Making a 'Big Bang' Detonate Softly

The isolationist shoguns of Japan's past would disapprove: Their successors have let the barbarians through the gates and into the Japanese market. So far through, in fact, that they're holding ribbon-cutting ceremonies.

The American investment firm Merrill Lynch launched its new Japan Securities Co. in Tokyo last month with much pomp and a slew of corporate dignitaries. Chief executive officer David Komansky, an imposing, bulky man, told the attending crowd that "Merrill Lynch is bullish on Japan!" But the words did little to ease widespread concern about how the new venture will change this country.

Merrill Lynch, America's largest brokerage house, has come to symbolize Japan's ambitious "Big Bang" - a financial-industry deregulation drive that opens the brokerage business to newcomers, boosts competition among firms, and expands the investment options of Japanese consumers.

This is a huge step for Japan's once-cloistered finance companies, and the economy as a whole. Launched in April, the Big Bang represents a loosening of the Ministry of Finance's grip on the economy and a step toward "global standards" of business.

But many here say a globalization of the market means a westernization of Japanese society, a shift toward a more profit-oriented system that places less value on harmony, relationships, and group well-being.

"It's really about a clash of civilizations," says Ron Bevacqua, a Tokyo-based economist for Merrill Lynch. "The US-style economic model versus the Japanese style. Japan so far has said no to drastic labor cuts and shareholder supremacy. Socially, they're not going to go all the way down that road."

Mr. Bevacqua, a lean, intense New Yorker, is well equipped to appreciate this unfolding drama. A longtime Japan watcher and former student of Chalmers Johnson, an American academic who has long urged US policymakers to take a hard line on Japan, Bevacqua is interested in more than the latest statistics.

"This job could just be about numbers - cold forecasts on tomorrow's industrial production report," he says. "But it's fascinating from a social, political, and historical point of view. Japan is trying to work out how to maintain economic sovereignty and social cohesion. It's a real experiment in economics."

Worries about foreign influences

His company's aggressive launch into retail securities, as opposed to the corporate work it usually does here, has heightened Japanese concerns about economic sovereignty and the influence of foreign firms on the economy.

"What right do stockholders have to run a company and employees just to maximize their profits?" asks Mariko Fujiwara, research director at Tokyo's Hakuhodo Institute of Life & Living, expressing the view of many here.

"Japanese companies work together to succeed [and their] profit allocation is more fair."

Merrill Lynch made its move after the November failure of venerable Japanese securities house Yamaichi Securities Co. That company, one of Japan's "big four" brokerages, had folded under some $2.3 billion (3.5 trillion yen) in bad debt.

Armed with the new freedoms allowed by the Big Bang reforms, Merrill Lynch had been in talks with Yamaichi about a joint venture. Instead, it took over the lease on 33 of Yamaichi's offices, hired 2,000 of its newly jobless workers, and went into the retail securities business itself.

To date, the Japanese securities industry hasn't offered clients much diversity in investments, concentrating mainly on low-yield Japanese financial instruments. Big securities houses have also focused on institutional investors, largely ignoring individuals.

At security houses like Yamaichi, consultants were often responsible for selling and buying stock as well as advising customers. Their mixed duties raised concerns about the objectivity of their advice. Still, news of Yamaichi's demise and Merrill Lynch's gain dismayed many Japanese.

"It reminds me of when Mitsubishi bought Rockefeller Center, and Americans got so upset," says Toshiko Oguchi, a Tokyo teacher. Seeing ads for foreign financial firms like Merrill Lynch gives Japanese an uneasy feeling, she says.

Unlike ubiquitous American imports such as McDonald's, these businesses deal with just money, which Ms. Oguchi calls a "core" part of people's lives.

Other commentators warn of the "Wimbledon syndrome," after England's prestigious tennis tournament that has been long dominated by foreigners.

But those worries may underestimate Japan's ability to incorporate foreign influences. The Japanese have had a long and successful history of adopting from the outside world and molding the imports to their liking.

The first overseas financial firm opened its doors here in 1858. Merrill Lynch has been chipping away at the Japanese market since 1961, but the business culture here has been little changed.

The new concerns might spring from the fact that Japan badly needs the boost outsiders can give it. Bankruptcies have rocked the securities industry, and all of the "big four" brokerages have been embroiled in racketeering scandals.

More urgently, Japan's population is aging and its pension system under stress - there aren't enough young people to support the elderly of the future.

'The wedge to reform Japan'

The country needs to make better use of the $10 billion in personal savings that are largely uninvested. Competition for these savings should improve the range of options and services, Big Bang proponents say.

"The pie is so big here that even a fraction will make foreign firms happy," Bevacqua observes. "If you're optimistic, this is the wedge to reform Japan."

At Merrill Lynch's new Tokyo office, the rush starts at lunch as people drop in to learn more.

"I read a lot about Merrill Lynch and was curious to know how they actually operate," says Yoshinori Yoneda, a Kyoto businessman who has stopped by on a break during a business trip. He has no illusions about what the plush, plant-filled office represents.

"The Merrill Lynch takeover is a symbol of globalization," Mr. Yoneda says. "But we can't slow globalization down. We can't go against the flow anymore."