When Mr Jones met Watanabe san…

Mr Jones, an Australian businessman, is visiting Tokyo for the first time. His company was recently purchased by a Japanese company and his new Japanese boss, Mr Watanabe, has invited him to Tokyo.

Mr Jones is very impressed. Everyone is well dressed and very polite. When he left his iPhone in a taxi, it was swiftly delivered to a nearby Police station. The trains are very fast – and always on time. They apologise for a one minute delay! 

Japan is clean and cheap - a bottle of water in one of the ubiquitous convenience stores is only JPY100, about $A1.20. Once again the employees are friendly, as they seem to be everywhere. The city is fascinating, the food fantastic. And Mr Jones decides he wants to move to Japan when he retires.

" Japan cannot afford not to diversify financial assets in order to achieve higher returns.”

At dinner in the evening, in a restaurant with spectacular views of the city, Mr Jones tells his boss how impressed he is. Mr Watanable is very pleased, and proud. But he has another perspective to show Mr Jones...

Rapidly ageing

Critically, Mr Jones won’t be alone in retirement: Japanese society is rapidly aging, birthrates are falling (fewer than one million births in 2016) and the working population (who pay taxes) is shrinking.

The current population of Japan is 127 million.  By 2060 it is expected to fall to 87 million – more than 30 per cent fewer.

The current working population (15 years to 64 years old) is 77 million. This will reduce to 44 million in 2060, a 43 per cent reduction. Today’s working population (15 years old to 64 years old) is 2.3 times those over 65 years old. That will reduce to 1.3 times in 2060.

This is bad news on many fronts but critically it means Japan’s prevalent defined benefit pension system will collapse.

Today’s Japanese pension system of a younger working population supporting the aged population was crafted when the Japanese population was growing after World War 2. It was effective throughout the remarkable economic growth era up to 1970s.

But in recent decades, particularly after the collapse of the bubble economy of the 80s, the dynamic reversed and the current shrinking young population supporting the growing aged population is not sustainable.

Japan is already famous for a long lifespan (men; 81 years old, women; 87 years old) and due to the improvement in healthcare 100 years of life is within the reach. 

These demographics will undermine the pension system and it will be more difficult for the current working population to make ends meet when they get old.  Longevity risk is real and increasingly discussed in Japan.

Upward trend

Mr Watanabe’s frank analysis caused Mr. Jones to pause.  Both his superannuation and personal financial investments in Australia are increasing nicely, helped by the relatively steady upward trend in share prices, handsome stock dividend payouts and reasonable interest income from fixed income investments. 

Mr. Watanabe went on, describing three critical differences between Japan and Australia in terms of financial asset building for retirement:

  • Japan does not have superannuation.  It does have 401k pension schemes but they aren’t common.  Most Japanese rely on defined benefit plans so the imbalance of population will make their after retirement plan miserable in the future.
  • When Japanese try to increase financial assets with their own investment activities, the return is not as attractive as Australia. 
    • Japanese equities have recently risen significantly but it are about the same level as 26 years ago.  The level is still 40 per cent below the record high in 1989.
    • Japanese dividend yields average 1.8 per cent compared with 4.3 per cent for Australian equities.
    • Japanese interest rates are extremely low.  The 10 year government bond yield is around zero while the comparable Australian bond is close to 2.5 per cent.
  • Japanese are very conservative and do not take risks in order to achieve higher returns.  Deposits consist of 52 per cent of Japanese individual financial assets compared with 14 per cent in the US.

Most deposits are Japanese Yen deposits paying around, well, nothing. About zero per cent yield.  Mutual funds are only 5 per cent of the total financial assets compared with 11 per cent in the US.

These conservative attitudes are caused by the following factors:

  • Financial literacy in Japan is not very high
  • Investment return experiences are not good partly because of the lackluster Japanese market and partly because historically some financial institutions failed to prioritise their customers’ best interests, rather focusing on their own fee generation by recommending customers keep switching their financial instruments.

Mr. Watanabe mentioned his wife, Mrs. Watanabe, is very active in FX trading but those active investors are still not the majority of Japanese.


