Japan has always been one of the most difficult markets for western banks, but that has never stopped them from trying to enter the country.

Japan has always been one of the most difficult markets for western banks, but that has never stopped them from trying to enter the country.

Now, a new wave of players is attempting to enter the wealth management and private banking markets of Japan to take advantage of the country’s rebounding sharemarket and economy, where an estimated five million people or 0.4 per cent of Japan¹s population - have assets of Y100 million or more. All up, Japanese individual investors financial assets are estimated at Y1.5 quadrillion.

While Nomura looks outside Japan in an attempt to expand its own wealth management business, leading western names such as UBS, SG, HSBC, and even Citigroup which notoriously had its private banking license revoked in 2004, are looking to affluent Japan as a driver for their growth in Asia.

The Japanese banks, too, are awakening. Sumitomo Mitsui is one which is ramping up its capabilities, forming a Private Advisory Department earlier this year to work across consumer, middle market and corporate banking units.

Others are tapping western expertise, such as Mitsubishi UFJ Trust, which earlier this month announced a partnership with US trust bank Northern Trust to offer investment and inheritance management services. Meanwhile, Mizuho Financial has formed a partnership with Wachovia and Wells Fargo to offer market investment trusts.

Of the newer foreign aspirants, SG Private Banking is already making its move, doubling its assets under management in Japan over the last two years to close to Y400 billion ($3.4 billion). By the end of 2006, SG had around 1,000 customers, up by 150 per cent in two years since 2004.

With the traditional Japanese area of trust banking in mind, SG offers discretionary management and the management of non-financial assets such as real estate and art. It has doubled the number of employees assigned to wealthy customers to more than 100 and has plans to open new offices in Nagoya and Osaka.

For UBS, it is a case of back to the future after the Swiss bank withdrew from the Japanese private banking and wealth management markets in 2002, beating a retreat along with down-sizing from majors such as Goldman Sachs and Morgan Stanley.

The return, in fact, began as long ago as 2005 when UBS began sounding out customers, both businesses and individuals with financial assets of Y200 million or more each.

UBS group chief executive officer Peter Wuffli reportedly visited Japan in April for a series of meetings with potential clients for its highly tailored services following the establishment of a branch in Osaka last year. Mr Wuffli also hosted a meeting of UBS chief executives, the first time the bank has held such a meeting in Japan since 2004.

The bank is believed to be planning to launch a centre in Tokyo this year to train personnel, and reportedly has plans for a new branch in Nagoya.

One of the big problems for western banks in the past is that they have failed to understand the wealthy Japanese customer, who is typically reluctant to entrust the full scope of their financial assets to any one financial institution, even a local one.

It was a failure to recognise this along with a sharemarket slump – which killed UBS’ previous attempt to penetrate Japan, but this time the bank has reportedly come up with a new business plan which stretches to 2015 and which, insiders claim, is specially tailored for Japan.

“It’s all about concentrating on their specialty, which is asset management, and not being so reliant on ‘owning’ the customer,” said one western banking source in Tokyo, who claims to be close to the UBS effort.

“Japanese are cautious at the best of times even with their own banks. The trick is to convince them that a western bank is the best in the world at something, and they really will be missing out if they are not part of it, even in a very small way.”

Another western bank with Japanese expansion on its mind is HSBC, which revealed in April that it is seeking a retail banking licence in the country. Currently, HSBC only has a wholesale licence but a desire to penetrate into private banking and wealth management has prompted a change of strategy.

HSBC is believed to be planning as many as 50 branches throughout Japan over the next few years, and is reportedly scouting Tokyo’s upmarket Ginza district as the location for its retail headquarters.

Despite the expansion plans, western banks can still get into trouble in Japan. Citigroup was perhaps the most notorious example, and its private banking licence was revoked after regulators accused the bank of failing to implement safeguards against money laundering and of misleading clients, among other misdemeanours.

Now, Citi’s $12 billion purchase of Japan’s third largest brokerage Nikko Cordial sees it return to the country with a 109 branch network, which will offer among other services wealth management products.

Brushes with regulators are not solely the province of Citgroup, either. In another incident in March, Japanese regulators ordered Credit Suisse to tighten its internal controls after it sent a Hong-Kong based private banker into Japan to solicit business, even though he was not licensed in that country.

The controversial banker, Atsushi Doden, was acquitted last year of money laundering charges involving a Japanese client, who was a convicted loan shark.

Mr Doden, who is no longer with Credit Suisse, set up a private banking account for the client in Hong Kong in 2003.

The Doden case may have been a storm in a teacup, but it did emphasise, yet again, how difficult it is for western banks to get big fast in Japan.

Recent history is littered with many who tried to penetrate the very particular markets of the world’s second largest economy. It will be interesting to see if this current wave creates casualties, or champions.