12. The Re-emergence of Japanese Banks in Asia

Alessandro Zanello, and Daniel Citrin
Published Date:
November 2008
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Shinobu Nakagawa

In an effort to diversify their lending and raise profits, Japanese banks are expanding overseas, particularly in other countries in Asia.1 As they move toward less defensive financial positions—including by reducing government bond investment and expanding uncollateralized small and medium-size enterprise (SME) lending—banks are also re-establishing operations in Asia that were scaled back in the wake of the collapse of the bubble as well as the 1997-98 Asian crisis. These operations mainly comprise providing lending, derivatives, and cash management services to Japanese companies as they shift production and distribution into Asia, but they also increasingly include transactions with non-Japanese clients. Japanese banks’ strategies in Asia differ from those in Europe and the United States, where they focus more on investment banking services such as mergers and acquisitions and securities lending.

This chapter describes the re-engagement of Japanese banks with the rest of Asia, including the rapid increase in credit extension and the products and strategies employed. It then considers the potential implications of this re-engagement for financial and macroeconomic stability in both Japan and the other Asian countries.

Recent developments in Japanese banks’ overseas operations

Japanese banks’ external credit outstanding has been growing apace, but especially rapidly vis-à-vis Asia (Figure 12.1). While the current share of credit extended to Asia is only about one-fifth to one-sixth of that vis-à-vis North America or Europe, it has been growing steadily since the end of fiscal year (FY) 2002. Asia has also accounted for a rising share of Japanese banks’ overseas branches, particularly in countries where Japanese manufacturers have established operations (Figure 12.2 and Table 12.1).2

Figure 12.1Japanese Banks’ External Credits

(average annual growth in FY2003-06, in %)

a Figures in parentheses are the regional shares at the end of FY2006.

b Asia/Pacific includes Australia and New Zealand, and offshore centers include Hong Kong SAR and Singapore.

Source: Bank of Japan.

Figure 12.2Shares of Regional Branches

Table 12.1Branch Network in 2007a
BranchesSub-branches and Representative Offices
Africa/Middle East2Africa/Middle East12
Hong Kong SAR5Hong Kong SAR2
New Zealand1New Zealand0
South Korea4South Korea0
Taiwan POC4Taiwan POC0
Latin America/Caribbean6Latin America/Caribbean5
North America10North America12

The sum of Mizuho Corporate Bank, Sumitomo-Mitsui Banking Corporation, Bank of Tokyo-Mitsubishi UFJ, and Mitsubishi UFJ Trust Bank, not including their subsidiaries and affiliated companies.

Source: Individual banks’ Annual Reports.

The sum of Mizuho Corporate Bank, Sumitomo-Mitsui Banking Corporation, Bank of Tokyo-Mitsubishi UFJ, and Mitsubishi UFJ Trust Bank, not including their subsidiaries and affiliated companies.

Source: Individual banks’ Annual Reports.

Within Asia, China and South Korea have been the two largest destinations for Japanese banks’ credit.3 As Japanese companies (and their parts suppliers) in industries such as autos and home electronics have ventured further into these Asian countries, their domestic banks (both major and regional) have followed to provide financial services, such as lending and cash management, in a fashion similar to the approaches of German and other industrial-country banks. In China, the rise in credit partly reflects lending to large Japanese manufacturers that are working to upgrade facilities so that they can produce and distribute final consumption goods. While the shares of both China and South Korea have trended up since 2000, along with the shares of India, Taiwan Province of China, and Vietnam, the share of ASEAN-4 countries (the four largest economies in the Association of Southeast Asian Nations, i.e. Indonesia, Malaysia, the Philippines, and Thailand) has fallen.

Japanese banks have also become more active in the domestic banking markets of selected countries (Tables 12.2 and 12.3). Activities include providing banking services to non-Japanese corporate clients, although they remain limited to well-known names in the region and public projects, due to insufficient financial disclosure by local SMEs. Japanese banks are also increasing their involvement in syndicated loan participation and arrangements, as well as asset securitization and liquidation, particularly in South Korea and major Southeast Asian countries.4 Retail operations such as housing loans and consumer credit are much more limited. However, there may be increased scope to expand such operations in China in the near future, as provision of such services in local currency was allowed in December 2006.

