FOCUS: Japan stages comeback to rescue battered Wall Street firms

TOKYO, Sept. 25 Kyodo - Just as the world's second-largest economy was about to lapse into a recession,
Japanese banking giants have staged a stunning comeback with a frenzied series
of investments into the cash-strapped U.S. financial sector.
Just five years ago, the same banks had sought much needed capital from foreign
financial institutions to dispose of the bad loans accumulated during Japan's
bubble economy in the late 1980s to the early 1990s.
And now they are back to return the favor.
Earlier this week, Mitsubishi UFJ Financial Group Inc. said it will acquire
between 10 to 20 percent of common shares in the second-largest U.S. securities
firm, Morgan Stanley, in an investment that is likely to reach around 900
billion yen.
Within days, speculation spread that Sumitomo Mitsui Financial Group Inc. may
also be ready to invest in Goldman Sachs, but the deal failed to materialize
after the No. 1 U.S. investment bank found other sources to boost its capital.
The two have had close ties, with Goldman rescuing the Japanese bank during its
own credit troubles in 2003.
Beating other overseas bidders, Japan's largest brokerage, Nomura Holdings
Inc., recently acquired the Asia-Pacific franchise and the European operations
of failed Lehman Brothers Holdings Inc. in a deal that excludes any trading
liabilities.
''This is a once in a generation opportunity,'' Nomura President Kenichi
Watanabe said in a statement Monday.
''It was worth the wait. They would be good purchases,'' a senior official at
Japan's Financial Services Agency also said.
The string of announcements came amid one of the worst credit crises to ravage
the U.S. financial sector in decades, prompting a $700 billion government
bailout plan to clean up bad debt in a repeat of Japan's own banking crisis.
With bitter memories of the bursting of the bubble economy still fresh in their
minds, the decisions did not come easily for the conservative, risk-averse
Japanese financial institutions.
But observers said MUFG was able to clinch a deal with Morgan Stanley precisely
because it had stood on the sidelines when oil-rich Middle Eastern investors
and Asian sovereign wealth funds hastily stepped in late last year to rescue
U.S. financial institutions deep in the midst of a housing crisis.
In announcing the deal, Morgan Stanley was quick to highlight that advantage,
hailing MUFG as ''the world's second-largest bank holding company with $1.1
trillion in bank deposits.''
''These are carefully studied investments that have the potential to bring huge
rewards,'' said Jesper Koll, former chief economist at Merrill Lynch Japan
Securities and current president of Tantallon Research Japan K.K., an advisory
arm of a Singapore-based hedge fund.
''This is the first time that you have got sizable capital participation of
major (Japanese) banks,'' Koll said.
Despite the finely orchestrated moves, Katsuhito Sasajima, banking analyst at
JPMorgan Securities Japan Co., said Japanese banks are still far from taking
the reins in managing the U.S. financial institutions reeling under the
subprime loan fallout.
''They will not be able to broadly expand investment operations in Europe and
the United States (even) through the companies they have invested in,''
Sasajima said.
''If we consider the fact that Japanese banks have been downsizing overseas
operations (for the past decade or more), it is unlikely that they will
immediately step in to take control of management,'' he said.
A senior official of a major Japanese bank also admitted that ''Japanese banks
do not have the caliber to manage'' the aggressive Western investment banks
thirsty for high-risk transactions.
MUFG's decision to take a maximum stake of 20 percent in Morgan Stanley's
shares also came amid fears that greater control by the Japanese bank will
trigger an exodus of Morgan Stanley employees, Shinichi Ina, banking analyst at
Credit Suisse in Japan, said.
''It is better not to bring the Mitsubishi color upfront and to maintain
(Morgan Stanley's) independence'' since the vastly different cultures of the
two companies may clash, Ina said.
With the top two U.S. investment banks about to become bank holding companies
to be regulated by the U.S. Federal Reserve, Ina also said profits at Morgan
Stanley may fall as it retreats from risky operations.
''One risk would be the possibility of an over-blown investment if it (Morgan
Stanley) fails to achieve the level of profits MUFG is betting on,'' he said.
Yet whatever the hidden risks may be, many experts were quick to draw a line
between the brash real estate investments Japan made in the late 1980s and
current moves to sweep up the failing Wall Street firms.
''These are strategic alliances that are being built here...the start of true
globalization for Japan's financial services,'' Koll said.
''They are going beyond pure investments to expand operations abroad that are
not growing in Japan, and to do that they will utilize talented resources and
networks'' of U.S. financial giants, Credit Suisse's Ina said.
==Kyodo