Japanese Go Bargain-Hunting on Wall Street

"They spent the last 18 years going to hell and then coming back," said Ken Courtis, former vice chairman of Goldman Sachs in East Asia. "It is now the U.S. banks and investment firms that are on the hellish road toward the bottom."

As Japanese banks recovered over the past five years, their cash reserves grew at an astonishing rate, owing to the peculiarities of this country's investing culture and its continuing economic problems.

There are about $15 trillion in personal financial assets in Japan, about $8 trillion of which are on deposit in banks. Banks are stuffed with money from an aging population whose consumer spending has been declining for years. Supermarket and department store sales have declined for 11 consecutive years, while sales of new cars of all brands peaked 18 years ago and have been falling ever since.

In the past two years, millions of elderly Japanese have grown alarmed about the security of their government pensions. The government announced early last year that more than 50 million pension records had been misfiled. The problem has not yet been sorted out, and it has led to people stuffing even more savings into banks.

As important to the capacity of banks here to accumulate capital: The cost of keeping someone's money in Japan is close to zero. Most depositors receive less than 1 percent interest on their savings. The central bank in Japan keeps interest rates extraordinarily low (0.5 percent for overnight loans to banks).

In large measure, low interest rates are a function of the country's huge public debt burden. At 182 percent of the Japan's gross domestic product, it is the most onerous in the world. The government acquired much of this debt in the 1990s, when it bailed out troubled banks. If interest rates were allowed to rise substantially, Japan's ability to service this debt could be threatened.

Finally, cash-flush banks in Japan have few local opportunities for profit. The economy is contracting and a recession is likely. Export-dependent companies such as Toyota report flat or declining worldwide sales, and foreign direct investment in Japan is by far the lowest among the world's major economies.

As Watanabe, the president of Nomura, made clear Monday: Opportunities are mostly elsewhere.

"It will significantly extend our reach in Asia," he said, referring to the purchase of Lehman's regional operation. "We see immediate strategic benefits, delivering the scale and scope to realize our vision to be a world-class investment bank."