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Proactive ‘One Mizuho’ strategy adds unique industry insight for its clients

Interview - December 10, 2015

Mizuho Financial Group (MFG) is in a somewhat unique position as it houses a bank, a trust bank and a securities business under one roof, and can also provide its clients with industry knowledge and consultancy services. Yasuhiro Sato, President and Group CEO of MFG, discusses the group’s long-term vision, its strides into international markets, and ways to increase its international revenue stream.

 

YASUHIRO SATO, PRESIDENT, GROUP CEO AND MEMBER OF THE BOARD OF DIRECTORS OF MIZUHO FINANCIAL GROUP, INC.
YASUHIRO SATO | PRESIDENT, GROUP CEO AND MEMBER OF THE BOARD OF DIRECTORS OF MIZUHO FINANCIAL GROUP, INC.

Mizuho Financial Group has established a solid reputation in the market today and provides comprehensive financial services through its subsidiaries. The group is in a somewhat unique position, as it is effectively the only group in Japan with a bank, trust bank and securities company under one umbrella. To what extent does the integration of these core services gives Mizuho a more competitive edge to respond to the ever changing and more sophisticated needs of your customers today?

Back in the 1980s, banks, securities companies and life insurance companies were all separate entities. In the 1990s a second phase and business model started, where banks started to organize as financial conglomerates, like Travelers/Citicorp, J.P. Morgan, and Bank of America. That was the first time in history that we had this type of business model as large financial groups. That was very efficient for the clients at that time. Then in the 2000s the investment banking-centric business model came out, which included Lehman Brothers, Morgan Stanley and Goldman Sachs. This investment banking-centric business model could create a very high return – something over 25% ROE, using the leverage of the balance sheet and some financial high technologies, for instance the sub-prime loans. The Lehman Brothers collapse put an end to that third phase business model and opened a fourth phase, starting in the 2010s, where all financial institutions were in search of a new business model.

This is when we initiated our ‘One Mizuho’ strategy, putting under our bank, securities company and trust bank under one umbrella. Under this model, we are focusing on the clients’ needs, and putting our products out there. In the past, a bit like a department store, financial conglomerates were exposing their products to their clients, and marketing them to the clients. But now, we are not waiting for the clients to come, but we are proactively visiting our clients. Our clients’ needs are so complex at the moment. For example if you are looking for an investment product, some people do not know what’s on offer, and which products are appropriate for them. So we focus on the clients to find out what is the best solution for them. This is a completely different business model. Because clients’ needs are so complex and so different, we can’t just focus on the traditional banking or lending business. We have to have wider revenue sources, including the trust services, securities services and other banking services. That’s the core value behind the ‘One Mizuho’ strategy. This strategy has been quite successful so far, and revenues from client business in our all financial institution have been increasing and exceeding that of our competitors.

Our approach is to focus on the clients’ needs and not wait for the clients to come in, but to come out and proactively meet them. Many times we found that clients don’t know what they should do. I will give you an example: an automotive part maker in Tokyo wants to make an investment for the future, however they don’t have all the information, they don’t know what the future is like for their industry, what the trends are in other markets and other companies. They need to know the facts, what is taking place in the market and what other companies are doing, and this is the added value that Mizuho can bring them – we provide them with industry knowledge and consulting services, and can advise on the real shape of the future of the automotive industry for them. So our role far exceeds the banking role, but touches upon industry consulting, and this is again our aim with the ‘One Mizuho’ approach. So far we are a key player and a leading player providing such advanced solutions to our clients.

 

The group’s vision is to become “the most trusted financial services group with a global presence and a broad customer base, contributing to the prosperity of the world, Asia, and Japan” – how does that vision differ from your competitors?

