Japanese giants have a yen for a merger

Corporate mergers in Japan are usually very private affairs. The public knows little about them until the deal is done and dusted. However, the saga unfolding between three of the country's top banks seems to be breaking from this tradition.

Last Thursday the ailing UFJ Holdings and the Mitsubishi Tokyo Financial Group (MTFG) signed a basic merger agreement, which "when realised, will create the world's largest financial group with assets totalling ¥190 trillion [£950bn], surpassing Mizuho Financial Group and reorganising the nation's financial sector into three massive financial groups", said the Yomiuri Shimbun.

The agreement followed a Tokyo high court ruling that overturned a lower court order banning merger talks between the two banks because of an earlier agreement with another Japanese rival. "In one month, UFJ has offered itself to MTFG; [reneged on an earlier agreement with] Sumitomo Trust & Banking Co - which is part of Sumitomo Industrial Group, but separate from Sumitomo Mitsui Financial Group - to sell it the UFJ trust bank subsidiary; refused to consider SMFG's merger proposal; fought an SMFG injunction halting merger talks; and finally won a high court decision allowing its preferred deal to proceed," explained the Australian's Peter Alford.

"Not since Alice popped down the rabbit hole have things looked this curious," added the Lex column in the Asian Financial Times.

The Asahi Shimbun reckoned that political and international factors explained why a large part of the UFJ-MTFG merger was in the public domain. "The finance ministry can no longer call the shots on everything that goes on in the financial industry, and also because of the progression of the globalisation. At any rate, we welcome the open talks about realignment in the banking industry," said the paper.

That was a view shared by Japan's leading business daily, Nihon Keizai Shimbun. "We hope that the management system of Japan's financial sector will become more transparent by taking advantage of this valuable experience," it said.

But the Wall Street Journal Europe felt that a change in Japan's "clubby corporate culture, where decisions are made in back rooms", was not in the offing. UFJ's shareholders have been kept in the dark and the price of MTFG's offer has not been disclosed. "This ignorance on the part of shareholders was just another symptom of their lack of participation in the decision-making process," said the paper. "Perhaps the saddest thing is that the lack of shareholder involvement in important decisions is seen as the norm in Japan."

Lex in the FT said UFJ was a bank with a "ravaged balance sheet" and a record of evading regulatory inspections. The Japanese government has ordered it "to shed two-thirds of its ¥4.6 trillion [£23bn] of bad loans by March", said the China Daily. This was why the financial group was willing to sell out to a stronger bank with more capital, said the Economist.

But the magazine argued that bank mergers "will do little for Japan's financial system ... unless they lead to tough treatment of duff loans to 'zombie' firms", such as the retailer Daiei and the property developer Daikyo, which owe UFJ ¥700bn (£3.5bn). "If a combination of tougher inspections by regulators and fresh capital from a merger partner leads UFJ to get tough on these and other borrows, it will mark huge progress by Japan's worst-managed big bank."

What MTFG was getting from the merger was "UFJ's small business and consumer clients, a possible source of profit growth", said the China Daily. And this might explain why HSBC is taking an interest, noted the Times's Patience Wheatcroft. There were concerns when HSBC bought Household, a US finance group. However, it charges relatively high interest rates to "relatively lowly" consumer borrowers, and has had a healthy impact on HSBC's profits, she explained. "Britain's global bank is now contemplating a carefully targeted attempt to enter Japanese consumer finance, in which interest charges are notoriously high when official rates are still negligible. The latest bout of consolidation ... provides too good an opportunity to miss."