Wall Street investment banks, or their remnants, eager for outside cash, have found some big buyers. On September 22, Mitsubishi UFJ, Japan’s largest bank, announced plans to buy a 10%-20% stake in Morgan Stanley, making it the biggest share holder and earning it a seat on the board of directors. The deal may run as high as $9 billion. The same day, Japan-based Nomura Securities picked up Lehman Brothers Asian units for $225 million.
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Japanese Jumping Back into Wall Street as China Sits and Watches
25 September 2008
Wall Street investment banks, or their remnants, eager for outside cash, have found some big buyers. On September 22, Mitsubishi UFJ, Japan’s largest bank, announced plans to buy a 10%-20% stake in Morgan Stanley, making it the biggest share holder and earning it a seat on the board of directors. The deal may run as high as $9 billion. The same day, Japan-based Nomura Securities picked up Lehman Brothers Asian units for $225 million.
The acquisitions by its financial firms clearly have the Japanese market’s support. Both Mitsubishi’s and Nomura’s share price has risen on the news. According to Nikkei News, Sumitomo Mitsui Financial Group, Japan’s second largest bank by market value, will spend 100 billion yen to buy part of $2.5 billion shares issued by the Goldman Sachs.
The Japanese financial firms’ decisive moves will discomfit their Chinese rivals. After all, China Investment Corporation (CIC), China’s sovereign wealth fund, already bought a 9.9% stake in Morgan Stanley for $5 billion , but has not only not gained a seat on the board, its investment has lost much of its value. And the stake CIC acquired in Black Stone for $ 3 billion has also suffered, about a 50% book loss.
Financial acquisitions abroad by CIC and other state-owned financial institutions trigger strong doubts in China. Their overseas investments must be approved by the State Council, but the decision-making circle has not reached consensus on whether it is a proper time to buy on the Wall Street. Market rumors had it that CIC had intended to acquire almost 50% of Morgan Stanley shares, but if it did it came to naught.
Japanese firms’ previous round of capital export started in 1985. On September 1985, under pressure from other countries, the Japanese government signed the Plaza Accord. Within three months, the yen’s exchange rate against the USD surged by 20% from 250: 1 to 200: 1. Within three years, the exchange rate against the USD zoomed to 120: 1, and even nearly 70: 1 at the peak.
Drastic yen appreciation caused serious loss to Japan’s export sector, which is very crucial to Japan. But as the real economy could not absorb too much capital, Japanese enterprises were forced to expand overseas, which coincided with the US need for domestic industrial adjustment. Japanese companies blindly bought vast amounts of firms, real estate, futures, stocks, even art collections, prompting worried editorials in US papers about the Japanese “taking over.” But the domestic bubble burst in Japan in the early ‘90s, and Japanese firms had to divest themselves of much of their US booty, and Japan suffered a long term downturn until recently.
This time, Japanese enterprises are behaving more rationally.
As one of the world’s major manufacturers, exporters, and depositors, Japan was for long the world’s No. 1 foreign currency holder. Even now it is second, next only to China, and the largest owner of US government bonds.
Unlike developing countries such as China and India, Japan is already into the post-industrial period. With domestic resource shortages and a seriously aging population, Japan’s surplus capital needs to seek more stable and higher investment returns worldwide. Japan has been a good low-interest fund supporter these years. Every year $66 billion flow from Japan to 6 emerging markets in Asia through Standard Chartered. Japan has issued 1.7087 trillion yen of Samurai bonds so far this year, an increase of 32% over the previous year.
As the US financial turmoil has worsened, prices of US financial shares have dropped to their lowest level in the recent five years. Last Wednesday alone, the share prices of Morgan Stanley and Goldman Sachs, the last two Wall Street bulge-bracket investment banks, slumped by 44% and 23%, respectively. But since the US government is expected to launch bailout policies, global market investors’ confidence has rebounded, and with important rivals gone, the investment value of the two firms has been re-discovered.
Japanese companies’ return to Wall Street is a product of global financial integration, which is a result of the global economic integration. Wall Street’s troubles offer a good chance for low-cost expansion.
Japan’s return also means the trend of financial globalization, which has been widely damaged due to the spread of the subprime crisis, is being gradually restored. In the future, global financial giants must be more diversified and must accept greater, and wider, supervision and rules. This will help to remedy the increasingly wide gap between capital globalization and local supervision.
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