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
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
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
Do you expect deal trends to change over the next 12
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
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
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
What practical effect has the Sarbanes-Oxley Act had
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
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
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
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
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.