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NEWSLETTER- the JAPANALYZER

December 2003

Market Snapshot - Japan
Japanese Banks: finally on road to recovery?

Each month the Japanalyzer takes you inside one of Japan’s IT industries- showing you who’s who and where the market is heading. This month we focus on Japanese Banks, which provide the backbone of support to Information Technology and other key industries of Japan. Last month, Japan’s four biggest banks posted strong profits for the first fiscal half of the year. While the results were boosted by such one time developments as a tax rebate from the Tokyo government and a rebound on the Tokyo Stock Exchange, the news left many Japanese economists with a positive outlook. Some say the results indicate a gradual recovery from the non-performing loans and poor economic performance of the long recession. Yet others point to the weak banks that remain such as Resona, Japan’s fifth largest bank (bailed out by the government earlier this year) that remains in the red, and Ashikaga bank, a major regional bank that recently had to be nationalized. This debate over whether Japanese bank improvement signals the beginning of the end of the 12 year Japanese recession is likely to continue as more banks report their results.

The concern about Japanese banks after all this time, still relates to the bad-loan problem. Bad loans have been reduced dramatically but they remain above acceptable levels. The average ratio of nonperforming loans at Japanese banks is at 6.5% compared to 5%, the industry standard. The persistence of a high ratio creates doubt about Japanese banks ability to accurately assess bad loans. The culprit appears to be small and midsize corporate borrowers, which seem to be having a harder time repaying their loans. At top 5 Mizuho Bank for example, losses on loans to small and midsize companies accounted for 190 billion yen of the 300 billion yen in bad loan losses Mizuho expects to dispose of this year.

The other key area of concern is the use of deferred tax assets as bank capital. Deferred tax assets are essentially credits derived from tax payments on future profits. The use of tax credits has been reduced but still accounts for an unhealthy proportion of major Japanese banks’ capital. For the first half this year, Mihuzo and rival UFJ both had this ratio was at 51%.

Yet in despite of the above concerns there is still plenty of room for optimism stemming from the banks core profitability numbers. Banks measure their profitability, like most businesses, on their margins, which are improving. At Mizuho, average margins are up by four percent for the first half of the fiscal year. At Sumitomo Mitsui, average margins are up at least 10%, taking the average rate charged on its corporate loans to 1.73%. Meanwhile, Mitsubishi Tokyo is hoping to increase margins by an average of 30% across its entire portfolio by March of 2004. However incremental these improvements may seem, they represent a symbol of the banks efforts to improve their bottom line. As Mr. Shigemitsu Miki, President of Mitsui Tokyo, recently said in reference to his company’s internal plan to turn around performance: “Lend more charge more”. We’ll all be waiting until the end of year results to see if such banking strategies will really lead to recovery for the banks and the Japanese economy, in general.

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This Month's Bridge Builder
Featuring the real voice of IT across the Pacific

December, 2003

Broadband in the Living Room
Mr. Yoshikuni (Yoshi) Hirayama, Executive Vice President, Panasonic Technologies

The FCC announced with great fanfare recently that high-speed connections to the Internet had increased 18% in the first half of 2003, raising the total of lines in the U.S. to 23.5 million. Meanwhile, Japan, which has a population half that of the US, says it already has almost 10 million DSL lines. Great news from both sides of the Pacific- so why is it you would be hard pressed to find carriers, PC makers, and the IT community in general, celebrating? Consumers today employ only a fraction of the potential latent within their Broadband connection, using it mainly to accelerate e-mail and Internet surfing. Very few broadband customers see a Broadband-powered homework as a gateway to all manner of digital content. But consumer electronics companies such as Sony, Samsung, and Panasonic hope to change all that. Panasonic for example, recently introduced an Ethernet capable TV that would finally network a TV as a PC or other device is integrated today. Panasonic sent one of its Research Directors Mr. Yoshikuni (Yoshi) Hirayama to outline Panasonic’s strategy at a recent Japan Society event where he discussed Panasonic’s vision for the wired home. This month’s Bridge Builder features key highlights from Mr. Hirayama’s presentation.

Mr. Hirayama began his presentation by reviewing the key characteristics of American broadband users. Relativity wealthy, educated, and proficient with a PC, American broadband subscribers represent an attractive market. Currently, they use their home network for productivity rather than entertainment- in other words they are highly PC centric. But when asked “what do you want to do with TV? “, the users Panasonic surveyed said they wanted to “skip commercials”, have an “on-screen guide”, and “record/watch TV at the same time”. In other words they want to watch enhanced TV, according to Mr. Hirayama. The American broadband subscriber, says Mr. Hirayama, is different from the Japanese broadband user in one key area- speed. Japanese DSL connections are typically an order of magnitude faster than American DSL connections primarily due to the density of Japan’s infrastructure.

Panasonic’s strategy for approaching the PC-centric American broadband user is to better facilitate home network entertainment, a challenging area with great potential, says Mr. Hirayama. Panasonic’s answer to the challenge: T-navi, a service that enables consumers to obtain content through high-speed access to the Internet from their digital television sets. Panasonic released its Internet-capable digital TVs in Japan in May of 2003 and began the T-Navi service with 21 T-Navi sites. T-navi sites are essentially websites specifically formatted for viewing on a digital TV. Panasonic has not yet introduced the service in the US but the value proposition of T-navi, according to Mr. Hirayama is compelling nonetheless: simple access to information services from your living room. Mr. Hirayama believes that like the Teletext interactive information service which has been successful in the UK, T-navi has a similar chance at success in the US and Japan. Panasonic says it hopes to attract more than 1 million users of the service by 2006.

For more information on the Japan Society, please visit them on the web at www.usajapan.org and for more detail on Panasonic’s T-Navi see please visit the service site:http://panasonic.co.jp/enet/products/tnavi/ (Japanese only).

Previous Interviews

4th Fiber Optics Expo
January 28-30, 2004, Tokyo Big Sight (Tokyo International Exhibition Center)
Features various optical communication devices & equipment : optical fiber cable, optical devices, optical transmitters, optical measuring/inspection equipment, optical communication equipment/systems.

Net & Com 2004
February 4-6, 2004, Makuhari Messe (Nippon Convention Center)
Features computers, network-related hardware and software, peripherals, service solutions.

IC Card World 2004
March 2-5, 2004, Tokyo Big Sight (Tokyo International Exhibition Center)
A leading exhibition for the Japanese smart card and smart tag industry. Exhibits feature smart cards, card systems, smart tags, applications, and peripheral equipment. This sixth IC CARD WORLD will be a radically expanded event, with an expanded exhibition, the latest information via seminars and workshops, and other programs.

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