Action 32. Make Tokyo Asia’s Number-One Financial Market (1 of 2)

As of 2015, personal financial assets in Japan amounted to 1,708 trillion yen, while corporate retained earnings stood at 354 trillion yen. Despite this, Japan’s money and capital markets are weak by international standards. This is because 1,500 trillion yen in personal assets, corporate savings, pension funds, and university endowments is not being invested as risk money. We therefore want to propose policies for restoring Tokyo’s position as Asia’s top financial market.

1. Turn Personal Financial Assets into Risk Capital
Why are Japan’s 1,700 trillion assets held mainly in cash and deposit accounts, and just sitting there sleeping? Apparently, in Japan the average age of an inheritance recipient is 67 years. Sometimes an inheritance recipient is the spouse of the deceased, but even if they are a child of the deceased, they have often already reached retirement age and are elderly people themselves. In other words, money is just being transferred from one elderly person to another, and ends up dormant. Statistics show that more than 60% of financial assets are in the hands of people of 60 years or older. Almost all the assets of elderly people are held as bank deposits. In addition, if funds are placed in banks, the Basel Accords, which require that more capital be held for risk assets, mean that most of them are just lent out or invested in government bonds. As a result, it is foreign investors that supply the risk capital to the stock market, and one of the characteristics of the structure of Japanese financial markets is the huge presence of foreign investors.
To address this situation, the first task is to overhaul this structure by implementing a range of policies, such as NISAs, to make it easier to make small investments. It is also essential to move funds into risk capital, which offer a greater economic multiplier effect. In other words, no Japanese citizen should just dump their money in the bank. They should consciously purchase real estate, make investments in publicly-traded shares or as “angels” in unlisted companies, invest in mutual funds and REITs, and so on. Action on the part of each individual will help make Japan’s financial markets stronger.
2. Turn Corporate Retained Earnings into Risk Capital
Alongside personal financial assets, another thing that warrants attention is all the money lying dormant in corporations. Retained earnings now total 354 trillion yen, while the balance of cash and deposits held by companies has reached 241 trillion yen. This is an extremely serious problem. Despite holding all these cash and deposits, companies are hardly investing any of it, perhaps because of sore memories of their forays into the financial markets during the bubble years. For this reason, aggressive measures, including a tax system for corporate angels, should be taken to convert the financial assets held by corporations into risk capital.
3. Improve the Management of Pension Funds and University Endowments
In Europe and the United States, pension funds and university endowments provide a huge amount of risk capital. Japan is home to the Government Investment Pension Fund (GPIF), which with over 130 trillion in assets is the world’s largest pension fund. If it can transform its portfolio from one dominated by government bonds to one that invests in riskier assets, the impact will be significant. With regard to this point, the appointment of Hiromichi Mizuno, who had hitherto been based overseas, as Chief Investment Officer in April 2015 is significant.
Regarding university endowments, losses on investments in derivatives by Komazawa and Keio Universities led the Ministry of Education, Culture, Sports, Science and Technology to issue a notice that university endowments “should generally invest in instruments where the principal is guaranteed.” As a result, the internal rules of universities limit them to highly safe investments such as bonds and deposits. For example, the University of Tokyo, which has a total endowment of 27.9 billion yen, only invests in national government bonds, local government bonds, corporate bonds, fixed-term savings, and so on. With the appointment of an expert asset manager, these funds could also be turned into risk money. The government will need to take the lead in producing guidelines, but the diversion of university endowments into risk capital will be essential.