Written by Richard Aston, portfolio manager of the CC Japan Income & Growth Trust plc
Many companies stand to benefit from the Japanese government’s asset-income doubling plan. After all, pledges recently confirmed by Prime Minister Fumio Kishida stand to unlock dormant investor capital.
Few areas, however, are likely to benefit more from elevated domestic investment than financials. We don’t just mean retail banks, either – we’re seeing opportunities across the entire sector as efforts to uproot Japan’s economic conservatism proliferate.
Transitioning to investing
Kishida’s drive to get Japanese citizens interested in making their wealth work for them is propelled by various factors. At the top of the PM’s list, however, is no doubt the nation’s retirement savings gap.
This stems from dynamics such as a lack of high-return retirement plans, an ageing population, negative real cash interest rates, and a cultural shift away from life employment. And it’s resulted in, among other things, Japanese families needing to save at least Y20 million (around £126,000) alongside their national pension to live adequately in retirement.
This is commonly referred to as the “20-million-yen problem”. And while numerous solutions have been floated, the one the Japanese government is zoning in on is the nation’s lacklustre savings-to-investment flow.
As it stands, more than half of the 2,000 trillion-yen worth of nationwide personal financial assets are held in ultra-low interest rate currency and deposit accounts. That’s more than any other major developed country.
In other words–Japanese savers are highly conservative. So, to fix this, Kishida recently confirmed plans to double the amount households generate from their assets by:
· Expanding the scope of the NISA scheme for investment tax exemption
· Redesigning iDeCo defined contribution individual pension plans
· Improving financial literacy so households can build stable asset portfolio, and
· Encouraging households to select suitable financial assets
Starting to benefit
Kishida’s plans are in their early stages. And we expect Japan’s transition from savings to investment is unlikely to be without its bumps in the road.
Not least because Japan’s ageing population means the bulk of nationwide assets are in the hands of the elderly, an age group not necessarily known for their appetite for risk assets.
Regardless, we welcome any efforts to double household asset income over the coming years.
The inflows that could result from a stronger investment culture stand to strengthen the quality Japanese companies in which we’ve already invested. Also, greater competition for investors’ attention is likely to accelerate corporate Japan’s ongoing governance reform. This could potentially create a number of exciting new opportunities for us as income investors, as well as enhancing those that already exist.
Against this healthy backdrop, Japanese financial stocks could benefit greatly.
Alongside the more general market-wide benefits already noted, these companies may offer the products and services that will enable Japanese consumers to transition from savings to investment.
In fact, companies operating across a variety of different financial sub-sectors are already beginning to profit from Kishida’s proposals and factor them into their business plans.
Mitsubishi UFJ serves as a good example.
In its results for H1 2022, the financial group identified wealth management as a key part of its growth strategy, forecasting total gross profits of Y235 billion for FY 2023. That’s a significant jump on the Y208 billion generated in FY21 and is expected to stem from growing momentum in the acquisition of new retail and corporate clients.
Likewise, WealthNavi is marketing its full-automated “Robo-NISA” product as a way of addressing the 20-million-yen problem. Specifically, it believes the service can increase total assets under management per user by encouraging regular automated deposits and reducing withdrawals.
And then there’s SBI Holdings, which has identified its NISA and iDeCo offering as key strategic products in response to Kishida’s asset income doubling plan. In fact, despite its products already accounting for a large portion of these industries–some 30% in the case of Junior NISAs–the firm has now launched initiatives to engage more customers.
A promising opportunity
We welcome any efforts to promote a transition away from savings and into the stock market in Japan.
It remains to be seen whether Kishida’s plans will prove successful, but as far as we’re concerned, it will only take a small amount of additional interest to provide quality financial stocks with significant additional balance sheet strength.
We’ll be keeping an eye on this opportunity throughout the rest of 2023 and beyond.