The Japanese have been here before; they are the ones the world is turning to. Twenty years ago seems so long ago now. Back then the Japanese housed 7 of the 10 largest banks in the world. Now they have 1. After the bursting of the asset bubble in Japan during the early 90’s the Japanese banks had no choice but to retrench. Yet, today with the financial crisis affecting most of the western banks Japanese banks have the capital that is needed.

The 90’s was an aberration for the Japanese not just the banks, but the country as a whole. While, the U.S. was going through the tech boom the Japanese faced what is known as the “lost decade.” During this time the Japanese financial institutions were selling assets that they had bought from all over the world in the 80’s just to pay off the losses they were facing at home. The clean up took a long-time. The Japanese banks made it worse by not writing down losses and keeping “ghost accounts” on their books.

At the beginning of this decade things were better and banks started to accumulate capital. The Japanese also became famous for their appetite to save and their low risk aversion in the financial markets.  The Japanese government bonds became the lowest yielding bonds in the world. Some in the financial world even ridiculed the Japanese for taking such low returns, while other places offered much higher yields. That build up in the early part of this decade is now what gives the Japanese the opportunity to once again become a global financial powerhouse.

It was just two years ago that western banks were a force to be reckon with. The American and English investment banks and universal banks were looking like world beaters. There were having huge returns from both real-estate markets in developed countries and underwriting fees from developing countries. They were trying to branch all over the world and there was no stopping them. Then the real-estate markets broke down and the financial crisis hit. Now they seem to be broken and their need for ever higher returns has them looking for capital infusions. Guess who is stepping in?

In September with the U.S. bailout looming the news of Japanese banks going international for investing opportunities made headlines. Nomura bought Lehman’s European, Middle Eastern, and Asian divisions. Mitsubishi UFG announced a plan to buy 20% of Morgan Stanley. This is in tune with a move that started in mid-2007 when Japanese banks started going into western markets to invest and purchase financial assets.  They are also trying to grow their M&A activity worldwide where they lag far behind their western counterparts.

The Japanese households today sit on 15 trillion of assets with about half of those in cash. This gives the Japanese a huge deposit base to expand on. Businesses in Japan are also not known for taking on debt, they have lots of cash on their balance sheets. The population of Japan started shrinking a few years ago in what looks to be a long-term trend. Then after a couple years of slow expansion the GDP of the nation has suffered a setback. All these factors are leading to Japanese banks looking for greener pastures to use their capital. Those first few moves in September were only the beginning of a much greater trend.