At Mizuho, we have established what we call the ‘Industry Research Division’ which is the specific team of specialists that watch closely more than 18 industries we have singled out. We have about 200 analysts working in our bank. They are specialized industry analysts – not equity analysts – who are looking in depth at the key trends and the future outlook of an industry, such as technology, chemicals, oil and gas, automotive, new energy, etc. This is a major strength that we have developed, and it provides our bank a leading edge. For example, when I visited a major technology company in Korea, our team explained to the company the future of the telecom carrier and raw materials – that is our differentiation point. No bank can provide such precise analysis and industry outlook as Mizuho. It is our close associations, partnerships with and access to other industry players that give us this edge and enable us to provide such comprehensive and advanced services. Our reports are quite useful for our large corporate clients, and give our brand a very unique strength.

 

You have been quoted in the Financial Times as saying “Mizuho’s main dish would be supplying finance to internationally active Japanese companies whilst becoming closer to non-Japanese blue chips”. A year after having made this statement, are you any closer to the ‘main dish’ of which you spoke?

At this moment, about 30% of our revenues come from our international business activities. This figure has been increasing quite sharply lately, and within just a couple of years it should reach more than 40% of our revenues – both from Japanese or non-Japanese related areas. We have very strong relationships with non-Japanese business clients, and we are quite strong in the infrastructure business, especially in Asia. As you know there are many needs in Asia in terms of infrastructure, including airports, roads, railways, etc. We are quite well positioned in regards to project finance; we are the number three or four player in this area. One of our competitive advantages is that we are working in partnership with the Japan Bank for International Cooperation (JBIC), which is a government-owned financial institution, and a very strong institution that can provide very competitive rates for the longer term. JBIC has to work with private sector banks like us, as they can have only 50% of the financial scheme at most. The combination of JBIC and Mizuho has created a very competitive player in the infrastructure market in Asia. So, non-Japanese corporations and infrastructure businesses are two large pillars of our international business strategy, and we’ll see much more growth in these areas.

Another example of Mizuho’s international activities lies within the agricultural sector. With the upcoming Trans-Pacific Partnership, we will have to strengthen our agriculture industry. This is one of the target areas for Prime Minister Abe. We at Mizuho are working on a project to export Japanese agriculture to the GCC countries. The GCC countries have the financial resources but lack capacities to hire younger people. So Mizuho will establish the facilities to export Japanese agriculture. We’ll set up large conditioning facilities in the GCC, where we will process Japanese agricultural products. That’s the kind of combination between Japanese businesses and non-Japanese businesses, and this is an example of a very large-scale project Mizuho is working on, but there are so many other examples like these. We as a Japanese bank see ourselves as a bridge between Japanese industries and the global market needs and demands.

 

The implementation of Abenomics had an immediate positive effect in 2013, however further growth was interrupted after the tax rise of 2014. What is your opinion of the effectiveness of Abenomics and the policies of the Bank of Japan over the last couple of years?

If you look at the figures pre-Abenomics and post-Abenomics, you can see, for instance, the unemployment rate has dropped from 4.3% in 2012 to 3.3% in 2014/2015, the Nikkei 225 has risen up from ¥8,661 to ¥18,947, and the US$/Yen exchange rate has gone up from ¥79.4/US$ to 120.9/US$. That’s been induced by Abenomics, and particularly by the first arrow, which is the monetary easing policy by the Bank of Japan (BoJ), and the second arrow which is the budgetary stimulation package from the government.

The issue is with the third arrow, the growth strategy. I used to be a member of the Japanese Government’s Industrial Competitiveness Committee, and I could see there were so many regulations in every industry. Yet within the last two years, the government has been implementing many deregulation measures – mostly in the nursing, medicine, agriculture, and technology-related industries. However it takes time to see results. It is therefore a bit too early to say whether or not the third arrow has proven successful. As far as I know, looking at the real business field, I can say that the deregulations are producing some effects, and we will certainly see some positive results shortly.

 

Which areas would you specifically highlight which require further deregulation?

One example is the nursing and medical services industries. There are still some heavy regulations remaining in these areas. In Japan, doctors still have strong medical power but Prime Minister Abe is looking at ways to break these regulations, but it takes time.

 

How would you assess the overall performance of the banking/finance sector since 2008?

