Just over a year ago, a catchy image was hanging over Tokyo markets. As "Big Bang" got under way, the question many Japanese bankers were nervously asking was whether Tokyo was destined to become a financial version of the UK's Wimbledon tennis event - a world-class tournament offering lucrative prizes that the domestic players keep losing to foreigners.

A year later, however, the results of the first year of this "match" look complex.

In recent months foreign players have certainly swarmed into Tokyo on a scale never seen before, and they have seized some juicy and high-profile prizes. But what is also becoming increasingly clear now is that the financial markets contain different "leagues": although foreign houses have taken a share of some lucrative merger and acquisition work, for example, the domestic houses continue to dominate the retail market.

As "Big Bang" proceeds, the domestic players are not likely to fight back in some sectors - but are also learning to team up with their foreign rivals to form groups such as Nikko Salomon Smith Barney.

The area where the foreign houses have made most impact has been in investment banking. One sign of this can be seen on the Tokyo Stock Exchange, where foreign brokers have seized over one-third of the trading share during the past year - twice the level of three years ago.

Some Japanese bankers believe that this has occurred because foreign investors have been the most active purchasers of Japanese stock this year. Others argue that the share reflects the high levels of proprietary trading carried out by foreign banks.

The western banks insist that the rising share also shows that foreign houses have an edge in terms of trading technology. It is striking that the largest share has gone to US houses which have traditionally placed high emphasis on investment in information technology systems.

organ Stanley, for instance, has seized almost 6 per cent of the market, followed by Nikko Salomon Smith Barney with around 4 per cent - similar to the 4 per cent share held by the part of Nikko's domestic operations which have remained outside the joint venture. Meanwhile, Merrill Lynch and Goldman Sachs both have around 3 per cent, followed by Warburg Dillon Read, Deutsche Morgan Grenfell, HSBC Securities, Jardine Fleming, and ING Barings, all with between 1 and 2 per cent.

Bankers not in this list argue that too much attention on the TSE alone is misleading. JP Morgan claims to have around 40 per cent of the government bond options market, which receives little media coverage. Even some of the houses on the high-profile TSE list admit that simply reaping market share does not necessarily create profits: margins on straight trading are thin, and set to become even thinner when brokerage commissions are fully deregulated later this year.

Western investment banks have also been seizing a greater share in other, higher-margin areas. They still have only a limited presence in domestic equity and bond underwriting (although margins are also generally thin here as well). But in "new" financial products, such as securitisation, western groups have tended to have an edge over most of their domestic rivals. The same picture is reflected in the disposal of bad debts and distressed assets: although this remains a fledgling sector at present, many bankers hope this will boom as the Japanese banks address their balance sheet problems.

Perhaps the most visible - and lucrative - area of foreign progress is in the mergers and acquisitions market, which is expanding as corporate Japan is forced to restructure.

Last year Goldman Sachs received the highest value of mandates for completed deals, totalling $4.6bn, due to deals such as the disposal of Japan Leasing. This was followed by JP Morgan and Schroders. However, the ranking is volatile: in terms of deals announced in the first quarter of 1999, Merrill Lynch and Morgan Stanley Dean Witter were top, according to Thomson Financial Securities Data.

Some Japanese players are scrambling to catch up: Bank of Tokyo Mitsubishi, for example, has also carried out some prominent M&A work. Others argue that these markets are still too immature to merit serious investment: Junichi Ujiie, president of Nomura Securities, insists that Nomura will only enter sectors such as real estate securitisation when there is sufficient liquidity.

Even some western bankers question how long the foreign dominance of these new, high-margin sectors will last, given that Japanese firms have proved adept at copying new techniques and products in the past in other sectors. Another big question now is whether success in investment banking niches will also be reflected in the retail and asset management market. Although this sector has remained the most domestic to date, it could also offer some lucrative gains.

In retail, the low-margin "bulk" business continues to be dominated by domestic banks: Citibank, the US group, is the only foreign concern to have seriously attempted to establish a Japanese business in retail banking.

Japan is being forced to reform its pension system in a way that will create a dramatic boom in demand for products such as US-style mutual funds. There are already signs that this is provoking tensions: the American Chamber of Commerce has warned that the manner in which the pensions legislation is being created looks potentially discriminatory.

There appear to be plenty of battles looming in the coming year. And it is still far too early to assume that the non-Japanese are going to win, game and set, in every match.


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