Japan's SMFG defends culture of cross-shareholdings between groups

The president of Japan's second-biggest banking group has put up a defence of cross-shareholdings, which have been blamed by the government for sustaining a culture of complacent managers and low returns.

Listed companies in Japan have long held shares in each other as a way of cementing business relationships. But the administration of Shinzo Abe, prime minister, has attacked such cosy arrangements, arguing that unwinding both unilateral and mutual cross-holdings could boost the country's growth potential by subjecting executives to tougher scrutiny from investors.

Under a new corporate governance code published in draft form this month, big listed companies will be required to evaluate the risks and returns of their cross-holdings on an annual basis and to provide "a detailed explanation of their objective and rationale." The requirement should result in lower cross-holdings over time, according to a senior government official.

Yet in an interview with the Financial Times, Koichi Miyata, president of Sumitomo Mitsui Financial Group, said cross-holdings were "not necessarily a bad thing," and have "a lot to do with the mentality of businesses in Japan."

"It's a very delicate question, but there will be cases where a company is going to be reluctant to give us business, if we don't hold the shares," he said. "By holding shares we spend our own capital. As long as there is a good return, it is good for investors."

Mr Miyata's comments suggest that further big reductions in Japan's cross-shareholding ratio could be hard to achieve, despite the regulatory pressure. According to Nomura Securities, the percentage of shares held by listed companies (excluding insurers) in other listed companies fell slightly to 11 per cent on a market-value basis in March 2014 from 11.3 per cent a year earlier, marking a fourth successive year of declines.

Domestic equity holdings in SMFG's main banking unit have come down sharply since 2001, when they had a book value of Y5.9tn - equivalent to 145 per cent of group tier one capital. At the end of September this year the portfolio was worth 21 per cent of tier one capital. However, its absolute size - Y1.67tn - was little changed from March 2006 (Y1.84tn).

Yasuhiro Sato, president of Mizuho Financial Group, Japan's third-largest banking group by market capitalisation, told the FT earlier this month that he was aiming to trim its Y2tn of stockholdings to less than 25 per cent of tier one capital, from about 27 per cent now. "Because of our relationships with quite important clients, the speed [of selling] is quite slow. We have to enhance it," he said.

With few exceptions, cross-holdings are harmful because partners "always vote yes" and they impair capital efficiency, the government official said. "If you have $1bn, it is better to invest in a factory, or in M&A. Instead, companies tend to buy shares in other listed companies."

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