Table 12.2Top 10 Asian Jurisdictions for Japanese Banks’ External Credits(end of FY, in %)
Shares in Asia
1Indonesia18.6South Korea25.0South Korea27.5China26.0
2South Korea18.4China19.9China26.7South Korea25.4
6Philippines6.1Philippines6.1Taiwan POC7.7Malaysia7.7
7Taiwan POC4.3Taiwan POC4.5India4.6Taiwan POC6.9
Source: Bank of Japan.
Source: Bank of Japan.
Table 12.3Principal Assets and Liabilities of Overseas Branches of Japanese Banks(as of end FY2006, in US$ billion)
Loans and bills discounted211.0Deposits202.7
Investment securities59.2Acceptances and guaratees52.3
Cash and due from banks48.5Negotiable certificates of deposit39.1
Trading assets9.5Interoffice accounts31.7
Financial derivatives8.2Call money13.2
Foreign exchanges7.3Borrowed money11.6
Due from foreign banks3.4Trading liabilities10.8
Foreign bills bought3.2Financial derivatives8.6
Call loans6.0Payables under securities lending3.4
Receivables under securities
borrowing0.4Due to foreign banks1.6
Source: Bank of Japan.
Source: Bank of Japan.

Japanese bank business activities in Asia

Funding operations

The funding structure of Japanese banks’ overseas activities is fairly simple. Assets—mainly loans and securities investment—are principally financed by local currency deposits and interoffice accounts (borrowing from headquarters or other branches). This balance sheet structure is basically the same for most Asian branches.5 In China, however, loans exceed currency deposits, and thus the banks rely more on interbank funding (call money) from large Chinese banks.

Looking ahead, however, banks may diversify their funding sources. As credit exposures continue to grow, local branches may need to develop a variety of funding alternatives from local financial markets, such as call money and bonds with various maturities, which in turn could support development of local capital markets.

Products and services by Japanese banks

The main products and services offered in local Asian markets are varied.

  • Syndicated loans have become a major instrument for supplying credit to regional projects and large-scale facility investments by both Japanese and non-Japanese clients. Japanese major banks are active as both arrangers and participants. Loan syndication often includes Japanese regional and local Asian banks, and in some cases, U.S. and European counterparts.

  • Through their group trust banks, Japanese banks are also selling Japan-related trust products, such as Japanese real estate investment trusts, or J-REITs, and trust beneficiary rights including high-yield Japanese credits. These products meet the needs of Asian investors, who have strong appetites for higher returns and also want to diversify their geographical exposure beyond the United States and Europe.

  • Inroads into retail banking operations, such as housing loans and consumer credit, have been slower, however, reflecting stiff competition from entrenched local banks. Japanese banks are looking to establish alliances and capital relationships with local large financial institutions in some markets in order to increase their activities in the retail sector.

Implications for financial and macroeconomic stability in Asia

The increased presence of Japanese banks in Asia boosts their profitability and improves their risk diversification, and thus bolsters the stability of the Japanese banking and financial system. It also provides another source of credit for Asian economies, and thus potentially supports their stable long-run growth.


Asia has been a source of high and relatively stable profits for Japanese banks. Asia, along with North America/Latin America, has been a source of high return on assets (ROA) (Figure 12.3). This is notable, given that North American operations are less asset-intensive and rely more on fee-based activities. The strong profitability of Asian operations may reflect the fact that even ordinary lending can earn sizeable returns in some Asian countries: for example, lending margins in China average 350–400 basis points. Moreover, there does not seem to have been a deterioration in credit quality: according to bank annual reports, asset quality (as measured by nonperforming loans) on credit to the private sector has, been significantly better in Asia than in the United States.

Figure 12.3Japanese Major Banks’ Return on Assets by Regiona

(FY, in %)

a Current profits divided by total assets of Mitsubishi-UFJ FG, Mizuho FG, and Sumitomo-Mitsui FG.

Figures in 2005 are IMF staff estimates based on the fiscal half data.

Source: Individual banks’ Annual Reports.

While the shift into Asia has supported core profits, they remain low. High recent net incomes mainly reflect huge reductions in domestic loan-loss provisioning costs, made possible by Japan’s economic recovery. Going forward, high-yielding activities in Asia, along with an expanded range of activities at home, could bolster Japanese banks’ profitability and thereby promote the health and stability of the banking system.

Credit risk management and diversification

The expansion in Asia is also increasing the geographical diversification of Japanese banks. In order to avoid building excessive credit risk concentration in particular markets, diversification needs to be well balanced between Japan, other Asian countries, and other regions. Such diversification is also consistent with Japanese supervisory policies and the Basel II principle. That said, credit exposures to Asian markets remain small compared to other regions, such as the United States and Europe—and a few countries account for a large share of the exposure to Asia.

Growth in Japanese banks’ credit extended to Asia is also providing diversification across Japanese and non-Japanese clients. In particular, the lending shares accounted by Japanese and non-Japanese clients are currently roughly equal in most Asian countries, thanks to efforts to build long-term relationships with local conglomerates and governments.6 In China, by contrast, Japanese companies account for 80-90 percent of credit exposure. Indeed, Japanese banks regard themselves as almost at full capacity to provide financial services to such corporate clients in China.

