Back in the 1980s, when Japan found itself flush with unprecedented wealth, it splurged on flashy overpriced trophies like Rockefeller Center and the Pebble Beach Golf Links. It was a dizzying shopping spree that left little but a bad case of buyer's regret as the country's asset bubble burst and markets crashed in the early 1990s. Its mammoth banks retreated from the limelight, weighed down by mountains of bad loans. But in 2008, Japan Inc. is making a comeback. Reincarnated by the painful lessons of the past, Japan's financial heavyweights are venturing aggressively abroad again, on the hunt for smart deals in the wake of a historic Wall-Street shake-up. “The Japanese have recovered from their own debacle in the 1990s and early 2000s and now have reasonable amounts of capital but not domestic growth,” said David Threadgold, banking analyst at Fox-Pitt Kelton in Tokyo. “The Americans have squandered unimaginable amounts of money and are now looking around the world at who can help fill the hole.” Nomura Holdings Inc., Japan's biggest brokerage, announced plans late Tuesday to buy Lehman Brothers' operations in Europe and the Middle East, on top of the Asian operations it bought a day earlier from the failed US investment bank. Top Japanese bank Mitsubishi UFJ Financial Group Inc. announced late Monday that it has agreed to buy up to a 20 percent stake in Morgan Stanley. This summer it spent US$10 billion to acquire remaining shares of UnionBanCal, California's second largest bank. And Sumitomo Mitsui Financial Group Inc., Japan's third-largest bank, is reportedly considering investing several hundred billion yen in Goldman Sachs. Compared with their US counterparts, Japanese financial institutions have emerged from the subprime crisis relatively unscathed. Conservative lending strategies, as well as memories of more than a decade of financial missteps, are now beginning to pay dividends, analysts say. Japanese banks, which once doled out money on the assumption that real estate prices would rise indefinitely, now scrutinize cash flow in their lending decisions, said Sherman Abe, GIMV chaired professor at Hitotsubashi University's Graduate School of International Corporate Strategy. “When your economy is now being not only recognized but feared, you develop a sense of confidence,” said Abe. “And I think that resulted in overpaying for assets, not only domestically but internationally. But the pain of the consequences of that have made Japanese bankers more prudent while learning to be more sophisticated in their approach to lending.” Japanese banks were saddled with about $8 billion in subprime-related losses, the government said in June, a small fraction of the massive amounts lost by other banks and institutions worldwide. Not only are Japanese banks fundamentally healthier, they are flush with cash thanks to nearly $15 trillion in domestic household financial assets, about half of which sit in deposit accounts. But with the Japanese economy at a standstill and its population dwindling rapidly, it's pragmatism more than inflated self-confidence that is driving Tokyo's financial giants to seek international growth. Japanese banks currently derive just 10 percent to 20 percent of their earnings from markets abroad, said Shinichi Ina, banking analyst at Credit Suisse Securities in Japan. “The domestic market is shrinking,” he said. “They have to expand their overseas exposure.” Indeed, attaining world-class status is a key pillar of Nomura's corporate strategy under new CEO Kenichi Watanabe, who described his company's Asian purchase a “once in a generation opportunity.” Already a behemoth at home - it underwrites 60 percent of listed companies in Japan - Nomura now looks to transform itself into “bridge between Asia including Japan and Europe and the United States,” the company said in its annual report. Nomura has not disclosed a price tag for Lehman's European operations, but its purchase of the investment bank's Asian operations was valued at around $225 million - pocket change for a company with $263 billion in assets as of March 31. Standard and amp; Poor's kept its rating on Nomura unchanged Wednesday, describing the investment amount as “limited.” Moreover, Nomura won't be stuck with Lehman's trading assets or liabilities. “Our ability to capitalize on this opportunity in spite of such volatile markets reflects our financial strength and demonstrates how well we have managed the credit crisis,” Watanabe said in a statement. “This deal is validation for our strategy.” Investors so far have responded with resounding approval. Nomura's shares jumped 5.2 percent to 1,505 yen Wednesday, following a nearly 10 percent rise in the stock on Monday. Japanese markets were closed Tuesday for a holiday. Mitsubishi UFJ advanced 4.2 percent to 936 yen, and Sumitomo Mitsui added 1.2 percent to 684,000 yen. Analysts, however, say it remains to be seen whether Japanese banks can successfully steer their recent acquisitions without alienating its thousands of new employees under a traditionally conservative Japanese business culture. Abe, who worked in finance in Japan during its economic heyday in the 1980s and early 1990s, says he's optimistic that the country's financial institutions can handle the global stage this time around. “It always depends on the ability of management to handle this growth,” he said. “But I've got to believe that many managers of Japanese banks have international experience, and that that's going to enable them to think more globally.”
