Japan completes rate deregulation


TOKYO -- Wary of the tumult that occurred in the United States and always resistant to abrupt change, Japan finally completed its deregulation of interest rates this week after more than a decade of tiny shifts.

The major banks in Japan responded to their new-found freedom by doing -- nothing.

Rates on just-deregulated deposits, for example, previously set at a negligible 0.22 percent a year, rose an average of 0.03 percent. That translates to 30 cents a year for every $1,000 on deposit.

"Price competition is two to five years away," predicted David Snoddy, a banking analyst at Jardine Fleming Securities in Tokyo.

The meagerness of the results was consistent with other trumpeted efforts recently made by Japan to reform its government and economy.

An increasingly skeptical news media slammed the results, with the most popular network news show, TV Asahi, providing scathing commentary as well as a retrospective look at a bank scandal during the past decade that included political kickbacks, stock manipulations and numerous bad loans.

While the assorted debacles have increased enthusiasm for deregulation, they have simultaneously raised concerns about the possible consequences. Several of the major newspapers warned that "excessive competition" could threaten Japan's financial stability.

For the country's powerful Ministry of Finance, any complaints about the slim evidence of change are less persuasive than concern over repeating the bank disasters in Maryland, Arizona, Ohio, Rhode Island and other U.S. states after deregulation.

In a sense, this week's move began 15 years ago with the issuance of the first certificate of deposit. Vast corporate deposits, which were the most likely to go offshore in the face of Japan's internationally uncompetitive rates, were the first to be deregulated, with decontrol gradually spreading to the smallest and least transferable deposits.

"In America's case, liberalization was done in quite a short period," said Mori Akihiko, section chief for banking research at the Finance Ministry. "We tried to decrease the shock of deregulation through a learning period."

Although the overt control by the ministry has now ended, more subtle but still powerful tools remain to block the same heady rise in rates once offered by the most aggressive U.S. banks. Were any to suddenly and dramatically raise their rates, Mr. Akihiko said the ministry would have to examine their soundness.

Japan's bankers pay tremendous attention to any such moves, and a truly rebellious stand would be a surprise.

"Banks are still under the umbrella of the ministry," said Toshinori Okubo, Japanese representative for the Canadian investment firm ScotiaMcCleod Inc. and a former executive with a major Japanese financial company. "The deregulation is only cosmetic, will take Japan a long time to see change."

Strict banking controls in Japan have kept competition for deposits at a minimum, As a result, depositors have had to tolerate not only low returns but also steep fees.

Individual checking accounts are almost unknown. Instead, payments are typically made by electronic transfers costing as much as $8 apiece.

The few breaks depositors did receive, like freedom from charges on monthly payments directly debited from their accounts by utilities, only locked them more deeply into a single institution, further deadening competition. Because of the complexity of arranging these monthly deductions, steadily layered over many years, executives at a number of major banks here predict there will be almost no shifts by consumers, regardless of changes in rates offered.

Some banks are offering new services, such as crediting interest payments monthly rather than annually, and expanding hours a bit. But an obvious area of improvement -- all-night automatic teller machine usage -- is still provided by only a single bank, Citicorp, which is thought by some to have a special waiver by the ministry.

For many years the results of such restrictions seemed to be highly beneficial to Japan. The flip side of low returns provided to depositors was a vast pool of cheap funds that could be used by Japanese banks to fuel the country's industrial expansion, as well as their own.

Pressure for a more fundamental change emerged only gradually. Swaddled by regulations, overseas institutions are now perceived to be more efficient and innovative. That has not only cost Japan a role as an international financial center but has prompted its own financial institutions to move their most sophisticated operations to other Asian markets.

"It is not possible for only Japan to be regulated while the rest of the world is being deregulated," Mr. Akihiko said.

Copyright © 2020, The Baltimore Sun, a Baltimore Sun Media Group publication | Place an Ad