MW-92 -- Growing Pains?

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J@pan Inc Magazine Presents:
M O N E Y W A T C H
Weekly Financial Commentary from Tokyo
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Issue No. 92
Monday, September 13, 2004
Tokyo

CONTENTS

@@ VIEWPOINT: Growing Pains?

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@@ VIEWPOINT: Growing Pains?

I admitted to some anxiety after the string of bad news on
personal consumption and employment before the O-bon holiday period,
and it now appears that it this is also being reflected in a
revision of second quarter GDP numbers. These numbers were revised
from an annualized growth rate of 1.7 percent down to 1.3 percent.
This could be seen as a reaction to the 7 percent growth rate of the
previous six months, but there are a few more worrying signs. We
welcome the diminishing reliance of the economy on public spending,
but there was a smaller than expected increase in business
expenditure, and corporate inventories fell.

These numbers just add to our worries about the outlook, especially
as the weaknesses appear to be spreading. That said, we are not
running for the emergency exits yet -- but it's worthwhile keeping
track of their whereabouts for future reference.

And then, just as the economy had us excited at the beginning of this
year, so too did the possibility of a hostile bid by Sumitomo Mitsui
Financial Group (SMFG) over UFJ to break up the agreed upon bid by
Mitsubishi Tokyo. On Friday it appears that the fat lady had started
her warm-ups for the final encore: UFJ had authorized the issue of
preference shares that effectively acted as a block on a bid by SMFG.
The last option (or rather hope) for a more contentious battle would
be a few shareholder lawsuits to block the issue of the preference
shares. We will have to wait and see.

But on reflection, is SMFG better off without UFJ? As we've seen
in the bidding processes for 3G licenses in Europe, the winner of the
auction is not always the winner in the business. Given UFJ's
proven inability to deal with problem borrowers (it continues to have
huge loan losses), its history of lying to regulators and its proven
inability to put its capital to work efficiently, UFJ cannot be seen
as a great catch -- especially with a $6.4 billion capital injection
before even considering the purchase price.

Something makes us wonder if SMFG's strategy is just to ensure
that MTFG does not get a complete gift. Paying the full price will
make MTFG's management work hard to make the integration a
success, allowing SMFG free rein to consolidate smaller players in
the industry without too much scrutiny from its big rival.

Again, we have to wait and see, but with Goldman as SMFG's advisor,
I would imagine this initial skirmish is just the beginning of a long
battle.

Finally, in reading this month's J-RED (Japan Real Estate Direct),
I notice with interest that Japan continues to innovate. Monogatari,
an urban hot spring that opened last year in Odaiba, has just come up
with the revolutionary idea of having an onsen for your pets.

I have no idea how this would work, but it is certainly in keeping with
the current pet craze in Japan. If you would like to read more, sign
up for your free 3 month subscription of J-RED at:
www.transpacific.jp/publishing

-- John Charles-Decourcy

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STAFF
Written by John Charles-Decourcy (jcd@japaninc.com)

Edited by J@pan Inc staff (editors@japaninc.com)

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