December 1998

The good news is the size and growth of personal financial assets in Japan and their rising accessibility to professional investment advisors. As at March 1998 managed assets were JPY661.7tr and are projected to rise to approximately JPY1,250tr as at March 2011: investment advisor accessability and share rise from actuals of 17.9 per cent and 7.0 per cent to around 60 per cent and 25 per cent.

The bad news is a background of continuing bank balance sheet weakness. Yen investment returns will remain depressed. The Swedish model for restructuring post-credit bubble financial institutions has been much studied: its damage impact on lenders and borrowers is unacceptable to the iron triangle of vested interests: politicians plus bureaucracy plus industry.

The Gordian knot will be cut by the small investor. Institutionally Japan has been much influenced by China and Prussia and personal investment behaviour has been heavily oriented towards deposits and guarantee of principal. There has been a great suspicion of marketable securities. This will start to slowly change and the deposit base of the banks will be eroded.

The direct marketing of financial products and the introduction of defined contribution pensions will raise the savoir faire of the individual investor. Deposits in personal financial assets will move towards the German weighting. MoF is moving the banks also in a German direction: Japan's Big Bang, "nihonbanbigguban", is more correctly pronounced "Allfinanz".

There is also balance sheet weakness in the public sector institutions: TFB and FILP are both regulated and managed by MoF/MoF amakudari personnel. The ramshackle system is to be dismembered and privatised. This offers MoF escape from the mess and motivation is strong. The accessibility and share projections for investment advisors are reasonably firmly based.

Foreign investment advisors are taking market share as IACs and SITMCs on their history of long term contrarian investment policy and professional standards of business behaviour. The Japanese institutions have a battle on three fronts: universalisation, restructuring and introduction of global standards. Foreign market share may be expected to continue to rise.

In the retail arena, access to distribution is the crux for the foreign entrant. Direct marketing, joint venturing, partnering and simple distribution agreements are being employed. "If it works in Wichita, it will work in Wakamatsu" is behind the direct marketing: there are already clear indications of difficulties. It is known that partnering in Japan always presents difficulties.

In the wholesale arena, time and perseverance are the royal road to Japanese mandates. Behind this lies the traditional business practice of the pre-modern, Edo, merchant class. Consistency of commitment and use of quality personnel are valued. This is Edo due diligence. Consultants, academic ifs and buts, and one-off slick presentations are viewed quite coldly.

Erosion of the deposit base will eventually force Japanese bank management to change. Once universalised and restructured, the banks will offer formidable competition with products to suit Japanese needs and with powerful distribution. Foreign management must position itself to resist the inevitable and historical Japanese pattern of exclusion of undue foreign influence.

Japan has been described as change within continuity. Wichita and Wakamatsu are different. Senior management must better study Japan as it is, rather than as it "should be". There is substantial potential business in asset management, but many less than obvious pitfalls. The continuity of Japanese practices must first be understood and then the parameters of change.

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