Interest rates have been very low, around the 0% level, which is not good for the international financial industry. But because of external stimulations to the entire economy, which create opportunities for the banking industry, the cross-border lending business is booming. Softbank Corp. acquired Sprint in the United States, and Japan Tobacco has launched new business ventures in Europe, and many other Japanese companies are becoming more active and expanding their business overseas. These increasing international activities, expansions and acquisitions create tremendous opportunities for the Japanese banking industry. So in spite of the long-lasting low interest rates in our country, and the induced decreased profitability of the lending-business, the total overall financial industry – including the lending and investment banking business – has been doing quite well, enjoying some good results and positive impact from all external activities.

 

The perception of both the investment environment and the Japanese business culture is sometimes called into question by potential foreign investors – what steps can be taken to enhance the Japanese overseas image and promote more FDI into the country?

Prime Minister Abe is a strong advocate of increased inward foreign direct investment. There were in the past many difficulties for foreigners in Japan, high costs of operations, and all kinds of barriers. These issues won’t be overcome immediately, but the Japanese government is working on this, and trying to ease conditions for foreigners, creating for instance international schools for foreign people and so on. With the Tokyo 2020 Olympics/Paralympics, we are now preparing to receive larger numbers of visitors in the Tokyo Metropolitan area. However in traditional industries and business fields, like in the automotive industry and telephone industry, I don’t think there are enough opportunities in the Japanese market to justify high in-bound investments. Perhaps in the robotics industry, or medicine and IoT related business fields we will see FDI coming in. The Japanese government is actually ready now to receive high-level specialists from overseas in these areas, and establishing good conditions to receive them. That could be a good start to receive investments from overseas into Japan.

 

What challenges do you think Japan will face in a more globalized world, and what opportunities will arise from that?

Globalization is our main agenda at the moment. Although we are an international financial group, with more than 100 offices overseas, we are still facing some challenges with the globalization of our operations. In our headquarters we are still working and communicating in Japanese. We have some processes in place to translate from Japanese to English, and then share with our global staff. I admit that this isn’t the most effective process, and definitely we need to instill and enforce a more English-related culture in our Japan offices. In addition, Japanese culture is very specific and difficult to explain. This is a very team-centric culture that differs a great deal from the Chinese, European or American ways. Creating a unified and open type of culture is quite difficult for us.

 

What are your thoughts on Japan’s revitalization strategy?

I think that the third arrow will produce results that will be visible only a few years down the line. The US economy is growing stronger, the European economy is facing some challenges, China will witness a slower growth for the coming years, and emerging markets like Brazil, India or Russia, all have some issues because of low oil prices. Next to these economies, Japan will be able to have a quite sustainable growth for the next few years – a very modest growth indeed, of only 1%, but sustainable. We don’t have any fundamental threat in front of us. The US economy is strong, but the Japanese economy could be the second runner, next to the US economy, to lead global growth. We have some confidence in that.

 

Your US CEO has stated that “it’s a great investment to place our money in the Americas now.” In the past you have signaled that you were potentially keen to add a US commercial bank to your books. What are your plans to increase your presence, activities and visibility to the United States?

Earlier this year, we have acquired the North American loan commitments from Royal Bank of Scotland (RBS). That acquisition was quite successful and propelled Mizuho as the Number 10 debt capital market player in the United States. In addition, we also acquired a 16% stake of Matthews International Capital Management, the asset management company in San Francisco.

We see the US market as very promising and already very successful for us. We are very much looking at expanding our activities within commercial banks, asset management companies and some security businesses in the United States to enhance our organic growth. We are now scrutinizing the market and actively seeking for some target companies, to make an investment, from Japan.

 

Do you feel international growth is essential to the group?

I would say both yes and no. If you look at the history and chronology of financial crises – we had in 1973 the oil crisis, in 1981 the Latin American debt crisis and S&L crisis, in 1987 it was Black Monday, around 1998 to early 2000s, the Russian financial crisis and the dot-com bubble explosion, followed by the Lehman Brothers collapse in 2008. There have been crises about every 10 years. We are now about eight years after the Lehman shock, which means that potentially we may have new market turmoil in two or three years’ time. I am not in any way predicting the future, however we have to carefully watch the global market and identify what are the weakest links and potential threats. It could be China, it could be Europe, or it could be the US FRB’s interest rate increase.

