The Japanese Presence in the European Financial Services Sector: Historical Perspective and Future Prospects

Into the late 1980s, Japanese financial institutions were a growing presence in the European financial services sector. Several factors can account for the significant investment in Europe by Japanese banks and securities firms. Firstly, in step with the Japanese industrial expansion into Europe, Japanese financial services firms moved overseas to service the foreign needs of their domestic clients. Significant additional investment resulted from the emergence of Europe as an important world financial center: European markets attracted Japanese banks and securities firms which sought both superior liquidity and opportunities for learning Western financial technique. Finally, although Japanese banks have not attempted penetration of the European retail banking market, they have been somewhat successful at becoming important intermediaries in the local wholesale banking activity. The strong growth of Japanese financial institutions in Europe can be linked to two aspects of the competitive advantage of Japanese firms in the 1980s: the success of Japanese industrial clients abroad and the competitive cost advantage of Japanese financial institutions. The relative cost advantage appears to be due to such macroeconomic factors as the appreciation of the yen, advantageous cost of capital, and strong gains in the stock and real-estate markets, as well as the success of Japanese banks in implementing a strategy of high operating efficiency which offsets their disadvantage at competitive differentiation. Developments in the 1990s indicate an important erosion of many of the factors which supported the competitive advantage of Japanese financial institutions in Europe such as the crash of the equity and real-estate markets, the deregulation of the Japanese financial system, and the adoption of international banking standards. Moreover, trends in the European financial services industry indicate an increase in market efficiency and domestic competitiveness. As with the European firms, only the strongest foreign banks will survive in the emerging European financial market. In the 1990s, Japanese financial institutions face a tough, if not insurmountable, challenge in maintaining their position in Europe.