1. Japanese Financial System at Crossroad
Toshiyuki Tsujioka
Tsuyoshi Daito
Robert Early

2. Who are they?

3. Agenda Overview of Japanese Financial System
Japan Post – the Last Crusade
The new wave (Shinsei Bank and Ripplewood)

4. Japan’s amazing economic success since WWII – Why?
Per Capita GDP
‘000 USD
Japan
U.S.

5. What is Gosoh-Sendan ? 護送船団
Unique banking system in Japan
Literally means “Convoy System”
Essentially means “No Loser” in banking
Government’s policy to maintain robust, regulated banking sector

6. How did Gosoh-Sendan work until ’80s?
Government
High Regulations
Corporations
Banks
Private
Deposits
Loans
Employment

7. Why was Gosoh-Sendan successful?
Gosoh-Sendan System
Rising
asset
price
Risk-
averse
culture
Long-
term
investment
Today’s first take-way if the word Gosoh Sendan. The direct translation is convoy system.
Meaning: convoy system =
Most successful business model since WWII
Government’s strategy to develop industries by robust finance support by banks
No one should fail
Corporations’ high dependence on bank loans (=indirect finance)
Highly regulated system
This is the key to understand Japan’s success after WW2
Japan’s GDP grew at 8-10% annually after WW2, second largest economy in the world
Toyota, Sony – These companies huge capital expenditure and growth were supported by this convoy system
High dependence on bank loans as a means of financing, capital markets did not develop until 80’s
Interest rates (borrowing, lending, short-term, long-term), size and numbers of branches, extremely high entrance hurdle to business

8. What happened in ’90s? Gosoh-Sendan Globalization Burst of Bubble
Vicious Cycle of Credit Crunch
Asset prices fall
Bad loans accumulate
Banks become reluctant to lend

9. Reform after reform since late ’90s
Change in regulatory body
Capital injection by government
Strict write-off policy
Banks are forced to restructure
Default & nationalization
Mega mergers
These are painful, but necessary steps!

10. An optimistic scenario is…
Corporations
Banks
Private
Deposits
Loans
Capital Markets
Bonds Equity
Equity Investment
ETF
401K
Hedge Funds
Indirect Finance
Direct Finance
But…

11. Banks hold more than 50% of Financial institutions assets
22%
$44 trillion
Banks: 54%
$26 trillion

12. Japanese households hold more than 50% of assets in cash/deposits.
13%
$35 trillion
Cash: 55%
$13 trillion

13. Japan Post The biggest financial conglomerate in the world.
Total assets: USD 3.8 trillion
Huge market impact.
Holds about ¼ of JGBs
outstanding

14. Axis of Evil: Politicians, Government, and Japan Post
need to sell JGBs
Politicians:
need votes

15. Key take aways
The privatization of Japan Post is the last step to market efficiency.
Regardless of the outcome, market participants must follow their moves.
The opportunities are in specialized segments (hedge funds, private equity, etc.)

16. Ripplewood and Shinsei Bank
A Major Force for Restructuring

17. Ripplewood and Shinsei Bank
Bought Long Term Credit Bank from Japanese government and turned it into Shinsei Bank
Total investment of $1.15B in 1999
IPO of 35% for $2.1B
Shinsei is valued at over $6B
BIG PROFITS

18. Timothy Collins of Ripplewood
Philosophy degree from Depauw
MBA from Yale
6 years of M&A at Lazard
5 years of fund management at Onex, Toronto Investment Company
NO experience in Japan

19. Long Term Credit Bank Traditional lender to industry
Real estate speculation hit hard times in 1989 when Bank of Japan raised interest rates
Bad loans increased
In October 1998, LTCB applied to become nationalized under new law
Goldman Sachs chosen to organize bid

20. Ripplewood and Connections
Had contacts in Clinton administration that knew of LTCB problems and bids
Convinced Masamoto Yashiro, former chairman of Citigroup Japan, to join
Joined with former Goldman Sachs executive, J. Christopher Flowers, banking deal specialist
Advised by Paul Volcker, former head of Federal Reserve System

21. Sale of LTCB Ripplewood only serious bidder
Even though impossible to assess bad loans, Japanese government offered the possibility to “return” some bad loans after sale
Ripplewood raided more money than necessary including from Mellon Bank

22. Shinsei Bank Masamoto Yashiro became CEO
Focus on entering retail bank market and deal with loans
On June 28, 2000, returned loans and capital for Sogo, reputable retailer, forcing bankruptcy
IPO in 2004
Current numbers
Total revenue of ￥123.5billion
Net income of ￥66.4billion

23. The Future: Japanese Activities
Japanese private equity investment increasing
Unison Capital Inc.
Nippon Mirai Capital Co.
Japanese banks back private equity groups
Mizuho Capital Group
Phoenix Capital Co.

24. Don’t be like this!!!

25. Back-ups

26. “Main Bank” System 6 mega banks 3 long-term banks
80 first-level local banks
100 second-level local banks
Toshiba
Mitsui Bank
Mitsui Chem.
Mitsui Insur.
Mitsui Corp.
Toyota
Cross-Share Holding