Riding Japan's new wave

“It's boom time out here at the moment,” says Andrew Castle, a partner in Allen & Overy's Tokyo office.

The head of Denton Hall's Japanese operation, Steve Lewis, agrees: “Last week, if we got out of here before 4am we were doing well,” he says. “Things are really booming.”

The big firms are bullish. Linklaters is doubling the size of its Tokyo practice. The firm is moving two additional partners there and has poached a Japanese lawyer from rival Slaughter and May (The Lawyer, 28 June). The firm's Hong Kong partner Simon Davies will be moving to Tokyo next month and will be followed later in the year by a further senior securities partner, bringing Linklaters' Japan contingent of lawyers to 16.

Wilde Sapte's Japanese office has also recently expanded, taking on three new lawyers. Senior solicitor Tom Deegan was recruited last month from Lovell White Durrant while this month the firm was joined by Susy Singgih from White & Case (Singapore) and James Mayo from Coudert Brothers (Hong Kong).

Meanwhile, Clifford Chance is looking to add three to its existing 17-lawyer practice by September, including one partner, and Ashurst Morris Crisp and Denton Hall are following suit with two new lawyers each.

“All the leading law firms have been staffing up in the course of 1998 and 1999,” says Tokyo-based Clifford Chance partner Rob Burley.

All the big firms seem to be sure that, as Jonathan Inman, Linklaters' Tokyo managing partner puts it: “Japan is an exciting place to be at the moment as it continues to open up and deregulate.”

Securitisations work provides the mainstay for UK law firms operating out of Japan.

The background to this new work has been the programme of deregulation undertaken by the Japanese government as cultural prejudice against western involvement in the local legal services market has lessened.

In the first quarter of this year, Moody's rating agency cites the completion of 19 cross-border securitisations, of which Clifford Chance has been involved in five.

“Since 1997 the Japanese securitisation market has taken off,” says Burley. “There is now a wider acceptance of securitisation as an alternative funding source and there have been three new laws passed since last September to facilitate securitisation.”

Not all firms have been prepared for this turn in the market. Lovell White Durrant is said to be finding it difficult to get in the necessary expertise to cope with the new work as it has traditionally focused on project finance.

“They are begging for securitisation lawyers,” says one locally based partner, “But it is too late because they have missed the boat. Allen & Overy and Clifford Chance are too far ahead in the market.”

Not every firm, however, has sought to jump on the securitisation bandwagon. Ashurst Morris Crisp for instance has continued to focus on other areas.

“We've concentrated on projects and M&A work,” says Tokyo managing partner Alan Kitchin. “Japan never went off the boil for us. We have always been doing projects,” he explains, citing the new millennium airport in the Philippines and a host of projects in India, Indonesia and Thailand as work in progress where the firm is acting for Japanese sponsors.

“Most of the project work emanating out of Tokyo is UK law based,” he adds.

Such a flurry of activity might seem very attractive to an international law firm looking to extend its reach into all the important jurisdictions. Indeed Herbert Smith, Simmons & Simmons and Slaughter and May are all rumoured to be looking at establishing themselves locally.

Slaughter and May pulled out of Tokyo in 1995 but is rumoured to be looking for a way back in.

Head of banking stream Richard Slater denies that the firm has any interest in a return, arguing that such a move does not fit in with Slaughters' global strategy.

Japanese-based lawyers, however, paint a rather different picture. “I'd heard they had come over here and received a lukewarm response from their clients,” says one.

Slaughters partner David Frank comments: “I think the pool of work is pretty finite. It is difficult to staff an office in that sort of place.”

One of the brakes on firms' expansion is the cost of operating in Japan. Set up costs alone can run to £500,000. And then getting known is often a problem.

“It has taken us a long time to become known in the market here. Getting name recognition here is very tough. The Japanese are very conservative,” says Andrew Castle, a partner at Allen & Overy.

With the costs involved and when – as is often the case – the base exists simply as a shop window to market the firm's more profitable centres, some have decided it is simply not worth the bother.

“Japan does remain a very costly jurisdiction. The start up costs of coming in and building up a practice can be very demanding. Many foreign law firms have decided that they will provide their legal services from offshore,” says Gary Thomas, a partner in White & Case's Tokyo office.

For those firms lucky enough to have already developed a local presence, one of the best ways to forge strong links with the domestic business community is to establish a joint venture with a local law firm.

Freshfields is the only UK firm to currently have such an arrangement, along with four other foreign practices: Baker & McKenzie, US firms White & Case, Sullivan & Cromwell and French firm Gide Loyrette Nouel.

