Japanese banks begin to underwrite corporate bonds
With the easing of issuing requirements, an increasing number of bonds were floated domestically. In 1989, the number of new bonds floated in Japan totaled less than ¥1 trillion. By 1993, firms were issuing debt at a rate of ¥4 trillion per year.
As the banks saw bonds encroach on their business of lending funds to corporations, they began to demand that they be allowed to underwrite corporate bonds. The banks thought that if they couldn't make money as intermediaries by lending funds to corporations, they at least wanted to make money by evaluating bond issues and then underwriting them.
However, Article 65 prohibited the underwriting of corporate bonds by banks. MoF officials now realize that corporations are moving away from bank debt. To ensure the profitability of banks they must be allowed to underwrite corporate bonds. So beginning in 1993, subsidiaries of city banks were allowed to underwrite corporate bonds in the Euromarkets. Also, in 1993, long-term credit banks were allowed to establish domestic securities subsidiaries that can underwrite corporate bonds domestically. It is expected that city banks will be allowed to establish subsidiaries to underwrite domestic corporate bonds in 1994.
This move of course disturbed the securities companies who feared that the banks would soon steal all of their bond underwriting. When banks were allowed into the corporate bond underwriting business, MoF officials tried to console securities firms by allowing them into the trust banking business, again through subsidiaries. However, this gave little consolation to the securities firms because there were many limitations placed on their trust banking subsidiaries.
Further, securities companies fear the coming of bank underwriting for a larger reason. Securities firms hold little equity in their clients, do not lend to firms and do not belong to a keiretsu as do most of the large city banks like Sumitomo Bank. Thus securities firms are seen by many Japanese industrial firms as an outsider with whom they must consult with only when a stock or bond underwriting is needed. Thus, although securities firms lost the battle concerning allowing banks to underwrite bonds, the securities firms are adamant in not allowing banks to underwrite stock issuances. So far, it seems that banks will not be allowed into equity underwriting.
So with government debt serving as the tool that destroyed Japan's carefully constructed world of interest rate regulations, and with changes in corporate finance leading to the de facto destruction of the wall between banks and securities firms, Japanese finance has become a deregulated industry. Further change is in the air. Securities firms soon will see their fixed commission structure become deregulated for large-scale transactions, and the entire commission structure may become deregulated in a few years. Even the sleepy world of insurance will not be spared. By 1995, the MoF plans to eliminate the wall that separates life insurers and casualty insurers.