Having lived in Japan for most of my working life, I am often asked what exactly is the financial services industry (金融業界). It's a perfectly normal question given the financial services industry offers a wide range of products and services which is further complicated due to the lack of a tangible product. It’s easy to imagine what companies such as Toyota or Sony do because we can see and use their products. The same is obviously not true for financial services. I'm going to provide an overview of the industry here and also provide some nuances specific to Japan.
What is the Financial Services Industry?
The financial services industry includes an array of companies that help provide financial services such as investment, lending, and managing of money & assets. These include institutions such as banks, securities, insurance companies, investment managers, accounting & audit companies, credit unions, and money lenders.
The Japan Financial Services Authority (金融庁)
Before we delve into the specifics of the financial services industry in Japan, it’s important to quickly touch base on the overarching entity responsible for regulating the industry. The Japan Financial Services Agency frequently referred to as the Japan FSA or “JFSA” is the responsible government agency for overseeing the banking, securities & exchange, and insurance sectors in Japan. They help devise the laws & regulations as well as guidelines to promote the stability of the industry. As such, institutions that undertake financial services activities are regulated by the JFSA and indeed the JFSA even has a list of the various regulated institutions on their website.
Banks & Trust Banks (銀行と信託銀行)
Banks are financial institutions that undertake typical banking business activities such as taking deposits, lending, transfer of funds, and foreign exchange.
City Banks: City Banks are large banks typically headquartered in Tokyo. This includes Japan’s so-called 3 “mega” banks of MUFG Bank, SMBC, and Mizuho Bank (If you’ve lived in Japan, you’ve seen em around).
Regional Banks: Regional banks are banks usually headquartered in cities outside of large cities like Tokyo and typically take on local businesses and residents as their clients. Important to note that there are two types of regional banks: First Regional Banks and Second Regional Banks. While the activities undertaken are the same, these institutions are members of different associations, with First Regional Banks as members of the Regional Banks Association of Japan and Second Regional Banks as members of the Second Association of Regional Banks. The reason for the difference is largely historical as Second Regional Banks were originally “Sogo Banks” which used to cover small / medium firms that weren’t able to be covered by First Regional Banks. Since then, these Sogo Banks have converted to become Second Regional Banks.
Fun Fact: You may have noticed there are a few ‘numbered banks’ in Japan such as The 77 Bank in Miyagi prefecture or The Eighteenth Bank in Nagasaki prefecture. Originally banks were named with numbers in Japan and by 1879 there were 153 so-called numbered banks. Many of these banks have either merged or changed names to become the institutions they are today but few still retain their original numbers.
Trust Banks: Trust Banks offer traditional banking services like regular banks but also trust-related activities which allow customers to transact contracts known as trusts, as well as real estate and investment management services.
Bank Holding Companies: These are companies that control one or more banks but do not engage in banking itself. A simple example would be Mitsubishi UFJ Financial Group which is a bank holding company that has ownership of MUFG Bank, Mitsubishi UFJ Trust and Banking, and more.
Fun Fact: Sumitomo Mitsui Trust Bank would seem like an entity related to Sumitomo Mitsui Financial Group, but actually they have no capital ties! Sumitomo Mitsui Trust Bank is a part of Sumitomo Trust Holdings and SMBC Trust Bank is the trust bank owned by the Sumitomo Mitsui Financial Group. Although they both have historical ties to Sumitomo and Mitsui, they are completely separate group companies.
Shinkin Banks, Labour Banks, and Shinkumi Banks
The following 3 types of institutions are akin to credit unions and are financial cooperatives that provide banking services. They are non-profit institutions and as such, they are not stock companies (Kabushiki Gaisha) that aim to create profit for shareholders.
Credit Associations (Shinkin Banks 信用金庫): Shinkin Banks are cooperative regional financial institutions created under the Shinkin Bank Law (信用金庫法) in 1951, and primarily serve small and medium enterprises and individuals. Thus, companies with over 300 employees cannot become a member.
Labour Banks (労働金庫): Labour Banks are financial cooperatives where membership is limited to labor unions, consumer-livelihood cooperatives, and organizations operated by workers.
Credit Cooperative (Shinkumi Banks 信用組合): Similar to Shinkin Banks, Shinkumi banks aim to help small and medium enterprises and workers. However, one fundamental difference with Shinkin Banks is that Shinkumi Banks are established under the Small and Medium Enterprise Cooperatives Act (中小企業等協同組合法) instead of the Shinkin Bank Law.
Securities (証券)
Unlike commercial banks, securities firms do not take deposits and their activities typically include Investment Banking (mergers & acquisitions, advisory services, and securities underwriting), and broker-dealer activities (buying and selling securities) for clients and their own accounts.
In Japan, companies that undertake these activities are referred to as “Shouken Gaisha” or Securities Company and firms would generally have this in their corporate name.
You might see buildings with names such as Nomura Securities and SMBC Nikko Securities displayed all around Japan and these are securities that conduct retail business and typically service individuals and small & medium enterprises. There are many companies including foreign multinational firms that conduct wholesale business which cater to larger and more sophisticated investors.
Insurance (保険)
Insurance is a financial product in which a policyholder (individual or entity) pays an insurance company in exchange for financial protection from a loss covered under the contract. Insurance is divided into 3 sectors in Japan:
First Sector (Life Insurance 生保): where insurance benefits are paid upon the death of an insured individual. Only Life Insurance Companies can sell these products.
Second Sector (Non-Life Insurance損保): where insurance benefits are paid upon the financial loss from an event. Common types of insurance in this sector are automobile and fire insurance. Only Non-Life Insurance companies can sell these products.
Third Sector: The third sector generally covers insurance not included in the first and second sectors such as accident and sickness insurance. Both Life and Non-Life Insurance companies can sell these products.
Investment Management (投資運用):
Companies that engage in investment management activities invest and manage financial assets and investment portfolios.
Mutual Funds: Asset Management firms that manage mutual funds invest client money with a focus on the relative return or performance of the fund vs a benchmark.
Hedge Funds: Similar to asset management, hedge funds focus on investing client money but with a focus on absolute returns. Hedge fund managers typically take on more complex and riskier trading strategies than mutual fund managers.
Private Equity: Private equity firms are investment management companies that invest in companies that are not publicly traded.
Venture Capital: A venture capital firm would invest funds in start-ups or small companies and assist those companies in their initial stages.
Audit and Accounting (監査、会計):
Accounting firms assist with the creation of financial statements and tax returns for their clients, whereas audit firms review and verify the work done by the accountants. In Japan and many parts of the world, these firms are required to be locally owned and independent by law.
But wait, I thought the Global Big 4 accounting firms exist in Japan as well?
Yes and No. The Big 4 (Deloitte, PwC, Ernst & Young, and KPMG) exist in Japan as well but they are so-called ‘Member Firms’ as part of a professional services network that share a common name, brand, etc., and not part of a multi-national corporation nor have capital ties.
Credit Rating Agencies (信用格付業者)
A credit rating agency calculates the financial stability and ability to pay back the debt of a company and assigns ratings accordingly. The global Big 3 firms of credit rating agencies are S&P Global, Moody`s, and Fitch, and have a large presence in Japan as well.
Money Lending Business (貸金業)
Money lending business operators are non-bank companies that provide money lending services. They include credit card companies and consumer finance companies as well as platforms that connect lenders and customers.
Fintech (フィンテック):
Financial Technology now commonly referred to as “Fintech”, refers to using technology to provide financial services. Many new companies have emerged globally and in Japan to revolutionize traditional financial services and this continues to be a growing area.