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Video #9 - U.S. Investment Firms Retreat Japanese Retail Market

Monday, January 09, 2006

sources | lesson plan


BACKGROUND INFORMATION

Case in point: In 1964, Merrill Lynch was the first U.S. brokerage to open an office in Japan. More recently, Merrill Lynch Chairman and CEO David Komansky acquired 33 retail brokerage branches and 2,000 employees from Yamaichi Securities, which had gone bankrupt. "We had hoped we could drive a new paradigm in the Japanese market and develop a more client-focused business," recalls Komansky. Instead, Merrill's Japanese retail operations ended up losing about $100 million a year as the country's stock market and economy continued to disintegrate.

In January, 2002, Merrill closed 20 of its branches in Japan and cut 1,200 employees. The big mistake, Komansky's successor says, was to think Merrill could so easily "export" its "mass-market, full-service" kind of brokerage model. This year Merrill has cut back significantly on its international operations, after suffering its first quarterly loss in three years. Merrill's stock, which has outperformed the S &P 500 over three decades, has fallen by 36% from its 2001 peak.

The way was cleared for expansion of foreign brokerage operations after Japan's asset management industry was deregulated at the end of 1998. This was part of the "Big Bang" initiative, which resulted in numerous reforms developed by the former Ministry of Finance (MOF-- currently the Financial Supervisory Agency or FSA), and its purpose was to make Japan's financial system "free, fair and global." The first wave of reforms took effect on April 1, 1998. A second set of reforms, entitled the Financial systems Reform Law, were enacted by the Japanese Diet on June 5, 1998, and came into effect on December 1, 1998. Other reforms were to be adopted in stages over the next five years.

During the "U.S.-Japan Financial Services Talks" held in Tokyo on December 20-21, 1999, the U.S. Department of the Treasury and the Japanese Ministry of Finance said that the opening of financial markets in both countries appeared to be going smoothly. Furthermore, on July 18, 2000, in a summary report to the President and the Prime Minister from the U.S. Department of State and Japan's Ministry of International Trade and Industry, State Department spokesman Philip T. Reeker wrote: "Foreign direct investment in Japan has grown very rapidly in the last three years, mostly owing to the "Big Bang" reforms in financial regulations, improvements in the climate for mergers and acquisitions (M&A) and changing Japanese attitudes toward the presence of foreign firms." With the Japanese market open to them, U.S. firms attempted to sell mutual funds to Japanese individuals.

Unfortunately, the Japan is a nation of savers, not aggressive investors. Most experts agree that Japanese people save for three major reasons: to buy a home, to send their children to school and for retirement. According to the Los Angeles Times Syndicate, in 1998, Japanese families had saved $9.2 trillion-- an average of $76,000 in savings per person-- in guaranteed postal savings accounts. The article noted, "that is the second-largest pool of capital on the planet after the U.S. pension funds, which are already invested."

U.S. brokerage firms looked forward to the possibility of these funds being placed in mutual funds, as the Japanese sought higher returns than the 0.5 percent interest paid by the postal savings accounts. "Inevitably, they will funnel some of their money to U.S. markets," predicted Harold Malmgren, a Washington-based adviser to Japan's pension funds.

But Malmgren failed to account for Japan's current economic climate-- where lifetime jobs are no longer guaranteed, companies are failing, stock prices are dropping and banks are closing. Given that situation, those accustomed to "safe" savings are not about to invest in volatile mutual funds. Consequently, Merrill Lynch, Morgan Stanley and other U. S. firms have had to pull out of this segment of the Japanese market.

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SOURCES:

"Deregulation of Japan's Asset Management Industry," Investment Company Institute, January 10, 2000. http://www.ici.org/economy/japan_dereg.html "Japan's Economy Enters Critical Time," Los Angeles Time Syndicate, March 20, 1998 http://www.chron.com/cgibin/auth/story/mpl/content/chronicle/business/flanigan/ flanigan980321.html 'U.S.-Japan Financial Services Talks, December 20-21, 1999, Tokyo" U.S. Embassy Press Release#99-84R, December 21, 1999. http://usembassy.state.gov/tokyo/wwwt3408.txt Reeker, Philip T., "Text: State Department July 18 on Japan's Investment Climate," U.S. Department of State Statement, July 18, 2000. http://usembassy.state.gov/tokyo/wwwh2839.html Woolley, Suzanne, Amy Feldman and Adrienne Carter, "Hit by the Recession, a Bear Market and the Events of Sept. 11, Merrill Lynch Has Stumbled and Profits are Plunging, New President Stanley O'Neal Faces the Daunting Task of Reinvigorating America's Most Powerful Brokerage Firm," Money Magazine, Volume 31, Issue 3, Page 82+, March 1, 2002.

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LESSON PLAN

GRADE LEVEL/SUBJECT:

10-12/Economics, International Relations, World History, International Baccalaureate Programs (IB), Current Events, Geography

PURPOSE:

To present activities to be used in a variety of classroom situations in order to enhance student understanding of the Japanese economy and its significance globally.

OBJECTIVES:

Students will be able to:

  1. Describe the retail mutual funds industry.
  2. Describe the use of postal savings accounts in Japan.
  3. Compare and contrast the history of the savings industry in Japan and in the U.S.
  4. Explain why the retail funds market has not succeeded in Japan.

MATERIALS:

  1. Background information provided.

  2. Resources on Japan available at your school's Media Center and the Public Library System in your area.

  3. Background information available through Internet "search engines."

ACTIVITIES:

  1. Create a Venn Diagram comparing the savings industry in Japan with that of the United States. (See "Personal Savings and Incomes, US vs. Japan," http://christianparty.net/japansavings.htm)
  2. Draw conclusions from your findings in Activity #1.
  3. Using the information gathered in 1 and 2, write recommendations for foreign investments companies to follow in order to lure Japanese investors to buy mutual funds.
  4. Develop a prospectus geared to the Japanese mutual funds market.

EVALUATION:

Individual assignments should be graded by the teacher using established criteria. Group activities, presentations and projects may be evaluated by teachers and students using the following criteria and scale:

Content Creativity Clarity

1 = Superior (A) 2 = Excellent (B) 3 = Good (C) 4 = Fair (D) 5 = Poor (F)

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