“All top five or six firms have full-service capabilities and would be fine for a merger,” says one managing partner of a top-five UK firm.

However, some cultural and regulatory limitations persist (see box, top right) and have, so far, deterred any definitive moves in this direction.

One problem is the regulators themselves.

“The Japanese Law Society gets nervous. There have been a number of raids on practices with joint ventures with local firms,” says one Tokyo-based UK lawyer who explains that the local authorities are worried about Japanese nationals employed by the international firms giving domestic law advice.

The raids are believed to have taken place on a US practice; Freshfields is understood not to have been involved.

A joint venture may also restrict the amount of referral work that other Japanese firms pass on. A local firm is unlikely to refer work to a UK firm which has an existing link with a local rival.

“If you are a 40-partner Japanese firm, are you going to give any work to Freshfields when you know you won't get any back?” says Lewis of Denton Hall.

Culturally, the Japanese are still showing some reluctance to entertain associations with international practices.

“Traditionally, there has been a disinclination on the part of most Japanese lawyers to be part of larger firms, especially when it is with international firms. It seems there are not many interested in these type of associations. The Japanese tend to become lawyers to engage in a profession on an independent basis. The expression over here is 'lone wolf',” says Gary Thomas, a partner at White & Case in Japan.

However, the creation of the first 100-plus lawyer Japanese law firm, Nagashima Ohno & Tsunematsu (see box, below), may open the floodgates for a rush of tie-ups between UK/US firms and Japanese practices and more fully domestic mergers.

Reflecting the well documented trend in the rest of the world, US and UK law firms are now seeking to poach partners from each other in order to be able to offer dual capability.

“I often get calls from head-hunters asking if I'm interested in joining a US firm,” says the managing partner of one Tokyo-based UK law firm.

“There is a significant amount of US law securities work that we would be interested in,” says Castle.

“We strive to have both capabilities in Tokyo and elsewhere in Asia,” says Thomas.

However, Lovells' local managing partner Michael Hancock says: “Firms are still too small here to do both. There is still enough English law governed work to go after.”

“Currently there is quite a lot of Japan-US conduit business but the majority of cross border public deals have gone to the Euromarkets. The four largest UK firms in Tokyo, Linklaters, Allen & Overy, Freshfields and Clifford Chance, have had the lions share of cross border public issues,” Burley explains.

Some legal commentators believe that in reality the Japanese market is finite and the recent boom in numbers of lawyers going to Tokyo is simply a redeployment exercise.

However, as one Tokyo-based partner of a top-five UK firm says: “Looking at the rest of Asia, it's a pretty depressed legal services market. Tokyo is the one place that is bucking this trend.”

And, with the relaxing of cultural and regulatory restrictions on UK firms practising in Japan, the country has become a hotbed of activity.

Many believe this will only intensify over the coming months and years as they hope the liberalisation of the legal market continues.

“The Japanese are a bit shaken up by what's happening in Singapore and Malaysia. If they deregulate more Japan may follow suit,” says one locally-based foreign lawyer.

And, as the Japanese bases of UK firms shed their shop window image, there is now a firm belief that they can become profit-centres in their own right.

“We'll make a profit this year,” says Lewis confidently.

The first 100-plus domestic Japanese law firm

Nagashima & Ohno, one of the top five Japanese firms, and Tsunematsu Yanase & Sekine, the 13th largest, are to merge on 1 January 2000 to create Japan's first 100-plus lawyer domestic practice. This is a significant departure for domestic firms especially for the change it represents in Japanese cultural attitudes. Traditionally most domestic firms have been small. Gary Thomas, a partner in White & Case's Tokyo office, says: “Traditionally, there has been a disinclination on the part of most Japanese lawyers to be part of larger firms. The Japanese tend to become lawyers to engage in a profession and to be independent.” Some believe this will cause a rush of domestic mergers and joint ventures with international firms.

One Tokyo-based partner at a top-five UK law firm says: “It is significant. Japanese law firms now believe size is important. They believe foreigners needing legal advice look at size, so they believe they have to stay in the top 10. They are looking at it [size] in one of two ways. Firstly, to stay independent or secondly, positioning themselves as potential merger partners for us.”

Nagashima & Ohno is already a very well established and respected firm but, says Slaughter and May partner David Frank, the merger will allow it to become a truly full-service law firm by adding the capital markets expertise of Tsunematsu Yanase & Sekine. The new firm will be called Nagashima Ohno & Tsunematsu.