Japan government sweeteners aim to attract investors

Two decades ago, Japan coined the term “from savings to investment” in the hope of convincing risk-averse households to stop hoarding so much cash.

Since then, companies have faced increasing pressure to deliver better returns to shareholders, while pension funds and life insurers have been held to account on their obligation to challenge corporate leaders when they fall short of good governance.

Now, prime minister Fumio Kishida is aiming to address what government officials call the “final piece” of the puzzle that is trying to unlock $14tn of household financial assets: a shake-up of the country’s asset-management industry. “We will push hard to encourage sophisticated asset management and to solicit new entrants,” Kishida said in a speech at the Economic Club of New York, in late September.

After Japan’s economic bubble burst more than three decades ago, many domestic investors turned away from equities, and a long period of deflation meant that households could overlook the fact that bank deposits were earning almost no returns.

Repeated government efforts failed to spark a boom in investment, with households continuing to keep an average 54 per cent of their assets in cash and deposits, compared with 13 per cent in the US and 35 per cent in the Euro area. But, with prices now rising at their fastest rate in decades and the Japanese stock market at a 33-year high, the economic rationale for maintaining cash is under pressure.

In addition to this economic impetus, the government plans to introduce an expanded tax-exempt investment vehicle next year, called the Nippon Individual Savings Account (Nisa). Investors will be allowed to buy stocks of up to ¥3.6mn ($24,170) a year using the new Nisa account, which the Kishida administration hopes will reduce the barriers to investing in the stock market.

The government has a target of doubling the number of Nisa accounts to 34mn, and the amount invested to ¥56tn, in five years.

“With the expansion of Nisa, a system will be in place for people to make tax-free investments at this scale for the first time,” says Hideki Takada, director of strategy development division at the Financial Services Agency. “It’s not an exaggeration to say that this is a historic moment . . . and this is our biggest opportunity for savings to shift to investment.”

But, to persuade Japanese households to invest, market participants have long argued that the country’s asset-management industry, itself, needs to change.

The funds managed by Japanese asset managers have increased 50 per cent during the past three years to ¥800tn, according to Kishida. Much of that growth, however, has been driven by the reshuffling of assets by pension funds, banks and other institutional investors, and there is much more room to grow with the participation of more retail investors.

In a report issued in April, the FSA said a lack of information disclosure by the asset managers made it harder for investors to make a judgment on the fees and the performance of funds.

In addition, Japanese asset management firms are often subsidiaries of banks and brokerages, which raises questions over management independence. Also, critics say they are prone to chasing short-term returns instead of creating products for long-term investors because their bosses are frequently assigned from within the broader financial group for a relatively brief period.

In his recent speech, Kishida said he wanted to make it easier for foreign players to enter Japan’s $5tn asset management industry by creating special business zones that will allow applications to be completed in English.

“In these zones, we will take measures to improve the business and living environment tailored to the needs of overseas asset managers,” he explained.

Other reforms could include the easing of regulations to allow asset managers to outsource their back-office operations. The government also said it wants to address business practices that are unique to Japan — such as the method used to calculate the net asset value of a mutual fund. 

As well as easing regulations and administrative procedures to lower the barriers to entry, Nicholas Benes, a corporate governance expert, argues that more needs to be done to make engagement with companies easier for asset managers.

Under existing rules, shareholders that have more than a 5 per cent stake, or those seen as engaging collectively with others holding a combined 5 per cent stake, need to go through a cumbersome filing procedure to make suggestions on board diversity, the sale of assets, and other “material changes” to companies’ strategy.

“Japan is holding back efficiency and effectiveness by all asset managers,” Benes says. “This makes the market less attractive and that is a much bigger issue than making applications in English easier.”

Still, Noriyuki Sugihara, chief executive of Asset Management One, argues that increased competition and an expansion of products for retail investors is needed.

“We see a large business opportunity, since we believe that the latest reforms will lead to an extensive expansion of the investment trust industry,” Sugihara says.