years, there is a controversy about high-frequency trading which just reached the wider public with the publication of Michael Lewis’ latest book Flash Boys. His conclusion that US stock markets are rigged by high-frequency traders rose strong emotions on both sides. With the following links and excerpts I would like to give an impression of some of the first days’ contributions and comments.
The other day, I came upon an interesting article on Vox about The Returns to Currency Speculation: Evidence from Keynes the Trader where Olivier Accominotti and David Chambers described the results of their research on currency speculation in London in the 1920s and 1930s. Looking for more, I found a preliminary unpublished paper by the same authors on the topic in the internet (which unfortunately must not be quoted). In that paper, describing the London foreign exchange market in the period under consideration the authors drew heavily on Paul Einzig’s The Theory of Forward Exchange of 1937. This is one of several rich and fascinating books Paul Einzig wrote (actually, the author himself considered it his best effort, as he mentioned in his autobiography), which, although from another century (in 1919 the telegraph had just begun to change the nature of foreign exchange dealing in London), bear many lessons, not only for historians.
Paul Einzig was born in 1897 in Braşov in Transylvania, in a “quiet little backwater, a small town at the foothills of the South Eastern Carpathians” (Einzig 1960), at a time when this Romanian region was still a part of Hungary. In 1919, after studies at the Oriental Academy of Budapest and first steps as a financial journalist in his home country, he came to London.The world Paul Einzig was set to conquer: 2nd October 1919: London Dandies attired in menswear by Beau Brummell promenade in London’s Fleet Street.
The other day, the New York Times provided us with an example of how fads and fashions can be used to draw attention to, and win acceptance for, an economic argument. In his article In Search of a Stable Electronic Currency Nobel laureate Robert Shiller proposed the introduction of an inflation-indexed unit of account similar to the Chilean unit of development or unidad de foment (UF) which is existing since the 1960s. The article is in large parts a summary of the ideas of an academic paper the author published in 1998. In short, its main argument says that recent progress in computer technology has considerably widened the possibilities of inflation indexing which would allow for a better pricing, contracting and risk management in an economy.
Are US regulators corraling their financial system with the latest financial-safety rules for foreign banks as Patrick Welter (Frankfurter Allgemeine Zeitung) and others argued or will their move eventually even pave the way for closer cooperation and a revitalization of the worldwide regime of bank supervision?