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Japan seeks higher investment returns with plan to lure foreign asset managers

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Japan seeks higher investment returns with plan to lure foreign asset managers

Japan's latest plan to woo more foreign asset managers could help broaden the range of investment products and improve the returns on more than $18 trillion of household assets, more than half of which are held as cash or parking at banks as savings earning near-zero yield.

The world's third-largest economy proposed to lure "highly skilled" asset managers from overseas to develop new products "that do not exist in the current market" via tax breaks, visa rule changes and English-language services, Hiroshi Okada, director of Financial Services Agency’s strategy development division, said in February. The move to recruit talents from outside is part of Prime Minister Yoshihide Suga's initiative of strengthening Japan's position as "an international financial center for Asia and for the world."

"Foreign fund managers are expected to change Japanese individuals’ risk-averse investments by diversifying their assets as Japanese fund managers have tended to hesitate to do so, relying on an easier sale of bonds and stocks at home" than other products such as alternative assets, said Makoto Kikuchi, CEO of Myojo Asset Management.

Japan is not alone in promoting alternative investments, hoping to drum up investment returns while interest rates remain chronically low. According to PwC, global alternative assets under management are estimated to swell more than 50% to $21.1 trillion by 2025 from $13.9 trillion in 2020, with private equity being the biggest growth driver.

Since the 2008 financial crisis, Japan's outstanding household assets had grown by about 30%, according to the Bank of Japan. Small or individual investors are generally putting their investible funds into domestic stocks and bonds, while overseas investments as well as higher-yielding alternative asset classes such as infrastructure, real estate or private equity funds are still largely dominated by institutional investors.

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Conservative investors

In the fiscal year ended March 2020, 54.2% of household assets in Japan were held as cash or bank deposits, 28.4% were allocated to insurance and pension funds, 9.6% to securities, 3.4% to investment trusts and 1.4% to bonds, the central bank said.

The risk appetite of Japanese individual investors is markedly conservative compared to the population in the U.S. and EU, where the allocation to securities was 32.5% and 17.2%, respectively, while cash and bank deposits accounted for 13.7% and 34.9% of the household assets, respectively.

“The government will rely on experienced foreign asset managers to embrace financial vehicles such as an alternative investment for a higher return from a higher risk as Japanese fund managers are not well versed in such area,” Kikuchi added.

Takahide Kiuchi, executive economist at Nomura Research Institute, added that putting Japanese individuals’ money into overseas markets could also help provide a higher return than focusing on domestic investments into bonds or stocks at home.

Major pension fund reacts

Although the proposal aims at individual investors, some institutional investors in Japan are also stepping up their risk appetite, and thus reporting higher returns, amid an ultra-low interest rate environment at home.

Government Pension Investment Fund of Japan, also the world’s largest pension fund, plans to increase fund allocation to alternative asset classes to 5% in the near future. In the year ended March 2020, it allocated 0.6% of its assets totaling ¥150.6 trillion to infrastructure, real estate and private equity sectors.

“An alternative investment diversifies our portfolio but we need more skilled professions to shore up this complex investment,” a GPIF spokesman said. Currently, about 20 people are involved in alternative assets, about a third of total who also oversee bonds and stocks.

GPIF, which started investing in infrastructure in 2014, has since earned an average return of about 4% from alternative assets, according to calculation by S&P Global Market Intelligence. That is higher than the average annual return of 3.8% on domestic and overseas stocks and bonds between 2011 and 2020.

“After all, the Japanese government expects foreign asset managers to help the domestic financial sector play a bigger role in its economy like Hong Kong,” Nana Otsuki, chief analyst at Monex, Inc.

As of March 8, US$1 was equivalent to ¥108.85.