A treasure trove of personal savings is about to be opened in Japan. Beginning in October, 2007, more than 200 trillion yen ($1.7 trillion) will be removed from the postal system's government-sponsored and government-guaranteed savings programs and placed in quasi-private accounts. The impending flood has many asset managers thirsting after prospective new business.
Given the sums involved, and the recent opening of the postal system to slightly more speculative investment vehicles, expectations are running high. In October, 2005, Japan Post selected three asset management firms to begin distributing mutual fund products at 575 of its nearly 25,000 select branch offices. In April, it will choose four more funds for distribution beginning in June.
Hideki Sotokawa, director of fund services for Standard & Poor's in Tokyo, notes that savings in Japan Post have fallen from 259 trillion yen in 1999 to 203 trillion yen as of January 2006. He believes that the post office began offering mutual funds to keep its savers. In the long run, Sotokawa says, Japanese savers will direct an increasing percentage of these monies to asset classes other than Japanese government bonds, including equities, global-fixed income securities, and mutual funds that invest in these asset classes.
GRADUAL PRIVATIZING. Government bonds (JGBs) have long been Japan Post's predominant holdings. With the nation's diligent savers accustomed to feeling their principal is secure in spite of negligible returns, many believe that this focus on bonds will continue. Indeed, 74% of the postal savings are in term deposits that must be invested in government, municipal, and government guaranteed bonds, noted Goldman Sachs (GS) in a September, 2005, report.
The transfer of the public's savings to private oversight has been incubating over the past several years. Deregulatory policies permitted banks to begin selling mutual funds in 1998, while defined contribution pension plans were introduced in 2001. On Sept. 11, 2005, following the defeat of a postal reform bill, Prime Minister Junichiro Koizumi called early parliamentary elections and was re-elected in a landslide. In October, he used the occasion to push through the reform.
Japan Post is actually the world's largest savings bank, amassing private funds held by individual Japanese savers. And it distributes insurance as well as the nation's mail. (The Japanese government maintains a separate pension system into which individuals pay.) In all, it holds roughly 330 trillion yen ($2.8 trillion), which is more than half of the nation's gross domestic product.
SAME PATTERN. Under Koizumi's legislation, the postal divisions in 2007 will become separate entities under a holding company controlled by the government. At the end of a transition period in 2017, the state's stake in the holding company, Japan Post Corp., will decline to at least one-third, with the balance of shares sold to the public. The savings will no longer be guaranteed by the government, but by a Deposit Insurance Corporation, into which the new company will pay.
Goldman Sachs projected that by year-end 2010, total mutual fund balances held through postal offices could total over $60 billion, if sales follow the same pattern as after the lifting of the ban on bank mutual fund sales. However, it sees as little as $6 billion per year in Japanese savings moving into equities, assuming postal savings deposit assets into the stock market increase by 1% per year.
Of close to $13 trillion in Japanese household assets (1,509 trillion yen), mutual funds accounted for about 3.4% of assets at the end of 2005, or $436 billion. Equities accounted for another 11.4% ($1.5 trillion), according to preliminary Bank of Japan data for 2005.
CHOSEN FEW. Many observers expect Japanese investment firms to enjoy an advantage from tapping into the broadening Japanese market. Nonetheless, U.S.-based Goldman was one of the three firms selected by Japan Post to begin distributing mutual fund products through the post office branches, along with asset management divisions of domestic firms Daiwa Securities Group Inc. and Nomura Holdings (NMR).
Japan Post made the choice from 31 management groups seeking the spots, based on a mixture of quantitative and qualitative criteria, says Sotokawa, who advised in the process as part of a team from Standard & Poor's.
For its part, Nomura manages about $578 million in assets for the postal service in "hybrid" funds combining equities, bonds, and real estate investment trusts, says Nomura spokesman Yoshihito Suzuki. Although this is a fraction of the firm's total Japanese retail business of $116 billion and it is not currently profitable, the company expects to reap "substantive benefits in the near future" from the postal business, Suzuki says.
HOUSEHOLD INVESTMENTS. The minuscule size of Japanese mutual fund holdings leaves significant room for growth in the business. The strong stock market of the past couple of years, in Japan and internationally, coupled with the interest rate differential between Japan and other countries, has rewarded retail investors who ventured outside of domestic bank deposits, says Standard & Poor's Sotokawa.
He believes that this experience is likely to encourage more such investments among the Japanese. Nomura's Suzuki projects a growing role for equities, possibly outpacing bonds in the future, aided by the government's encouragement to move household assets "from savings to investments."
Franklin Resources (BEN), the fourth-largest U.S. asset management firm, is also seeking an expanded presence in Japan. With $4.5 billion in assets as of yearend 2005, the firm currently runs four Japanese funds, including its $3.2 billion Mayflower Fund, a yen-denominated portfolio of U.S. government securities.
PAST FRUSTRATION. Franklin has been in the country for a decade, and in January, 2001, received a government license to sell retail funds, says Vijay Advani, executive vice president of global advisor services. "Japan's full-scale entry into the mutual fund business could be a driver of the mutual fund market expansion," he says.
Past efforts by non-domestic money managers to infiltrate the world's second-largest economy have met with disappointment. "I would put it in one word: futility," quips Lou Harvey, CEO of Boston-based financial services research firm Dalbar Inc. "Many have tried, and been frustrated." Firms such as Fidelity and Merrill Lynch (MER) have encountered obstacles that forced them to "reconsider their commitment to the market and find alternatives," he says.
Jason Kendy, a spokesperson for Merrill in Japan, says that while the company entered the country 40 years ago and had never left, it had undergone "a substantial scaleback of retail brokerage operations we launched in 2001" in order to focus on high-net-worth individuals and small and medium-size organizations. However, Merrill's asset management arm continues to distribute mutual funds through third parties.
TIGHTER CONTROL. A Fidelity spokesperson says that since entering the country in 1969, the company had focused on non-Japanese investors before receiving its license to sell mutual funds in 1995. Another hurdle was meeting regulatory requirements. In late December, the Wall Street Journal reported that Goldman had been disqualified from participating in the expanded list of funds for April, 2006, pending an order from regulators to strengthen its compliance and internal control systems.
According to the Journal, the charges concerned the transfer of assets from one customer's accounts to another, and an illegal cross-trade between two investment trusts to reduce expenses. The ruling does not affect the company's existing fund that is being distributed by Japan Post.
"STREET SENSE". Standard & Poor's Sotokawa says that Goldman's case is not unusual in Japan, where both domestic and foreign-based companies are monitored by the country's Financial Services Agency (FSA). "If FSA finds illegal transactions, they make a public announcement and the company is forced to resign some public bids, such as in the Japan Post case," he says. State Street Trust and Banking Co. Ltd., the Japanese securities servicing division of State Street Corp. (STT), is another firm currently facing scrutiny from FSA, the parent company confirmed. Goldman Sachs did not respond to a request for comment.
Hurdles notwithstanding, asset managers will continue to grab for a piece of the postal savings pie, says Jim Lowell, editor of Fidelity Monitor. "Companies likely to go back into this breach have already gone down this path before, and will go in equipped with significant street sense," he concludes. And this time, select firms will be armed with what appears to be a government mandate.