Amidst all their other problems, just how well prepared are Japanese financial institutions for the millennium computer bug? After more than a year of debate and the odd testy exchange between banking officials and information officers across the Pacific some real evidence could soon be at hand.
If the Tokyo fixed-interest markets open at all on December 21 it will be at least a partial vindication of Japanese bankers' and regulators' confidence in the face of mounting criticism from counterparts in the US.
On Sunday December 20, Tokyo's BoJ-Net, which clears 90% of Japan's settlements, will move its clock forward to December 28 1999 and conduct a few hours of simulated trading, it will then march them forward again to January 4 2000, Japan's first business day of the new millennium. The tests will be linked with similar ones by the Tokyo Stock Exchange, and the domestic funds-transfer system operated by Zenginkyo, the Japanese bankers' federation.
Eschewing the beta tests adopted in other markets, the Japanese tests will use BoJ-Net and its members' own equipment and software in its simulation. That means there could be mayhem the following Monday if the Japanese confidence is not justified and the experiments cause damage to the underlying system. However it also enhances the authenticity of the tests as a guide to what will happen as the clocks turn over on the real Y2K (year 2000).
Concern about Japanese banks' and regulators' understanding of the potential problems of Y2K in the US and among foreign bankers in Tokyo started with the initial reluctance of the Japanese even to discuss the problem.
It was exacerbated by claims that Y2K was a non-issue because the Japanese use a date system based on the years the current emperor had been on the throne. The argument went that not only did this mean that the year 2000 was less significant in Japan than in the rest of world but also that since the death of Emperor Hirohito in 1989 the Japanese had had recent experience of this kind of change-of-era issue.
Foreign observers felt such comments only confirmed their concerns. Falling back on a "Japan is different" argument only seemed to underline the country's failure to realize the significance of global linkages. Worse still those who bothered to probe the argument further found that most software generating an emperor reign-year number on Japanese documents in fact relied on a simple macro that subtracted 1989 from the current western year number.
Foreign concern reached a peak with a report from Moody's that found that 49 Japanese banks planned to spend just $249 million on year 2000 issues, or roughly the budget for one medium-size US commercial bank. "It seems reasonable to ask 'is this enough'", wrote Moody's. "Japanese banks may simply be too distracted by more pressing matters - massive amounts of bad loans, an economy in recession, etc - to focus on arcane computer matters."
"The bulk of [Japanese] financial transactions are done electronically," says Chua Tockling, senior vice-president of enterprise management software company Computer Associates (CA), with responsibility for Japan and the Asean countries. "All it takes is one bank or a handful of non-compliant banks for there to be a problem. It doesn't take a lot to cause a bottleneck and there does seem to be some complacency."
To Rob Stein, managing director of Deutsche Morgan Grenfell in Tokyo, the issue is compounded by the high level of Japanese interaction with entities elsewhere in Asia, which he believes are even further behind on Y2K matters. He also questions the level of awareness about other dates in 1999 and 2000 that may also trouble computers.
"Call me negative, but I find it hard to believe that every credit union in the sticks has thought about the problem," says Alicia Ogawa, head of research at Salomon Smith Barney. It only takes one of them to cause a major screw-up." Do they have funds to sort out the problem?
Other commentators even claim that it was Nikko Securities' belated realization of the cost of Y2K compliance that finally pushed them into the arms of Travelers Group. And counterparties have started to show a reluctance to have certain kinds of business extend beyond 1999.
But are the Japanese victims of a misunderstanding?
The Bank of Japan began quizzing banks about their Y2K preparedness in August 1997. Tatsushi Kishimoto, a vice-president of JP Morgan in Tokyo who chairs the Y2K working group formed by the leading foreign financial institutions operating in Japan, says industry-wide coordination efforts were slow to get started, but that Y2K issues are now being addressed aggressively.
Sumitomo Bank's internet home page now outlines the company's full testing schedule and estimates expected spending at up to ¥30 billion ($208 million).
Fuji Bank director Kenji Watanabe estimates his bank's costs at just ¥5.6 billion but says that 90% of the 100,000 programs it uses have already been tested and adjusted. The bulk of the mainframe system was tested after its relocation from central Tokyo earlier this year, says Yoshiaki Sugita, another Fuji director and general manager of its systems-planning division.
Like many Japanese banks, Fuji and Sumitomo believe their Y2K compliance costs are mitigated by their greater reliance on mainframes than banks in most other jurisdictions. They also say that the heavy spending by most banks on upgrading these systems during their relative affluence of the late 1980s and early 1990s is easing their problems now.
These claims get some independent support. The upgrades in that era had four-digit date data as one of their system requirements, says Gen Eda who heads IBM's Japan Year 2000 Project Office.
CA's Chua's is more sceptical about how complete foresight into Y2K problems was that long ago, but he too concedes that the top 25 banks are better and also agrees that the mainframe users will take the smallest hit. "All the mainframe supplier companies have large systems-integration units and are supporting their clients heavily," he says.
Chua believes that the main danger comes from small to medium-size enterprises many of which have been too squeezed to update equipment and software that was originally leased and never replaced. This will include some smaller financial institutions. However as IBM's Eda points out, the same could be said for many other countries. Acknowledging this issue Fuji's Watanabe says the bank is now also quizzing its customers and counterparties over their compliance plans and will shortly be developing a formal questionnaire to test responses.