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April 03, 2006 at 08:00 PM
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 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 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, noted 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 said, Japanese savers will direct an increasing percentage of these monies to non-domestic bonds, including equities, global-fixed income securities, and mutual funds that invest in these asset classes.
The unleashing of such vast sums has provoked anxiety among private Japanese bankers and government bondholders due to the unknown effects on financial markets. Yet neither they nor the asset managers are likely to notice much of a change, at least at first, according to many experts.
“There is an extraordinary amount of inertia built into that money,” said Burton Greenwald, president of Philadelphia-based financial services consulting firm BJ Greenwald Associates. With the expansion of the asset management business, people are “not likely to be attracted by promises of growth, but initially by promises of stability, and perhaps a little extra income,” he said.
Government bonds have long been Japan Post’s predominant holdings. With the nation’s diligent savers accustomed to the security of their principal, despite 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 Japanese government bonds (JGBs), municipal, and government-guaranteed bonds, noted Goldman Sachs (GS) in its September 2005 report. Nearly two-thirds (63.9%) of those deposits are in accounts of three or more years.
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. He used the occasion to push through the reform in October.
Japan Post is actually the world’s largest savings bank, amassing private funds held by individual Japanese savers. In addition, 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 significantly over half of the nation’s GDP.
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 a pattern similar to that of the one that followed 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.
Some observers see these amounts as negligible. “It’s like a flashlight on a life raft in the middle of the Atlantic — good luck finding it,” said Jim Lowell, editor of Fidelity Monitor. “But if there’s nearly $3 trillion floating around, and you can hit it with products that relate to Japanese investors’ culture and objectives — a savings and income orientation — then you’re talking about a significant business opportunity,” Lowell added.
Of close to $13 trillion in Japanese household assets, mutual funds accounted for about 3.4% of assets at the end of 2005, or $436 billion, with equities another 11.4% ($1.5 trillion), according to preliminary Bank of Japan data for 2005.
Many observers expect Japanese investment firms to enjoy an advantage in 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 Inc. (NMR) .
Japan Post made the choice from 31 management groups seeking the spots, based on a mixture of quantitative and qualitative criteria, said 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 REITs, said company 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 said.