Of course, the expansion also raises potential challenges in managing credit risk exposure. Accordingly, Japanese mega banks are actively managing credit risk on a portfolio basis. Their Tokyo headquarters collate all information on domestic and global credit exposures and evaluate total credit risk on a quantitative basis and with respect to economic capital. Relatedly, they are managing credit risk through their financial operations—for example, by aggressively arranging and participating in syndicated loans both domestically and in Asia. More gradually, they are also starting to use credit derivatives to transfer Asian credit risks to global investors (although most of the risk transfer involves Japanese risks).

Macroeconomic implications

Although exposure to Asia remains modest, the better diversification of Japanese banks should in principle make the banking system more robust. With Asia still accounting for a small share of credit, the diversification benefit is marginal at present. Nevertheless, given that the regional and Japanese economic cycles are imperfectly correlated, the share of the balance sheet exposed to a deterioration in the Japanese economy is somewhat smaller than in the past. Accordingly, as long as regional economies are expanding, the risk of a sharp erosion of capital that would cause banks to rein in credit at home and abroad seems somewhat reduced. Similarly, because Japanese companies are also becoming more internationally diversified, their exposure to a downturn in Japan—and thus their creditor banks’ exposures—is reduced. Indeed, as they grow further, Asian banking operations could come to provide an earnings and capital buffer that would help to sustain credit growth and support the monetary transmission channel in the event of a domestic downturn, which would promote Japanese financial and economic stability.

By the same token, Japanese banks’ lending to local companies in Asia diversifies those companies’ funding sources. Compared with domestic banks in the region, Japanese banks are less exposed to local economic conditions and thus would be less likely to experience a significant worsening in credit quality because of a downturn in any one country. Accordingly, they could in principle play a buffer role if the local credit cycle turned down, reducing the risk of excessive reductions in credit that could adversely affect production and employment. This role may be especially important for Asia, given the lack of well-developed and liquid corporate bond markets. That said, whether Japanese banks would continue to lend in a downturn is a question, although as noted before, they did tend to maintain their exposures during the Asian crisis, compared with other mature-market banks. In addition, while the evidence on how foreign banks affect access to credit is mixed, survey evidence suggests that credit constraints are less binding for firms in countries that have greater foreign bank participation.7

At the same time, the risk of spillovers cannot be ruled out, although the risk does not seem large at present. In principle, a sharp and prolonged downturn in Japan could lead Japanese banks to rein in credit to the region in order to clean up their balance sheets, similar to what happened after the 1980s asset bubble burst. However, this risk is less than in the past, because major banks’ balance sheets are strong and they manage risks better. Similarly, a tightening of yen liquidity could in principle tighten terms on lending to regional clients, but the banks have been providing credit to Japanese and non-Japanese clients in the region mainly in terms of U.S. dollars and local currencies funded outside Japan through local deposits and interbank money. Lending in Japanese yen, by contrast, has been relatively limited. Thus, higher interest rates in Japan would have at most an indirect effect.


The re-emergence of Japanese banks’ activities in Asia brings potential benefits to both Japan and other countries. From Japan’s perspective, these activities are a potentially important source of both enhanced profits and better diversification. Both are beneficial for the Japanese banking system, especially in light of still-low core profits. At present, however, credit exposures to Asia remain relatively modest, but over time, growth in these activities could become a significant source of profits, while helping to diversify credit exposures. From the perspective of the host countries, the renewed presence of Japanese banks helps to diversify corporate funding sources, which is particularly useful in light of the limited development of local corporate bond markets.

Because this chapter focuses on cross-border activities, references to “Asia” exclude Japan. “Asia” also excludes the financial centers of Hong Kong SAR and Singapore (which are classified as “offshore centers”), and includes Australia and New Zealand.

Credit to offshore centers is rising as fast as credit to Asia, particularly vis-à-vis the Cayman Islands and Bermuda. In these jurisdictions, credits are mostly extended to special purpose vehicles that issue (for example) subordinated debt for Japanese banks. Offshore centers also serve as conduits for credit to U.S. and global hedge funds (mostly market-neutral and global-macro funds of funds), as Japanese banks diversify their asset portfolios.

As noted above. Hong Kong SAR and Singapore are classified in offshore centers, and thus excluded from the table.

Japanese banks’ branches, subsidiaries, and affiliated companies in Hong Kong SAR and Singapore play a leading role in their fee-based businesses in the region.

The share of interoffice accounts in total liabilities has declined by roughly one half in the last decade, as local branches in Asia have accumulated deposits from their corporate clients in the region.

Japanese banks did not reduce credit exposures to the local Asian corporate and public sectors drastically during the Asian financial crisis in the late 1990s, compared to their U.S. and European counterparts. This may have created goodwill with local clients, helping to promote their financial activities in the region.

See George Clarke, Robert Cull, and Maria Soledad Martinez-Peria, “Does Foreign Bank Penetration Reduce Access to Credit in Developing Countries?” World Bank Policy Research Working Paper 2716, November 2001.

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