Even as the Japanese government pledged to clean up its ravaged banking industry, Japanese regulators pressured Shinsei Bank Ltd. the first Japanese bank bought by foreigners to continue lending to some of its shakiest customers. In meetings with Shinsei executives, top officials of Japans Financial Services Agency directed Shinsei to loosen its credit policy and be more lenient to ailing borrowers. Shinsei was formed in March 2000 when a U.S. investor group, Ripplewood Holdings, acquired the failed Long-Term Credit Bank of Japan Ltd. (LTCB).

LTCB failed because it was unable and unwilling to follow the basic prescription for revitalizing a collapsing bank: Write off bad loans and cut credit to hopeless companies. That failure - as competitive, rational American one and Japans longstanding system of entangled preferences and noneconomic motives. These conflicting visions are best expressed by the former head of LTCB, who said, Perhaps the American way might be more efficient in a narrow economic sense, but it risked sacrificing the values that were most precious in Japan; ideas of harmony, respect and consensus. As Japans property and stock markets collapsed during the 1990s, and bad loans proliferated, the Ministry of Finance quietly told banks to understate their bad debts and keep their borrowers on financial life support. LTCB followed this advice and kept growing, even showing profits by adopting ever more lenient loan classifications, Eventually, after several rescue plans fell through, LTCB was sold to Ripplewood.

Shinsei has stirred controversy since it opened under new management because it told its corporate borrowers that if loans did not meet new standards for profitability, the borrowers had to repay them, pay higher interest, or offer collateral. Even more shocking to Japanese sensibilities, Shensei refused to help finance bailouts of delinquent borrowers and cut off credit to risky customers. Such practices, standard among Western banks, are a novelty in Japan and have resulted in a spate of newspaper and magazine articles criticizing Shensei for being tight fisted. Foreign investors are closely watching Shensei as a test of whether Japan will allow modern lending practices in its clubby banking world. Arm-twisting of bankers by politicians and regulators to support deadbeat borrowers is a major reason why Japans banks have been crippled by bad loans for over a decade. Although Shinsei agrees to some of the Financial Supervisory Agencys changes to its lending policy, the bank said it would not make concessions that compromise its financial health.

The prospect of investing in Japan scares many foreign companies. Real estate is prohibitively expensive. Customers are extraordinarily demanding. The government bureaucracy can seem impenetrable at times, and Japanese competitors fiercely protect their home market.

An investment in Japanese operations provides a variety of intangible benefits, however. More companies are realizing that to compete effectively elsewhere, they must first compete in the toughest market of all: Japan. What they learn in the process from meeting the stringent standards of Japanese customers and battling a dozen relentless Japanese rivals is invaluable and will possibly make the difference between survival and extinction. At the same time, operating in Japan helps a company such as IBM keep up the pressure on some its most potent global competitors in their home market. A position in the Japanese market also gives a company an early look at new products and technologies originating in Japan, enabling it to pick up and quickly transfer back to the United States information on Japanese advances in manufacturing technology and product development. And monitoring changes in the Japanese market helps boost sales there as well.

Required:

As a foreigner, how you analyse the country risk of Japan? Outline each of factors and you may support with any data or figures to proof your explanations. You also need to include the country risk rating based on your assumption information.