The Coming Week in Asia: For Japan, Biggest Bank Might Not Be the Best

But the euphoria over the announced alliance should linger in the coming week and maybe rub off on some other banks.
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For a people who have made an art out of miniaturization, the Japanese are doing a superb job of creating giant banks.

Three of the country's largest financial institutions --

Industrial Bank of Japan

,

Dai-Ichi Kangyo

and

Fuji

-- announced Thursday they would merge their operations in about three years to create the world's largest bank. The new and unnamed (it will certainly be a mouthful) institution will have assets totaling $1.3 trillion, about one-third Japan's GDP.

The media lapped up the news. "Superb," gushed one reporter in describing the alliance that will displace Germany's

Deutsche Bank

as the globe's banking behemoth. By comparison, the soon-to-be No. 2 has a piddly $735 billion in assets.

The alliance, which will take the form of a holding company so that each member can retain its stock listing, will battle domestic rivals

Bank of Tokyo-Mitsubishi

(MBK)

and

Sumitomo

for its share of Japan's exploding pension fund market. It will also create a global titan with operations in all of the world's major money centers.

"The Japanese finally understand they have to change the way they do business in order to survive," says

Thomson Bankwatch

analyst Philip Jones. "This could change the banking horizon, but it is certainly going to cause a lot of headaches."

On the surface, the three banks fit together as snug as a financial jigsaw puzzle. IBJ, a former state-linked bank that the government used to fund its pet industrial projects in the post-war era, has huge wholesale and investment banking businesses. DKB and Fuji are retail brand names. A branch of each is walking distance from almost every major railway station in Tokyo.

But bigger isn't necessarily better.

All three banks cull an unimpressive E+ financial strength rating, the second-lowest ranking of the nine from

Moody's Investors Service

. And while the banks' bonds are all on review for upgrade, they still are only barely investment grade at Baa2.

And while many will see the alliance as emblematic of a changing Japan, others are quick to point out the country isn't known for changing its course on a 10-yen coin. Noting the combined bank will take five years to chop 6,000 jobs out of a work force of 35,000 -- hardly dramatic or fast -- one stock trader said the consolidation process resembled a "turtle run."

Still, equity traders say the alliance euphoria will linger in the coming week and maybe rub off on some other banks. The banks posted double-digit gains after the announcement, helping to propel the benchmark

Nikkei

average 1.2% higher on the week.

Equity traders expect the Nikkei to rise to 18,500 early next week as speculation mounts that

Sanwa

and

Sakura

, two of the remaining big banks, will come up with a merger plan of their own.

Those dollar-holders who still ache for yen to buy Japanese banking shares, may well want to wait. Currency traders say the curiously quiet U.S. and Japanese authorities may be readying to intervene in the market if dollar falls to 110 yen.

The speculation was fueled by the announcement Yutaka Yamaguchi, the deputy governor of the

Bank of Japan

, will extend his visit after attending a seminar hosted by the

Kansas City Federal Reserve

.

He'll probably be happy to find American steaks, like Japanese banking conglomerates, are king-sized.