True, the economy is unlikely to boom. Independent economists think the government's official forecast of 2.5% real GDP growth for financial year 1996/7 is pie in the sky. Most economists would be surprised if growth much exceeded 1%. The real estate market still looks dodgy too. Analysts believe land prices still have a further 20% or 30% to fall - which will delay the recovery of the banking sector.
But Japan's financial markets will at last start to modernize. A senior official at a Japanese securities house comments: "1996 will be a benchmark year for deregulation in the capital markets in Japan."
The consequences of that deregulation will be that opportunities for foreign borrowers to issue bonds and equities in Japan will further increase and big Japanese institutions will start to buy foreign securities in large sums again. Even the stock market could be on the rise. Some analysts believe the Nikkei index, which was testing 20,000 in December (having risen from below 15,000 in July), could continue to climb as Japanese retail and foreign institutional investors increase their exposure.
What deregulation is likely? The restrictions on which foreign borrowers can issue public bonds in Japan were significantly eased from January 1. Issuers of samurai bonds (or publicly-offered Euroyen bonds) no longer have to have a BBB or better credit rating. This will open the way for lesser-rated sovereigns such as Romania, Bulgaria or eastern European cities to come to the market. Household-name companies (such as the big three US auto-makers, PepsiCo or Daimler-Benz) will also tap the Japanese retail market in greater numbers in 1996. Expect also more Eurobonds from Japanese companies when the 90-day seasoning period for such issues is reduced to 40 days (in line with the US) sometime during this year.
Potentially even more significant is a complete overhaul of the Japanese government bond (JGB) market. JGBs have missed out on the modernization that most other government bond markets, particularly in Europe, have implemented during this decade. Settlement is slow, no true repo market exists, one benchmark bond dominates trading (there are dozens of small illiquid off-the-run issues), and the yield curve is patchy - the government does not issue five-year paper, for example. The ministry of finance (MoF) is said to be looking at sweeping reforms. It probably has no choice. Japan's budget deficit will reach 7.7% of GDP next year: it is increasing by more than ¥20 trillion ($200 billion) annually.
The compartmentalized nature of Japanese finance (with banks, securities houses and trust banks separated) will begin to crumble this year too. A recent proposal to allow the creation of financial holding companies is likely to become law soon. It will allow banks to own securities houses and vice versa. Until now, this has been permitted only in exceptional circumstances. It will also make bank mergers easier. Now, when a major bank takes over a smaller institution, the two have to merge into one entity. The acquirer is forced to raise the salaries of the acquired staff to the level of the bigger bank. In future, the acquired institution can become a subsidiary, retaining its identity - and cost structure.
For these and other reasons, more banks will merge in 1996. The trust banks, particularly Yasuda Trust, look vulnerable. Some have (publicly-admitted) non-performing debt equal to more than 15% of assets. One or two will probably be bought by city banks. The top city banks, Sanwa, Sumitomo and Fuji, will also look for merger partners to compete against the newly-created giant Bank of Tokyo-Mitsubishi (to give it its clumsy official English name). A shock jumbo merger is not impossible either. The most extreme rumour in Tokyo links Fuji Bank, Yasuda Trust and Long-Term Credit Bank. Smaller securities houses will also be bought up. Below the big four (Nomura, Daiwa, Nikko and Yamaichi), few brokers make money. Most are connected to big commercial banks, which will try to take them over once the holding company law is passed.
Longer term, the biggest shift is the coming revolution in the pension fund industry. Japan's large, but backward, life companies and trust banks (which until five years ago had a monopoly of managing pension money) are losing ground to new asset management firms. These now run ¥4 trillion of Japan's ¥38 trillion of private-sector pensions. This year, when the life companies and trust banks lower their guaranteed annual return from 4.5% to 2.5%, money will flood into the asset management companies. The pension fund trustee at one of Japan's big trading companies told Euromoney he now has 10% of his pension fund placed with these firms (up from zero three years ago): he expects the percentage to grow to 40% within a few years. Even the public Pension and Welfare Corporation recently appointed four foreign asset management firms.
Why this is significant is that the asset management companies are much more sophisticated in their investing strategies. The traditional pension fund managers have only about 6% of their assets in foreign bonds (and almost nothing in foreign equities), 60% of their money is tucked away in low-yielding JGBs and as much as 15% is in cash. As pension money shifts towards the more adventurous fund managers, expect to see Japanese capital once again flowing into foreign bond and equity markets.
Finally, don't rule out really radical change in Japan this year. Japan has been a slow-moving society for 50 years. But signs are this is changing. Fundamental values - religion, Japan's role in the world, employment practices - are being challenged. Moving the capital out of Tokyo is being seriously considered, for example. Euromoney's long-shot prediction for 1996? That the MoF will be split up. Politicians will finally recognize that the ministry was responsible for the economic disaster of the past five years and that it is too powerful and all-encompassing to allow a free-market economy to develop. It will be divided into: the ministry of economics, government budget office, banking supervisory commission, securities and exchange commission, and tax agency - all independent and all based outside Tokyo.