Japan, A Nation Of Risk Takers?
For several weeks in April, Fidelity Investments pitched a tent in front of Tokyo's teeming Shinjuku train station. It showered commuters with 30,000 investing brochures and showed off its Japanese-language WebXpress online trading service. It even bought up every bit of advertising space on an entire train on the Yamanote commuter line, one of the world's busiest, to flog its mutual funds.
Such in-your-face sales methods may seem a little out of character for the normally buttoned-down Fidelity. But considering what's at stake, it's no big surprise: In the next two years, about $1 trillion worth of savings will be up for grabs in Japan. The money has been locked away in 10-year time deposits held by the government-controlled postal system. It will be released in fits and starts over the next 24 months--$105 billion in April alone.
The release of large sums in such a short period promises to produce a historic shift in Japan's capital markets. Since the postal time deposits now yield only about 2%, and bank deposit rates are hovering near zero, investment firms are trying to inveigle Japanese savers into socking away some of the money in equities. Some say that as much as $250 billion, or about 6% of Tokyo Stock Exchange's current market capitalization, could move. But "even if a fraction of that [$1 trillion] goes into the market, it would have a meaningful impact," says Bill Wilder, president of Fidelity Investments Japan.
To woo clients, brokers from Fidelity to Nomura to Merrill Lynch are hustling to market new products ranging from money market accounts to mutual funds focused on Japanese high-tech stocks and global bonds. In all, Japanese have invested about $160 billion in equity-based mutual funds. Fidelity's Wilder believes that amount "could easily double" over the next two years.
The risk is that pushy brokers and booming stock markets could be too successful in luring the cash away. Merrill Lynch is forecasting a modest shift to stocks that could boost the Nikkei Average by 20%, to 22,000, by mid-2001. A more dramatic exodus, say of some $500 billion, could undercut the Ministry of Finance's ability to prop up the bond market--and push up long-term interest rates to punishing levels. Given that 40% of Corporate Japan's liabilities are in loans, many with floating rates, a bond market collapse would probably blindside the economy and cut short the Nikkei's rally.
Postal savings have long been a key part of Japan's financial system. Since the late 19th century, post offices have doubled as deposit-taking institutions through a vast nationwide network that now has 24,000 branches. The $2.5 trillion the postal service holds is vital to the government and is treated by the powerful MOF as its own treasure chest. Finance officials have routinely steered the postal system's deposits into the bond market, thus helping keep long-term interest rates low, financing public-works spending and generally using postal savings to prop up the economy.
That's why Tokyo officialdom is working hard to keep its hands on as much of the cash as possible. The Ministry of Posts & Telecommunications has doubled its incentive pool to $576 million this year so it can pay bonuses to the 9,000 postal workers who handle deposits, if they persuade Japanese savers to stay put. The ministry has also launched an extensive marketing campaign. As of Apr. 20, just over half the maturing funds stayed in the system. But, tellingly, the money was put into no-notice savings accounts, which can be drawn down instantly and flipped into the stock market.
For savers, switching at least some of this mountain of assets to equities would seem to be a no-brainer. Japanese stock markets are still up 40% from their post-bubble lows in early 1998, despite their recent downward lurches. And even if savers converted their yen into, say, sterling in a 12-month Citibank Japan time deposit, they would get 4.1%--double what the post office offers.
Postal savers, however, are a very conservative bunch--not the sort to leap into high-risk investments in stocks, foreign currencies, or global bond funds. One saver, Hisao Ebihara, a 59-year-old accountant, for instance, said he would likely flip over his postal deposit to a time deposit at his commercial bank next year. "I don't want anything risky," he says. "I won't invest in the stock market or mutual funds." His reaction is typical. Seniors aged 60 years and over own about 70% of Japan's $11 trillion in household financial assets. Only 9% of that is directly invested in stocks and a mere 2% in mutual funds. By contrast, one in two U.S. households has equity investments.
So it may well be years before a U.S.-style investment culture takes root in Japan. For starters, Japanese savers probably need a crash course on investing basics. "Most of the population doesn't know what a mutual fund is," says Yasuyo Yamazaki, president of Goldman Sachs Investment Trust Japan, which manages $8 billion. Goldman even took the unusual step last year of sponsoring a nationally televised Sunday morning program called Money Angels, which revolves around everyday household financial issues and is larded with ads for Goldman's 20 or so mutual funds.
Charles Schwab Tokio Marine Securities, the joint-venture discount broker that launched on Apr. 21, turned its Web site into an Investor 101 seminar. "A national conversation is taking place about what to do with your money," says Ronald Strauss, president and chief executive officer of Merrill Lynch Japan Securities.
All the same, serious money is on the move. Fidelity, which manages $15 billion in Japan and distributes its 21 funds via banks, brokerages, and insurance companies, is on a roll. Its Fidelity Japan Blue Chip Fund, launched in early April and aimed at postal savers, hauled in a better-than-expected $300 million. The success of the fund owes much to its conservative style. It invests exclusively in proven multinationals such as Sony and Toyota and steers clear of volatile dot-com stocks or faltering sectors such as construction and banks. Wilder hopes Fidelity will triple its asset base, to $50 billion, by 2003.
The outlook for Merrill's big push into Japanese retail brokering is also improving. Back in 1998, it absorbed the branch network and most of the sales force of busted Yamaichi Securities. It was tough going at first. More Yamaichi clients defected than executives expected. Even so, Merrill has managed to build up 85,000 accounts, $13.4 billion in assets, and a menu of 40 mutual funds. Since January, Merrill has been pushing its Year Ahead Japan 2000 fund, which invests in top companies favored by Merrill's research team. Strauss is confident Merrill's risky foray into full-scale retail brokering will turn a profit by 2002.
Even Nomura Securities Co., whose image was tarnished by a series of financial scandals in the late 1990s, is enjoying a comeback. Its Big N Project mutual fund, which invests in a mix of small- and middle-sized company growth stocks, has pulled in $10 billion since its February launch.
With so much cash--and the fees it could generate--in play in a short period, foreign and domestic brokerages will continue ardently to court Japanese savers. And if reluctant investors do jump back in the market in a big way, maybe the Posts & Telecommunications Ministry will have to start its own brokerage, too.