Playing it safe pays dividends for Japan

By Mariko Oi
Asia Business Report

Japan's previous prudence could see it weather the current financial storm

"I keep cash at home just in case," says managing director Mr Haga as he pulls 4 million yen ($38,000) from a secret hiding place.

"This way I can control my own money, and make sure that I take the least amount of risk. For me to feel comfortable investing my money in anything, I would have to study it a lot."

As the head of a publishing firm, the 27-year-old earns more money than any of his friends, but his extreme take on risk aversion is not uncommon in Japan.

According to the latest survey by the Central Council for Financial Services Information, half of Japan's households keep their savings as cash or in bank deposits.

Less than one in five invest in any financial products.

And this conservative behaviour has been shared by Japanese financial institutions.

Changing attitudes

Japan's banks are known for their reluctance to take big risks. But that worked in their favour this time, limiting their exposure to the ongoing credit crisis.

But, unburdened by sub-prime losses, their investment attitudes are beginning to change.

Japanese people keep a very close eye on their funds

Japan's largest brokerage, Nomura Holdings, made the highest bid to win the battle for the Asian operations of Lehman Brothers after the US investment bank filed for Chapter 11 bankruptcy protection.

It then purchased Lehman's European and Middle East investment banking and equities divisions. A big gamble, Nomura's senior managing director Sadeq Sayeed admitted.

Other Japanese banks are now also on the acquisition trail.

Mitsubishi UFJ is buying up to 20% of Morgan Stanley, while Sumitomo sought to add to its holding in Goldman Sachs.

But are they fully recovered from Japan's market meltdown in the 1990s?

"The answer seems clearly 'yes'," says Richard Jerram, a Tokyo-based economist at Macquarie Securities.

"There has also been this lingering suspicion if they have a lot of stuff on their balance sheets that they are not telling us about. If they have a lot of sub-prime.

"But the fact that they are now out there, making these acquisitions pretty much confirms that their exposures were quite small."

Bargain hunting

As they recovered from the market meltdown in the 1990s, Japanese banks have changed their credit culture.

Before, they lent money on the basis of assets, much as US lenders still do. Now, many banks analyse the cash flow of their clients before extending large amounts of credit.

This painful restructuring process is finally paying off, and they are now able to go bargain hunting on Wall Street.

But these acquisitions also come with bigger risks - which they have long been reluctant to take.

And until the culture changes more dramatically, a lot of money will remain hidden under the tatami mat for a little while longer.