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SCMP Reporter

THE traditional role of an offshore banking market is to provide a tax-friendly investment environment, and a place for banks to accept funds and borrow money without meeting local reserve requirements.

    In major offshore centres, such as London, the market also acts as a base for equity funds and private banking facilities.

  However, this is not the case in Japan, where the Japan Offshore Market (JOM) has developed without fund management, private banking, or many of the regulatory freedoms taken for granted elsewhere.

    Despite this, the six-year-old JOM has grown quickly, overtaking Hong Kong and other centres to rank second largest in the world after London.

  Japan now has 204 banks operating with offshore licences, of which 116 are Japanese.

    By May of this year, the total asset balance of the JOM stood at US$607.7 billion - nearly double the size of the offshore market in Singapore and about 15 per cent bigger than Hong kong.

    However, the history of the JOM has not been a simple tale of uninterrupted growth. In fact, the market has shrunk in the last 18 months and, according to some bankers in Tokyo, may drop further over the next two to three years.

   ''We are at an interesting stage,'' said Toshio Yamasaki, an economist at the Bank of Tokyo.

  ''We are entering a re-adjustment period and, depending on interest rates, could see the JOM moving down in the next year to 18 months.''     Many Japanese banks have cut interbank lending and borrowing, both onshore and offshore, to comply with BIS capital adequacy ratios.

  The result has been a shrinking JOM since the end of 1991.

  In the last 18 months, the total asset balance of the JOM dropped by 7.4 per cent, with declines in both foreign currency and yen-based assets.

    Foreign currency assets in May stood at $215.7 billion - down from $332 billion at the market's peak.

  The decline initially reflected the BSI regulations.

  However, more recently, it has come from uncertainty over the future of United States' interest rates, which have been expected to rise for some time.

    Yen-denominated assets, buoyed by the currency's steady internationalisation and strengthening of the yen against the dollar, have fared better - rising from $273 billion at the end of 1990 to US$392 billion in May last year.

   However, they also have dropped - from a high of nearly $411 billion early this year - following disappointment over low yen interest rates in the first months of last year.

   Yen transactions now account for about 64 per cent of the JOM total.

    The reasons behind the speedy relative growth of yen transactions in the JOM are obscure.

   While the internationalisation of the currency is the most obvious explanation, it is not the whole story.

    Less than 16 per cent of Japan's imports are denominated in yen and fund raising by non-residents has declined since 1990.

   Instead, some analysts believe the expansion of yen transactions comes from Japanese banks raising capital on the offshore market, as opposed to the domestic interbank market.

  If this is true, it is despite the fact that regulatory and tax concessions are supposedly available only for transactions between non-residents.

    While some ''seepage'' between the markets is allowed, it seems there is greater inter-flow than officially credited.

    But Japanese bankers deny this, saying that since the tide of deregulation swept through Japan's domestic market in the late 1980s, local borrowers have preferred dealing locally rather than offshore.

    ''Banks sometimes used to raise yen offshore and use the domestic market for lending, but now they want to raise the money domestically,'' Mr Yamasaki said.

    Unlike the offshore market in London, the JOM remains a distant relation to its onshore counterpart.

  It is closer in nature to the New York International Banking Facility, or Singapore's ACU markets than generic offshore markets.

    The Japanese government is slowly moving to change this, and last April introduced a broad sweep of reforms to deregulate the banking sector.

    The reforms ran along the same lines as Britain's deregulation of the financial markets in 1986, allowing banks and brokerages to compete in the Euro-bond and Euro-equities markets.

    But the liberalisation was a pale imitation of the British version, allowing only a few banks access.

   ''The Japanese government tends to liberalise slowly,'' said Mr Yamasaki.

  ''I don't expect restrictions on the onshore market - let alone the offshore markets - to be completely lifted in the near future.'' 



JOM does the job differently