Japan Inc. in payback mode on Wall Street

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

A mere five years ago, these same banks were seeking much needed capital from foreign financial institutions to dispose of the bad loans accumulated during the bubble economy of the late 1980s to the early 1990s.

Now they're back to return the favor.

On Monday, Mitsubishi UFJ Financial Group Inc. announced that it will acquire a 21 percent stake in struggling Morgan Stanley, the second-largest U.S. securities firm, in a deal that is approaching ¥950 billion.

Beating other overseas bidders, Japan's largest brokerage, Nomura Holdings Inc., 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 Sept. 22.

"It was worth the wait. They will be good purchases," a senior official at the 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 easy 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.

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 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 stake of more than 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, said Shinichi Ina, banking analyst at Credit Suisse in Japan.

"It is better not to bring the Mitsubishi color upfront and to maintain (Morgan Stanley's) independence" because 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 regulated by the U.S. Federal Reserve, Ina said profits at Morgan Stanley may fall as it retreats from risky operations.

"One risk would be the possibility of an overblown investment if (Morgan Stanley) fails to achieve the level of profits MUFG is betting on," he said.

And 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.