Many of Japan’s universities will face financial crisis in the coming years, confronted with a combination of government parsimony and a rapid decline in the number of young people, say experts.

But they are responding inventively by trying to broaden their sources of revenue beyond government handouts. This presents rich opportunities for financial services companies.

A fifth of universities and colleges are in the red and the number will rise, says Sunao Onuma, chairman of the Association of Private Universities of Japan.

Eiichiro Kobayashi, vice-president responsible for finance at Waseda – perhaps the most prestigious of Japan’s private universities – predicts that over the next 10 years a quarter to a third of the country’s universities will face “management crisis” as financial pressures force them to rethink the way they are run.

The reasons behind the crisis are largely demographic.

The number of 18-year-olds in Japan peaked above 2m in 1990. But a birth rate that is among the lowest in the world has since pushed it down below 1.4m, decreasing the number of potential fee-paying students.

The government is adding to the demographic squeeze. Japanese ministers, keen to rein in the government’s fiscal deficit, have imposed a stringent regime for university funding.

The bulk of the money spent by Japan’s 89 state universities comes from the government. But under a regime that started in 2004, each year these universities will receive 1 per cent less than the previous year. Government subsidies to private universities have also been cut – as a proportion of costs, they have fallen to 12 per cent in 2004 from a peak of 29.5 per cent in 1980.

Japanese universities, acutely aware of their financially parlous state, are busily preparing survival strategies. “To survive the very intense competition, we need money,” says Mr Kobayashi.

“In future, universities can expect to face declining revenues from tuition and fees, so they want to make more money through investments and by increasing outside funding,” says Eiji Kata-yama, senior financial industry researcher at Nomura, Japan’s biggest securities house, and a member of its research team on universities and colleges.

The team took a group of Japanese universities on a tour of the US last year to see how their American counterparts managed their finances. “If you look at their investment, [most Japanese universities] are very unsophisticated compared with US universities,” he says. US universities put their money in a broader range of investments, including equities as well as safe but dull government bonds.

Waseda responded to a sharp rise in its debts by looking for new sources of income. One approach was to exploit the opportunities of its extensive property, for example by charging fees for accountancy exams held on its premises.

Waseda has also begun to switch from a low-risk/low-return investment strategy based on an annual yield of 2 per cent to a “middle-risk/middle-return” plan which shifts money from bank deposits to securities and has a target of 4 per cent.

Universities and colleges that want to change their financial management complain that the government still does not give them enough freedom (see case study below).

However, the government is expected this year to change the law to allow private universities to issue tradeable bonds for the first time. Largely in preparation for this, 24 private universities have already acquired their own credit ratings.

But some university officials see a danger in a bolder style of financial management. Mr Onuma of the APUJ, who is also president of Bunka Women’s University and Fashion College, says many private universities and colleges do not buy stocks because of the risk. “The presidents of Japan’s universities and colleges are not skilled business people.”

Mr Onuma says colleges such as Waseda and Keio will be able take advantage of their famous brand names both to issue bonds and to raise donations. But “the average university has difficulty getting donations”.

He suggests they build on their tradition of raising money from a broad range of operations, such as offering sports facilities to the public.

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