Mr. Jones was beginning to comprehend the challenge the Japanese people and Japan were facing as the population aged and investment returns remained subdued.

What was the government doing, he asked?

Mr. Watanabe explained the Japanese government had indeed been trying to lift the investment wealth of its citizens:

  • The Japanese Financial Services Agency has instructed financial institutions to issue Fiduciary Duty Declarations to prioritise customers’ interests above their own profits. 

    The FSA is also making efforts to enhance the financial literacy of people through     its own activities and through financial    institutions. The government is promoting     a shift from ‘saving’ to ‘asset build-up’. 

  • To address the issue of unsustainable defined benefit pension schemes, ‘Individual type Defined Contribution Pension Plans (iDeCo)’ were introduced by Government last year.  There will be no taxes on contribution and investment returns. The maximum contribution per year depends on the employment type but the limit for a typical office worker is JPY144,000 or A$1700 per year.
  • A ‘Periodic Investment Plan NISA or Nippon Individual Savings Account (Japanese version of UK ISA)’ will be introduced by Government this year.  There will be a tax benefit on these type mutual funds approved by Government.  The investment limit is JPY400,000 or A$4700 per year. 

The hope is these government actions will gradually change the mindset of Japanese individuals and encourage them to build their financial assets. However, the contribution limits for iDeCO and Periodic Investment Plan NISA are not large.  And, as usual, government actions alone cannot be the solution and Japan needs more private sector actions.

The obvious challenge is investment returns on Japanese assets – of any class – will remain relatively unattractive. For example, the AAA rated Australian government bond is yielding close to 2.5 per cent while the A+ rated Japanese government bond is yielding only around 0.03 per cent. All other things being equal, a lower rated A+ security should yield more, not less.

From the perspective of foreign institutions in Japan, this situation is potentially an opportunity.

There should be a market for more products like foreign securities and for foreign financial institutions to play a role in the Japanese market by providing more foreign financial instruments and market information and analysis.

Yet many foreign institutions, particularly retail banks, have exited the Japanese market over the last five years including HSBC, Standard Chartered, Lloyds Bank, Commonwealth Bank, Citibank and National Australia Bank.

In some cases the decision has been driven by head office strategic change but it’s probably also fair to say some simply ran out of patience waiting for change to come to the Japanese investment universe.

Asian centre

ANZ is the only Australian Bank and one of just a few foreign banks to maintain a retail presence but this is coinciding with a new promotion from the Governor of Tokyo to attract foreign financial institutions to open or expand business in Tokyo.

Tokyo aims to regain its crown as Asia’s leading international financial centre and is discussing measures such as tax breaks to attract foreign financial institutions to open up.

Obviously Tokyo is not the only Asian centre with such ambition but it does have the benefit of a real impetus for change coming from government and regulators – and the attraction of the Olympics in 2020.

It’s fair to say the dinner discussion was an eye opener for Mr Jones. He was taken aback. But Mr Watanabe wasn’t all doom and gloom: Japan has ascended from crisis before, most notably rebuilding after the devastation of World War 2 to become, in less than half a century, one of the world’s richest economies in per capita terms.

Change is occurring. The scale of the challenge is increasingly appreciated Mr Watanabe said. The development of Artificial Intelligence, the promotion of more women in the workforce including at management level, with enhanced support for raising children, and more acceptance of immigrants who are willing to migrate to friendly and polite Japan could be the solution for the lack of working population. Mr Jones presented some ideas and explained the environment in Australia.

The real challenge

Now I may have invented the story of Mr Jones and Mr Watanabe but they are composites of characters we see all the time in Japan – particularly as an Australian bank in Tokyo.

Both the challenges and possible solutions are clear. Indeed, if steps to address the population decline are not successful, the need to increase the aggregate returns available to Japanese investors becomes even greater. And that means both a greater diversity of investment choices and more offshore exposure.

Financially, Japan cannot afford not to diversify financial assets in order to achieve higher returns.  

Uenishi Hideo is Head of Retail and Wealth Japan at ANZ 

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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