Japan Merger Creates World's Largest Bank
By Akiko Kashiwagi and Peter S. Goodman
Washington Post Foreign Service
Friday, July 16, 2004; 10:46 AM
TOKYO, July 16 -- Two of Japan's biggest financial institutions on Friday announced plans to merge and create the world's largest bank, underscoring growing sentiments that the country's long troubled banking system has significantly improved.
The marriage of Mitsubishi Tokyo Financial Group Inc., Japan's second-largest bank, with UFJ Holdings Inc., the fourth-biggest, would create an institution with some $1.7 trillion in assets, outstripping the country's current leader, Mizuho Financial Group, and the global leader, Citigroup Inc. The newly forged company would have nearly 80,000 employees and more than 1,000 branches around the world.
The details of the planned merger remained to be resolved through negotiations to be held in coming days, officials from the two banks said at a news conference Friday evening. Earlier on Friday, the banks notified the Tokyo Stock Exchange that they are pursuing an agreement and hope to have a preliminary deal signed by the end of the month, with the objective of completing the merger by September 2005.
Other banks seemed likely to mount legal challenges, but if the deal is consummated, Japan's financial system would be dominated by three vast conglomerates: the combined UFJ-Mitsubishi group alongside Mizuho and the Sumitomo Mitsui Financial Group.
Analysts praised the proposed merger as a substantial step forward in efforts to cleanse Japan's banks of bad loans estimated to exceed $500 billion. The bad debt is the legacy of the collapse of Japan's real estate market in the early 1990s combined with a cultural aversion to failure that has kept credit flowing to many insolvent companies even as they have continued to lose money.
Economists have long feared that the bad debts choking Japans banks could trigger a financial meltdown in the world's second-largest economy, sowing crisis around the globe. Consolidation has been seen as a key means of averting crisis by combining troubled lenders with institutions whose books are in stronger shape.
"This should remove any lingering doubts about the stability of the financial system," declared Richard Jerram, chief economist with ING Financial Markets in Tokyo, in a report circulated earlier this week. "In terms of ending fears of financial system crisis, this is probably not the beginning of the end, but the final step."
Japan's prime minister, Junichiro Koizumi, and his economic policy czar, Heizo Takenaka, have made bank cleanup among their highest policy goals. They have pressured lenders to cut credit to insolvent companies, with Takenaka declaring that under his reign no company would be deemed too big to fail. Takenaka has vowed to cut in half the amount in bad loans held by major Japanese banks by next March.
The Mitsubishi Tokyo-UFJ deal reflects the progress-through-consolidation idea that has prevailed within Japan's banking system. Japan's most deeply indebted bank, UFJ, has a reputation as one of the country's shoddiest lenders and faces possible criminal prosecution from regulators for trying to conceal the full extent of its $36 billion in bad loans. The bank declared losses of $3.7 billion for the fiscal year that ended in March. Mitsubishi Tokyo, on the other hand, is widely seen as one of the stronger banks. As of the end of March, only about 3 percent of the loans on its books were classified as bad, as compared to nearly one-tenth of UFJ's debts.
Still, the banks dismissed speculation that the merger amounted to a government-orchestrated shotgun wedding. Mitsubishi Tokyo chairman Shigemitsu Miki told reporters that the merger was his idea, advanced during a meeting with UFJ president Ryosuke Tamakoshi at the end of May.
© 2004 The Washington Post Company