Nippon Credit Bank

13-10, Kudan-Kita 1-chome
Chiyoda-ku
Tokyo 102
Japan
(03) 263-1111

Public Company
Incorporated: 1957
Employees: 2,200
Assets: ¥16.42 trillion (US$131.38 billion)
Stock Index: Tokyo Osaka

Since 1957 the Nippon Credit Bank has been one of only three banks specially chartered by the government to conduct large-scale long-term credit activity. The last of these banks to be founded, the Nippon Credit bank is generally considered number three in the industry in Japan. It has, nevertheless, striven to build its market share by offering a more diverse mix of services. But as Japan’s financial environment becomes more liberalized, the bank increasingly finds itself competing in the same markets as regular city banks, trust banks, brokerage houses, and even insurance companies.

Japan’s long-term credit banking system emerged during the 1920s as part of a government effort to aid economic development. The government created the Industrial Bank of Japan to manage and regulate long-term financing for emerging industries.

After the war, the IBJ was preserved, but privatized on the premise that a privately capitalized institution would perform more efficiently. Its role was formalized with the passage in 1952 of the Long-Term Credit Bank Law. Despite the fact that the IBJ was heavily regulated—on a quasi-concessionary basis, like a power utility—the government felt that competition would enhance efficiency in the industry. The new law therefore provided for the creation of a second institution, the Long-Term Credit Bank.

By 1956 the government decided to charter a third long-term credit bank. The institution chosen to fill this role was a former colonial bank, called the Bank of Chosen (Chosen is the Japanese name for Korea), which had been under government control since the war.

Korea became a Japanese colony in 1910, and was subject to an ambitious development plan by Japanese industries and the government. In order to assist in this effort, the government established a special development bank, the Bank of Chosen. The bank channelled investment funds from the Japanese mainland to Korea and helped to establish that country’s basic manufacturing, mining, and forestry industries.

World War II drastically altered the bank’s operating conditions. While not exposed to enemy action or bombing, the bank was severely affected by the collapse of the Japanese economy. At the end of the war, all Japanese banks came under the control of a central authority that reorganized the industry.

The Bank of Chosen remained under government control until 1957, when it was re-established as a public company called the Nippon Fudosan Bank (Fudosan means “real estate” in Japanese). As Japan’s third long-term credit bank, Nippon Fudosan was licensed to issue three-and five-year debentures, something the city banks could not do. But at the same time, the bank was prevented from accepting short-term deposits from individuals as city banks could do.

Nippon Fudosan’s customers were large companies in search of investment capital. The interest they paid on industrial loans increased the bank’s pool of capital, making investment funds available for other projects. As a result, long-term banks like Nippon Fudosan made possible the quick development of such basic industries as steel, chemicals, and heavy manufacturing.

During the 1960s, the long-term banks wielded great influence in industry because they were the primary sources of investment capital. It became a common practice for banks to make major investments in client companies and for bank officials to occupy seats on clients’ boards of directors. But the banks’ influence was strictly limited by the government regulators who had created the oligopoly; long-term banks were prohibited from making unfair use of their power.

Indeed, the neutrality forced upon the long-term banks became a great asset. Nippon Fudosan was free to deal with any of a number of competitors in a given industry simultaneously. Likewise, client companies had no fear that industrial secrets or proprietary strategies would be compromised. As a result, the long-term banks had ready access to and excellent relationships with the largest and fastest growing companies in Japan.

The oil crisis of 1973-1974 profoundly changed the conditions under which the long-term banks operated. Growth in Japanese heavy industry began to slow as energy costs rose. While Nippon Fudosan concentrated mainly on small- and medium-sized firms, the bank’s exposure to certain depressed industries slowed its earnings. Gradually, however, more efficient production methods and the implementation of rationalization programs set the bank’s growth back on track. In order to better reflect its role in long-term finance, Nippon Fudosan changed its name to Nippon Credit Bank in 1977.

Oil caused a second, more serious shock in 1978-1979. The Iranian Revolution caused a serious rise in energy prices, effectively destroying OPEC and in the process deeply hurting the small- and medium-sized Japanese companies the Nippon Credit Bank depended upon.

As the heavy industrial sector underwent reorganization, including amalgamations, buyouts, and failures, Nippon Credit started to emphasize service industries and foreign companies. In doing this, the bank entered the American and European bond markets in an attempt to become more like brokerage, consultancy, and wholesale banks such as Morgan Guaranty and Bankers Trust. While such multiple roles were prohibited for any one company in Japan (and elsewhere), no laws prevented a company from operating each of its services in a different country.

The economic slowdown that followed the 1979 oil shock caused lowered demand for industrial financing from all sources, particularly the long-term credit banks. Increasingly, companies found it easier and cheaper to raise their own investment capital through bond issues. This marked the beginning of a disturbing trend for the Nippon Credit Bank.

In order to adapt to these new conditions, the bank planned to move more aggressively into securities markets, but could only do so outside of Japan. Meanwhile, the long-term banks began an effort to liberalize Japanese financial regulations—namely Article 65 of the finance code—to allow greater operating latitude. Such a liberalization, long overdue in light of new market conditions, would allow long-term banks to compete with brokerages, city banks, and even trust banks and insurance companies in a wider range of capital markets.

The effort has wide support throughout Japan’s finance industry, but has been slowed by lobbyists’ attempts to skew the new legislation in favor of certain sectors. The long-term banks, which most need legislative reform, are perhaps most threatened by it. The widening of their historically narrow role in the economy would most certainly come at the expense of greater numbers of other institutions. As a minority within the industry, it is unlikely that the long-term banks will prevail.

Certain that liberalization is inevitable, the Nippon Credit Bank is completing the first phase of its transformation into a “global financial engineer.” The process, begun in April, 1985, placed a new emphasis on foreign offices in the world’s leading financial centers. In addition to New York, Los Angeles, Singapore, and Hong Kong, the bank maintains offices in London, where in October, 1985 it opened a new subsidiary, Nippon Credit International.

Domestically, the bank remains deeply involved in corporate finance. Its principal business is divided among the manufacturing, real estate, and finance industries, but the bank also provides loans for companies involved in construction, communication, and transportation, and is a leading retail lender. Like other Japanese banks, Nippon Credit is highly supportive of its clients (in 1986 it took over management of Kurushima Dockyard, an unprofitable shipbuilder).

In the future, Nippon Credit is likely to meet intense competition both at home and abroad. However, it maintains a loyal following among small- and medium-sized companies, and bears a significant advantage in overhead costs; the bank maintains only 20 branches—one-tenth as many as most city banks—and just over 2,000 employees.

Principal Subsidiaries:

Nippon Credit Bank (Curasao) Finance N.V. (Netherlands Antilles); Nippon Credit International (HK) Ltd. (Hong Kong); Nippon Credit International Ltd.; Nippon Credit Australia Ltd.; Nippon Credit (Schweiz) AG (Switzerland).