One of the world’s largest and most developed economies is on the brink of an “economic renaissance,” global financial experts say — and with the introduction of new business policies and tax exemptions, the Japanese government under Prime Minister KISHIDA Fumio is inviting domestic and foreign asset management companies to partake in the growth.

Kishida’s administration has put into play a strategy to convert trillions of dollars of cash and bank deposits held by Japanese households into investments that generate financial returns — a move analysts expect will transform the economy. Kishida’s play: to spur a sea change in the wealth management culture in Japan, via the creation of better opportunities — more choice, more diverse assets, more tax exemptions — for investors. 

In order to strengthen communication channels in this industry, an Asset Management Forum will be launched to gather global investors and asset management companies, and foster discussion on how to spur a favorable investment climate in Japan. 

Japanese households are sitting on wealth that’s waiting to be realized

According to global investment firm KKR co-CEOs Scott Nuttall and Joseph Bae, Japan holds a significant amount of unrealized economic opportunity not only because of its fast-growing technological industries, but because Japanese families have traditionally been resistant to investing their wealth, preferring to keep assets in cash and bank accounts.

In fact, according to KKR’s macroeconomic research, Japanese households hold 54 percent of their $18.5 trillion of financial assets in cash, compared to 11 percent in equities. This long-standing trend of relying on cash as an asset class, Nuttall and Bae say, is due to near-zero (and sometimes, negative) interest and inflation rates in Japan since the late 1990s — far longer than any other developed nation. 

At the same time, it’s an opportune moment for change: “We believe the country is experiencing an economic renaissance of sorts,” Nuttall at KKR said. “We also have a positive view of the ongoing corporate governance reforms focused on publicly listed companies, which are gaining momentum under Prime Minister Kishida,” he added.

“There are many parallels in the changes that U.S. conglomerates underwent in the ‘70s and ‘80s when they started focusing on their core businesses,” Bae said. “Japanese companies possess tremendous potential to compete in the global markets.”  

‘Invest in Kishida’: Taking initiative

OKINA Yuri, an expert in financial markets and growth strategy and a chairperson at private think tank the Japan Research Institute, said that to leverage this unrealized opportunity, the Japanese government is launching policies that increase development of Japan’s already fast-growing $5 trillion asset management industry.

According to Okina, Kishida “has been advocating [for] a New Form of Capitalism since he first took office” —  a platform that aims to “grow the economy while solving external diseconomies that cannot be solved by the market alone, such as social issues, environment problems, or inequality issues.” 

Thus, these efforts will unfold on top of the prime minister’s ongoing four-pillar sustainable growth strategy: investment in people; investment in science, technology, and innovation; strengthening financial functions, which includes investment in startups and open innovation; and investment in green and digital transformation (GX and DX).

“Japanese people prefer cash and deposits because they tend to be risk averse,” Okina explained. Thanks to factors like the structure of Japan’s pension and retirement benefits systems, and stock price trends over the past 30 years, this is a long-standing trend, she noted.

“The Japanese government believes that it is very important that the deposits — which account for more than half of the national assets of the Japanese households — go toward investment,” she said, “and that the profits being realized by corporations also come back around to Japanese households.”

Prime Minister Kishida’s Council of New Form of Capitalism Realization has been working on strategies to help diversity develop and strengthen the asset management industry as a means of boosting investment. Okina said that to promote these strategies, Japan must make its business landscape accessible and appealing for foreign firms.

Removing barriers for foreign businesses

From industry deregulation and streamlining bureaucratic processes, to ensuring English-speaking healthcare resources in business districts, the Japanese government is addressing all manner of potential obstacles to foreign businesses. These initiatives, Okina said, are strategically designed to help shift investment habits and stimulate the economy.

Special Zones for Financial and Asset Management Businesses will encourage domestic and foreign financial service providers to expand to the Japanese market. In these zones, administrative procedures can be completed solely in English, Kishida said in a speech at the Economic Club of New York in September 2023.

“The funds managed in the Japanese asset management sector have skyrocketed by 50 percent during the last three years,” Kishida said in the speech. “We will push hard to encourage sophisticated asset management and to solicit new entrants. To start with, we will rectify Japan’s unique business practices and resolve barriers to entry, and will also introduce a new program to assist new entrants.” 

According to Okina, the ‘special zone’ system is already in use in various parts of Japan, allowing for deregulation of certain industries — start-ups, agriculture, medical care and others — as a method of spurring economic growth.

Good news for international financial businesses; good news for Japanese consumers

According to Nuttall and Bae at KKR, opening up the market to foreign asset management businesses should benefit all players involved — including individuals. 

First, they said, Japan’s “leading asset management center” policies address a long-standing conflict of interest for consumers. To date, many of Japan’s existing asset management companies are affiliated with banks or securities firms. This could be a blocker for consumers looking to access objective, independent investment advice. 

“Over time, Japanese asset managers need to fundamentally rethink their approach to deliver the returns that Japanese consumers will come to expect,” Bae said.

Nuttall added: “Now that Japan is slowly transitioning to a path of sustainable inflation, and the [Bank of Japan] is considering ending its zero-interest rate policy, Japanese retail investors will need to embrace an entirely new way of managing their assets to protect their retirement savings,” working with asset managers to move out of cash into higher-returning asset classes across the spectrum of risk profile. 

Nuttall and Bae expect the new policies will not only benefit consumers by adding new options to the competitive landscape; they should stimulate — and develop — Japan’s existing, domestic investment industry. Foreign businesses, of course, have much to gain here, too: “Japan represents a multi-trillion-dollar opportunity,” Bae said. “Asset management companies that intimately understand the market, culture and mindset of investors are poised to play an important role as Japan becomes an increasingly prominent asset management destination on a global stage.”

Expanding NISA: making it easier to invest

Another set of policies Okina and colleagues on Kishida’s council have been working on include revisions to NISA — Japan’s tax exemption program for retail investors. Amendments include the significant increasing of annual limits for investments, creating an unlimited tax exemption period and making the program permanent. 

KKR analysts are optimistic about the program’s potential: In other developed nations, investment programs and initiatives have shown to provide a steady flow of household income into investment accounts and retirement savings. 

And that isn’t just good for the long-term financial stability of the families who are investing, Bae said. It has resonating effects throughout the economy. “If you look at a country like Australia, their program has even provided some stability to the equity markets,” he noted.

What’s next for Japan?

The government announced the “Policy Plan for Promoting Japan as a Leading Asset Management Center” in December 2023. Representatives hope its measures will create a win-win economic relationship, enabling more sophisticated asset management in Japan while creating business opportunities for U.S. firms and strengthening the strategic partnership between Japan and other global financial leaders, the U.S. included.

Experts like Okina say it’s an occasion for optimism: “I think the Japanese economy will see a trend of growth in the near future, according to this growth strategy,” she said.