Is Japan finally changing? Maybe not

Foreigners, especially Americans, are always trying to 'save' Japan. Convinced they are the only ones capable of miracles, they nearly fall off the plane at Narita airport in their dark suits and braces, ready to remake the world's second largest - and arguably very troubled - economy into one more properly reflecting the verities of Wall Street's capitalism. Of course, these interlopers also assume they ought to profit handsomely from their efforts, for while their ambitions may be missionary, they have not sworn any vows of poverty.

Yet, most of the time these solemn commitments to 'turn around' a troubled company or 'remake Japan' dissolve a short time later in anger and recrimination. Six months or two years after leasing fancy new offices and putting up splashy billboards, the invaders pick up and go home again, pulling one of several well-worn excuses out of their quiver. The weak economy at home would not support a long-term investment. The returns have not been as projected. The Japanese partner welched on a promised opportunity.

Stockbrokers Merrill Lynch and Charles Schwab and retailer Rei are just three recent examples of firms who made huge splashes when they first came to Tokyo, then left shortly after with their tails between their legs. Close the door behind you on the way out.

Gillian Tett's book Saving the Sun chronicles the demise of one of Japan's hoariest financial institutions, the Long Term Credit Bank (LTCB), and the saga by American 'vulture capitalist' Timothy Collins and his Ripplewood Holdings to revive the franchise and thereby change the rules of Japan's insular, insulated and debt-ridden banking system.

The timing of this publication could not be much better. In May, the Japanese government was forced into a US$17 billion bailout of Resona Bank, the nation's fifth largest lender - after declaring repeatedly that the nation's banks were robust and on the road to recovery from their bad-debt overhang. And in mid-August, Ripplewood - the same firm that bought LTCB's assets and remade the institution into Shinsei Bank - announced it had engineered the first leveraged buyout ever concluded in Japan, paying US$2.2 billion for the fixed-line telephone business of Japan Telecom Holdings from Vodafone.

This book spends a great deal of time examining again the reasons behind LTCB's spectacular collapse in October 1998, when the government was forced to nationalise the bank because its capital deficit exceeded US$2 trillion, the result of spectacularly poor lending practices, especially in wild hotel and property deals. The government was forced to take over the bank because it had created so many derivative-related speculations that its meltdown might have caused a 'systemic risk' to the world's banking system. The laborious attempts by regulators to paper over earlier problems, and delay any resolution of LTCB's shrinking capital base, only exacerbated the cost of the final resolution.

A former Financial Times correspondent based in Tokyo, Tett relies on a novelistic style to describe Mr Collins, the opportunistic Kentucky 'cowboy' and Wall Street turnaround artist who ended up buying LTCB's assets with a lot of the Japanese government's own money. To help create his new financial institution, he hired Masamoto Yashiro, the western-infused businessman who used to run Citibank's operation in Japan, and relied on the political clout of men like former Federal Reserve chairman Paul Volker and Vernon Jordan, golfing partner and adviser to then US president Bill Clinton, to help clinch the deal.

Tett describes the difficult negotiations to win control of the bank, the problems of valuing the bank's portfolio, and the complex guarantees the westerners hammered out with bank regulators. The deal effectively allowed Shinsei to sell back to the government any loans so burdensome that they could never be collected.

This option proved controversial in July 2000, when Mr Collins' new bank refused to roll over non-performing loans from the Sogo department store chain, one of the nation's largest such chains, with branches stretching from Honolulu to Hong Kong. By refusing to go along with the rest of Tokyo's clubby banks, and insisting Sogo repay its loans, Shinsei forced the retailer into bankruptcy, and stirred the wrath of financiers and politicians.

Japanese bankers believe they are in business not to make profit, but to keep companies afloat and keep workers employed. That is their social contract, carried out with the knowing acquiescence of government regulators who orchestrate the nation's 'convoy system', where traditionally, strong companies carry the weak. Who were these rude outsiders who demanded that businesses pay their bills, asked to see a potential borrower's business plans and actually analysed risk before making a loan? To traditional Japanese financiers, Sogo's bankruptcy seemed a sign that Japan was heading down a dark and worrisome road.

The 'Sogo shock' was a moment of high drama, a bankruptcy that seemed to suggest Shinsei Bank had broken into the cosy cabal of financiers who ran Japan. Firmly ensconced inside the tent, it was going to be able to force real change from within. Yet, three years later, Japan's banking system has not radically changed. The nation remains mired with bad loans as well as sharp political disagreements over how best to work off the debt load. The Sogo shock seems to have been temporal and short-lived, as has Shinsei's impact on Japan's overall financial behaviour.

Why hasn't Shinsei's western-style approach to lending made more of an impact on Japan's financial institutions? Will Shinsei remain an outlier, consigned to be a bank shunned by many Japanese corporations, or will other, genuinely Japanese firms be forced, over time, to adopt the outsider's approach? And are Mr Collins and his colleagues really out to save Japan - or just expecting to earn themselves a handsome return for their labours? Unfortunately, Tett does not try to answer these important questions.

This is an engaging tale of microeconomic recovery, which explains how outsiders remade a bank, even if they have not yet succeeded in remaking a nation. Unfortunately, it remains to be seen whether a fuller, macroeconomic revival for Japan ultimately is forthcoming, while we must await another book to understand why it has taken so long.

Michael Zielenziger is a visiting scholar at the Institute of East Asian Studies at the University of California, Berkeley