Goldman obtaining a Japanese banking license AGAIN
Big news this week with Goldman Sachs obtaining a banking license in Japan to support their global Transaction Banking business. Not a surprise, really, since they started the application process in 2019. So even for a well-resourced and long-established organization like GS, it is not an overnight endeavor to be licensed.
What struck me the most, though, was this eerie feeling of deja-vu. Did we not have a banking license in Japan before? What happened to it? I thought that by the time I joined GS in Tokyo in 2000, the banking entity was at least dormant, and maybe the license already returned. So here is a little bit of financial markets history for those who care.
Goldman Sachs becomes one of the first international securities companies permitted to open a banking subsidiary in Japan in 1991
On February 6, 1991, Goldman Sachs obtained a license from the Japanese Ministry of Finance allowing the firm to establish banking branches in Japan. The Ministry’s approval followed successful Japanese-American talks during the spring of 1990 in which US negotiators pressed to allow foreign brokers into the currency business in Japan. Until the Ministry’s decision, American securities firms could only trade foreign exchange through an “authorized dealer.” Since Japanese firms were forbidden to engage in foreign exchange dealing, the only specialist foreign exchange bank in Japan had been Bank of Tokyo, severely limiting the firm’s ability to compete.
Source: Goldman Sachs History
The Japanese Big Bang
After the bubble burst, the Japanese economy was struggling. Reforms in financial administration and in the financial system were seen as one way to set the economy onto a better path.
In November 1996, then Prime Minister Hashimoto initiated the “Big Bang” agenda by telling his Minister of Finance and Minister of Justice to organize those reforms for the purpose of revitalizing Tokyo markets by the year 2001 to be comparable to other international markets, such as New York and London.
Editor’s note: if the language used 25 years ago sounds familiar, it is because all the wishful thinking around “Global Financial City Tokyo” promoted by the Tokyo Metropolitan Government for a few years now essentially uses it unchanged.
The Big Bang reforms started to be introduced during fiscal year 1997, and in 1998 included the liberalization of Foreign Exchange.
The Foreign Exchange Law and Foreign Trade Law
Highlighting the major change in approach, on April 1, 1998, the Foreign Exchange and Foreign Trade Law came into effect, replacing the Foreign Exchange and Foreign Trade Control Law.
It liberalized cross-border capital transactions consistent with global standards, and was to further vitalize the Tokyo market through the complete liberalization of the foreign exchange business.
- Permission and prior notification requirements were abolished in principle, individuals and corporations became free to engage in capital transactions and settlements with foreign individuals and companies
- The authorized foreign exchange bank system was abolished, and regulations regarding foreign exchange business were removed
With that, it became unnecessary for Goldman Sachs at the time to operate a bank branch in Japan. Note that in other markets that do not have full currency convertibility, such as Korea, the regulatory regime often requires foreign exchange and interest rate business, including derivatives, to be operated out of a bank branch. GS opened a bank branch in Korea in 2005 if my memory serves me well.
Other Sources:
Special thanks to Tim Cole for helping my fading memory.
Privatization, Deregulation and Institutional Framework — Institute of Developing Economies, Japan External Trade Organization (IDE-JETRO) — 1999
The New Foreign Exchange and Foreign Trade Law and Japan’s Balance of Payments — Eleventh Meeting of the IMF Committee of Balance of Payments Statistics — 1998
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