Having said that, we are going to invest more in international businesses, and we have to do that, no doubt. However while doing so, we have to be careful, and remember the lessons learnt, from the past financial trends and history. Capitalization has to carry on and has to grow though, so we have to overcome these negative thoughts, if we want to continue our growth path. So definitely we are looking at the international markets if we want to expand, but very carefully and cautiously.

 

How has that affected your global strategy, with regards to what risks the bank is willing to take or not?

Definitely it has. We are trying to stay close to our clients’ needs and to our fields of competency. For instance, we don’t touch the aviation finance field or the micro-finance business. We focus on our core strength which is catering to the needs of individual clients and corporations. In order to grow we are deeply focusing on corporate financing in the US and in growing markets like Asia. European financial institutions are still facing their own domestic issues, so they have some difficulties coming to Asia for the time being. So we focus on corporate finance, and our selected areas as US and Asia. That is our strategy for the time being – carefully, but aggressively.

 

For outside investors looking at Japan now, where would you highlight as places to go and places not to go?

Tourism is an area where we see has huge potential. Last year Japan welcomed 13 million visitors; this year this figure could reach over 19 million. The tourism sector at the moment lacks infrastructure and hotels to welcome these overseas visitors. That’s a big business to develop, even more so with the 2020 Olympics and Paralympics that will be hosted in Tokyo. All land-related business as well, such as condominium or office space development where we see growing demands, could offer promising opportunities for outside investors.

Artificial Intelligence (AI) and the Internet of Things (IoT) are also two interesting areas to look at. Japan is currently looking at hiring high-level professionals to develop these new industries.

 

How would you assess Mizuho’s contribution, and what type of legacy would you like to imprint on the Japanese society?

Prime Minister Abe and the Mayor of the Tokyo Metropolitan recently asked the financial institutions to make a presentation in regards to the new technologies to provide for the Tokyo Olympics/Paralympics. For instance, could an outside visitor use his or her credit card directly to travel with the metro and public transportation? At this moment, we don’t have this type of technology, but this is something we are looking at developing in order to enhance our efficiency and convenience. The Tokyo Olympics/Paralympics could in fact prove an excellent window to expose Japanese technologies. As a bank we feel this is also our responsibility, we are trying to push and create new business models for consumers, and this is quite an exciting mission.

 

From your fairly extensive time spent in New York, you are an international CEO and very much the global type of executive Japan craves. How have you used your international experience to instill a more global outlook across the group?

Young people have to acquire more experience living overseas. In my case, my first experience to visit New York was when I was 26 years old, which was too old. We should have such kind of experiences at a younger age. At Mizuho we are trying to send our young staff to overseas offices, so we are big advocates of cultural exchanges to encourage our staff to see the outside world. Also, the national staff working at Mizuho’s overseas offices has many opportunities to come to Japan and have relationships with the Japanese people and with our headquarters’ employees. This is in my opinion the best way to foster mutual understanding and mutual communication.

 

What would you like to share as final message to the US audience?

The relationship between Japan and the US will grow more from now on– economically and politically – and Prime Minister Abe has a strong desire to tie up the relationship with the United States. The US I believe is now at an interesting stage of its history, and is focusing on more domestic issues, which is a big shift from the past 50 years. That leaves room for other players to step up and intervene on the global scene, and I think a country like Japan is very well positioned to do so and play a larger role in global matters.

Japan is now trying to play a larger role on the international scene. The US-Japan relationship is so important and fundamental to the status of the world, both economically and politically. I think people around the world have to understand the new direction that Japan and Prime Minister Abe are taking. That’s very important for our two countries, and for the world.

In addition to that, I’d like to welcome all international people to visit Japan and experience Japanese hospitality. Japanese culture has a strong power to influence people – Japanese food, fashion, art, sake and so on – and in Japan you can be sure of experiencing something really different. 

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