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Foreign Penetration of Japan's Investment-Banking Market: Will Japan Experience the "Wimbledon Effect"?
Working Paper

Published By

Shorenstein APARC

July 2002

Foreign banks have long faced difficulties in attempting to enter certain Japanese financial markets. This is due partly to regulatory practices and partly to specific Japanese socioeconomic conditions, for instance the system of relationship banking. While retail banking is still a sector in which almost no foreigners have been able to succeed, some foreign financial institutions have been able to gain market share in investment and wholesale banking.

Today, Japanese financial markets offer a bizarre playing ground for foreign competitors.On the one hand, overdue reforms, deteriorating stock markets, and shockingly bad ratings should scare many foreigners away from making commitments to Japan's markets. On the other hand, it is just these problems and the dissatisfaction with the Japanese banking sector, as well as an increasing division of the Japanese economy into large global players and small domestic companies, that might help a few strong foreign banks with superior global capabilities overcome their liability of foreignness. Indeed, we assume that improved market opportunities for foreign banks in Japan are related to a fundamental lack of global capabilities on the part of Japanese financial institutions, despite their pronounced advantages as local players. In contemplating the future of foreign financial institutions in Japan, we propose three scenarios. Japan is often compared with Great Britain, where the term "Wimbledon effect" was coined after deregulation of Britain's financial markets--the "Big Bang"--resulted in the acquisition of many British banks by foreign companies. (The analogy refers to the fact that although Britain provides the world's foremost arena for tennis at Wimbledon, the winners of the Wimbledon tournament tend to be foreign players.) The Wimbledon effect would predict that market deregulation will strengthen the financial center but lead to asituation in which markets are dominated by foreign banks. Focusing on investment banking, our paper examines whether Japan faces the same developments as did Great Britain, whether the Wimbledon effect is a plausible scenario for Japan, and whether the analogy between the two financial centers is suitable.

The two other scenarios are strong positions of foreign-Japanese joint ventures ("mixed double") and the continuing dominance of Japanese financial-service providers ("home run").While domination by foreign financial institutions has come to pass in Britain, its BigB ang has at the same time boosted London's position as a financial center. However, in this paper we will explain why Japan's case is different from the situation in the British financialmarkets. Not only is market domination by foreigners in Japan an effect that cannot be expected in the medium run, but Tokyo's domestic orientation distinguishes it from so-called global centers such as London and New York and makes it highly vulnerable in the current situation. Japan's long-lasting economic problems, Tokyo's historical lack of a greater region it has served as a financial center, and an increasing need for globally competitive financial services by large international Japanese corporations cast doubt on the future status of Tokyo as a leading financial center.

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