Japan's national wealth owes a lot more to manufacturing excellence and export might than to skills at managing money. Small wonder, then, that elite Japanese universities turn out few world-class investment advisers. But giving money management little respect is costing Japan dearly. Thanks to ultraconservative investment rules, sliding property prices, and a stock market that is still down by half from its 1989 peak, Japan's private and public pension funds--with $2 trillion worth of assets--may not have enough cash on hand to support employees when they retire.
Japanese fund managers have failed to reach their goal of an annual 5.5% return on assets since the bubble economy days of 1988, so getting higher returns out of public pension assets is a key concern as the nation ages. That challenge, heightened by recent moves to deregulate the pension business and let foreigners have a crack at winning an increased piece of the action, have money managers such as Goldman Sachs, Morgan Stanley, J.P. Morgan, and Britain's Barclays Bank salivating. "This is a real watershed," says John R. Thomas, president of J.P. Morgan Trust Bank Ltd. He thinks foreign money managers could get up to 10% of Japan's $700 billion in corporate pension business in five years, up from less than 1% now. That could bring foreigners some $700 million in annual revenues.
Driving this enthusiasm are moves by Japan's Ministry of Finance to break the virtual monopoly on fund management enjoyed by life insurers and trust banks. The ministry plans to open half the pension market to new competitors from home and overseas in April; the rest of the market will become available by 1999. The ministry acted after the U.S. persuaded Japan in 1994 to deregulate pension fund management.
Other forces, too, are reshaping the nation's pension management business. In January, Japan's cash-strapped life insurers, which manage 40% of corporate pension assets, announced that starting in April they would lower their guaranteed annual rate of return from a meager 4.5% to a paltry 2.5%. With good reason: Insurers are burdened by $50 billion in bad debts from Japan's collapsed property market, estimates IBCA Ltd. analyst Koyo Ozeki.
News of the downgrade went over like day-old sashimi. The Employee Pension Insurance System, or Nenpuku, Japan's biggest pension fund, with $220 billion in assets, immediately announced plans to yank $47.6 billion away from insurers. It hasn't said who will get the dough, but foreigners expect to receive some of it. They are heartened by the system's recent move to steer $285 million apiece to Goldman Sachs & Co. and Morgan Stanley & Co.
ACQUISITIONS. Nenpuku's plan to cut assets managed by life insurers set everybody from Nissan Motor Co. to NEC Corp. considering similar steps. U.S. and British banks, with a global scope and expertise in financial engineering, hope to pounce on such corporate defectors. Barclays Bank PLC last year acquired Wells Fargo Nikko Investment Advisors, a leader in index investment funds previously owned by Wells Fargo & Co. and Japan's Nikko Securities Co. The British bank also acquired Wells's MasterWorks division, which sets up retirement funds and provides backup administrative services. "If this doesn't sound too pompous, this is an investment in the Japanese people," says Barclays CEO Martin Taylor.
Japanese competitors aren't sitting still while the foreigners gear up. Insurers are beefing up money-management arms to retain business, and Nomura Securities Co. is vying for the fruits of deregulation. But given the gap in Japan's pension system, foreign money managers will probably get a hard look. "Competition is the only way for efficient asset management," acknowledges Takumi Gunji, head of Nenpuku's management planning office. If foreigners introduce a healthy dose of competition to Japan's pension management business, their shareholders--and the retirement savings of the Japanese public--might both be better served.