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LEAD FOCUS: Japan stages comeback to rescue battered Wall Street firms.

TOKYO, Sept. 25 Kyodo

(EDS: ADDING NEW INFO ON SUMITOMO MITSUI AT 5TH GRAF)

Just as the world's second-largest economy was about to lapse into a recession, Japanese banking giants have staged a stunning comeback with a frenzied series of investments into the cash-strapped U.S. financial sector.

Just five years ago, the same banks had sought much needed capital from foreign financial institutions to dispose of the bad loans accumulated during Japan's bubble economy in the late 1980s to the early 1990s.

And now they are back to return the favor.

Earlier this week, Mitsubishi UFJ Financial Group Inc. said it will acquire between 10 to 20 percent of common shares in the second-largest U.S. securities firm, Morgan Stanley, in an investment that is likely to reach around 900 billion yen.

Within days, speculation spread that Sumitomo Mitsui Financial Group Inc. may also be ready to invest in Goldman Sachs, but the deal failed to materialize after the No. 1 U.S. investment bank found other sources to boost its capital. The two have had close ties, with Goldman rescuing the Japanese bank during its own credit troubles in 2003.

Beating other overseas bidders, Japan's largest brokerage, Nomura Holdings Inc., recently acquired the Asia-Pacific franchise and the European operations of failed Lehman Brothers Holdings Inc. in a deal that excludes any trading liabilities.

''This is a once in a generation opportunity,'' Nomura President Kenichi Watanabe said in a statement Monday.

''It was worth the wait. They would be good purchases,'' a senior official at Japan's Financial Services Agency also said.

The string of announcements came amid one of the worst credit crises to ravage the U.S. financial sector in decades, prompting a

$700 billion government bailout plan to clean up bad debt in a repeat of Japan's own banking crisis.

With bitter memories of the bursting of the bubble economy still fresh in their minds, the decisions did not come easily for the conservative, risk-averse Japanese financial institutions.

But observers said MUFG was able to clinch a deal with Morgan Stanley precisely because it had stood on the sidelines when oil-rich Middle Eastern investors and Asian sovereign wealth funds hastily stepped in late last year to rescue U.S. financial institutions deep in the midst of a housing crisis.

In announcing the deal, Morgan Stanley was quick to highlight that advantage, hailing MUFG as ''the world's second-largest bank holding company with $1.1 trillion in bank deposits.''

''These are carefully studied investments that have the potential to bring huge rewards,'' said Jesper Koll, former chief economist at Merrill Lynch Japan Securities and current president of Tantallon Research Japan K.K., an advisory arm of a Singapore-based hedge fund.

''This is the first time that you have got sizable capital participation of major (Japanese) banks,'' Koll said.

Despite the finely orchestrated moves, Katsuhito Sasajima, banking analyst at JPMorgan Securities Japan Co., said Japanese banks are still far from taking the reins in managing the U.S. financial institutions reeling under the subprime loan fallout.

''They will not be able to broadly expand investment operations in Europe and the United States (even) through the companies they have invested in,'' Sasajima said.

''If we consider the fact that Japanese banks have been downsizing overseas operations (for the past decade or more), it is unlikely that they will immediately step in to take control of management,'' he said.

A senior official of a major Japanese bank also admitted that ''Japanese banks do not have the caliber to manage'' the aggressive Western investment banks thirsty for high-risk transactions.

MUFG's decision to take a maximum stake of 20 percent in Morgan Stanley's shares also came amid fears that greater control by the Japanese bank will trigger an exodus of Morgan Stanley employees, Shinichi Ina, banking analyst at Credit Suisse in Japan, said.

''It is better not to bring the Mitsubishi color upfront and to maintain (Morgan Stanley's) independence'' since the vastly different cultures of the two companies may clash, Ina said.

With the top two U.S. investment banks about to become bank holding companies to be regulated by the U.S. Federal Reserve, Ina also said profits at Morgan Stanley may fall as it retreats from risky operations.

''One risk would be the possibility of an over-blown investment if it (Morgan Stanley) fails to achieve the level of profits MUFG is betting on,'' he said.

Yet whatever the hidden risks may be, many experts were quick to draw a line between the brash real estate investments Japan made in the late 1980s and current moves to sweep up the failing Wall Street firms.

''These are strategic alliances that are being built here...the start of true globalization for Japan's financial services,'' Koll said.

''They are going beyond pure investments to expand operations abroad that are not growing in Japan, and to do that they will utilize talented resources and networks'' of U.S. financial giants, Credit Suisse's Ina said.
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Publication:Japan Weekly Monitor
Date:Sep 29, 2008
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