Introduction

Author: | Published: 5 Jan 2004
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Fumitaka Eshima

Fumitaka Eshima is a managing director of UBS Investment Bank in Japan and heads the firm's legal department. He began his professional career at Anderson Mori, from where he moved to Freshfields in London and then Lee & Lee in Singapore, before joining SBC Warburg in Tokyo as a director in 1996. After some time at Credit Suisse First Boston as managing director of the legal department in Tokyo, he moved to UBS - SBC Warburg's successor - in April 2003. His experience includes a variety of capital market, M&A and other investment banking transactions, as well as structured products deals and financial regulatory work. He is a graduate of Tokyo University and holds a masters degree in law from London University.

IFLR: What was the biggest change in 2003 to the regulation of Japan's financial markets?

Fumitaka Eshima: The more aggressive approach by the Financial Services Agency (FSA) to the bad-loan problem at Japan's leading banks.

What business opportunities has this created?

Foreign investment banks have provided advice, and sometimes financing, to Japanese banks in relation to their efforts to reduce non-performing loans (NPLs) and improve capital. Specific transactions include the setting-up of NPL holding or advisory subsidiaries and capital raisings — both tier one and tier two.

Foreign investment banks have also played a role in relation to the efforts of the Japanese banks to reduce or manage their cross-shareholding portfolios.

Do you expect deal trends to change over the next 12 months?

Restructuring of distressed companies will continue to be an important source of business opportunities for us. Japanese companies, both borrowers and lenders, are more willing to seek help from foreign financial institutions both as advisers and as principal financiers.

The continuing pressure on domestic banks to improve their asset quality and capital base could bring further business to the foreign investment banks. For example, with Japanese banks keen to increase capital, this could lead to more securities offerings. Or the banks may want to try more structured trades to invite foreign capital in selected areas of their operations.

Also, with the recovery of the Japanese stock market, the second half of 2003 saw a jump in volume of equity financings by domestic companies, in particular convertible bonds. I hope to see even more equity capital market transactions next year, both in convertible bonds and in straight equities.

What more can the FSA do to stimulate the markets?

While there is room for further deregulation in various areas, what is more important is that the FSA meets its self-imposed objective to halve non-performing loans at the leading Japanese banks and stabilize the banking system no later than 2004.

Without a stabilized banking system, individual stimulus measures would not make any meaningful difference.

Has the FSA changed its approach to compliance in the past year?

The overall framework remains unchanged. What was noticeable last year was a greater emphasis being placed on client identification and client vetting. This follows the introduction of client identification legislation in Japan at the beginning of 2003 and more broadly the efforts of US and other regulators in the area of anti-money laundering or anti-terrorist financing.

What practical effect has the Sarbanes-Oxley Act had in Japan?

The Act is a source of concern for US SEC-registered Japanese companies, particularly in relation to governance rules and certification requirements. Yet I do not expect the Act to have an actual impact on the structuring of deals. An SEC-registered Japanese company is subject to the requirements under the Act irrespective of whether its next offering is SEC-registered or purely under Regulation S. However, the Act can potentially hinder more Japanese companies from seeking US listings, as seen in the case of Porsche in Germany.

Is the focus on analyst conflicts affecting your practice?

This is affecting not just our firm but the investment banking industry as a whole. Communication between research analysts and investment bankers is much more restricted than before and compliance officers need to act as gatekeepers between them.

As at the end of 2003, one big remaining issue in Japan was whether research analysts should be allowed to participate in pitches for new mandates or in roadshows. While the current Japan Securities Dealers Association rules do not prohibit this, investment banks are already taking a cautious approach. I expect the Association's rules to be changed.

The Industrial Revitalization Corporation of Japan has had a lot of attention in recent months. Do you think it will be effective?

I am not very optimistic about the IRCJ. The idea is for it to buy distressed loans from banks and revitalize the borrower. However, the dilemma is that the Corporation needs to buy loans low while banks do not want to sell their loans low, given that they have already incurred substantial losses in recent years. Perhaps the IRCJ needs to think about some sort of incentive for the lenders, but this is a difficult issue.

Still, foreign financial institutions remain interested in business opportunities which may come from the IRCJ. For example, we should be able to advise the Corporation as to the restructuring of target companies, and also on future exist strategies for its investments.

What possibilities do you see for corporate defence mechanisms such as poison pills?

Changes to the Commercial Code as of 2002 introduced stock acquisition rights (shinkabu yoyakuken) and also allowed greater flexibility in structuring different classes of shares for Japanese companies. These should make it easier for companies to adopt poison pills.

However, poison pills remain an untested area in Japan, and there is still uncertainty as to whether a poison pill could be seen as materially unfair (and hence subject to an injunction) if the bidder challenges it. A question also remains as to whether a poison pill can be compatible with the "equal treatment of all shareholders" under the Japanese Commercial Code.

On balance, I think poison pills are technically possible in Japan. Perhaps the biggest issue is whether any company wants to be the first to introduce them, because that will probably send the message to the market that the company expects a hostile takeover.

Finally, which area of economic reform needs most attention in 2004 and why?

Pension reforms are the priority for the Koizumi administration this year. Without an action plan to address the large pension fund deficit, and more generally the fiscal deficit, it would remain risky for foreign investors to make long-term investments in the Japanese financial markets.