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The evolution of financial markets in Japan

David Runacres
David Runacres
Head of Japan, Data & Analytics, LSEG

A little-known fact by those not familiar with the domestic financial markets in Japan is that the country is home to some of the largest banks in the world when measured by deposits – and this presents market opportunity.

  1. Japanese market opportunity is driven by change in the market, not growth as a whole.
  2. All Japanese financial institutions are touched by the need to change to a) drive better returns for investors, b) address the systemic change in the Japanese demographics and c) combat a low to negative interest rate environment.
  3. The next 24 months will be crucial for the Japanese Government, with support from the Bank of Japan, to hit their goals of increasing retail investment in Japan.

The Japan Post Bank has around US$ 1.6 Trillion – yes with a “T” – in deposits from its members. There are 3 other banks including Mitsubishi UFJ Financial Group (MUFG) with similar hoards of savings piled up inside.  Even a lesser known bank, the Federation of Agriculture and Fisheries Credit Union (The Norinchukin Bank) – focusing on agricultural, fisheries and forestry industries – holds about a half trillion in their accounts.  These are very focused on simple “passbook saving account” business models and make most of their business from straightforward retail financial services.

Herein lies the biggest change about to sweep the financial markets in Japan and probably the main phenomena driving the growth of Refinitiv’s business in the country now and into the coming years.  A number of years of zero to negative interest rates initiated by the Bank of Japan has seen margins squeezed to negligible for banks and returns on savings become a pittance for depositors.  So driving the savings towards investing in various – albeit riskier – assets would do many things: drive alternative sources of revenues for banks and financial corporations, potentially give better returns to beleaguered account holders and drive a higher throughput of liquidity in the Japanese market as a whole – along with many other benefits to all involved.

Transforming a conservative retail market place

So how to actually achieve this dramatic change in the retail customer from pure saver – and a conservative one at that – to an investor looking for better return and that will take some level of risk? That is where technology can really help.  An example is one of the larger banks has taken an approach whereby enabling the bank “teller” to be able to act as more of an investment adviser – albeit in a very simple way – and help a customer choose a suitable investment. Upon a customer entering a branch, an AI-assisted capability will propose potential products based on the profile of the client – or their existing portfolio if they have invested before.  It will then propose “talking points” for the staff member to engage the customers with up-to-date market information and news about that recommendation.  Early indicators show that this will potentially solve the problem of staff experience, or lack thereof, in an efficient way.  Refinitiv’s news and market sentiment capability is key to enable fact-based recommendations and advice. In fact, we have been working with the Japan Post Bank on MarketPsych Indices which help its advisers have access to market trend information.

Other approaches to the problem have looked at the construct of financial products, such as a balanced portfolio of funds to mitigate risk, or a bias towards insurance products for the longer term investor, all of which are underway in the Japanese market. These new products make for an interesting opportunity for the asset management community in Japan, who are also being pressured to change an asset base heavily skewed towards fixed income products and specifically Japanese Government Bonds (JGB’s) in order to build products that would be attractive and suitably conservative to tempt first time, cash rich retail investors. As a consequence of this dramatic change in portfolio, the larger Japanese Asset Managers are quickly moving towards AI driven strategies for investing, ESG metrics to be able to present a “greener view” and other differentiation mechanisms to help sell their products over their domestic competition. For Refinitiv, this data-driven approach creates large opportunity in the market as the preeminent provider of data.

Behaviour change for financial markets in Japan

For Japanese retail investors who already are keen on investing in the marketplace, there is already a mature set of capabilities in the market to transact. Whether the investor is looking for foreign exchange investments (after all, the simplest of all asset classes) or Exchange Traded Funds (ETF’s) or even equities, a variety of online services exist from SBI Securities, Rakuten Securities and GMO CLICK Securities among others. These mature services do prompt the question as to how existing face-to-face players, who also have the cash deposits, will be able to drive a change in behaviour and still retain the client by continuing to maintain the trust and belief of the newly enabled retail investors. They are currently taking the right steps to engage the deposit holders, educate them and advise them. The next step is to enable the actual transactions by making them easy, simple and safe – and therein lies one of the biggest opportunities that Refinitiv sees in the Japanese market today.

Today, we are involved at every step of the change, and the increasing pace of change is obvious to see from our engagement with clients on the ground. The next 24 months will be crucial for the Japanese Government with support from the Bank of Japan to hit their goals of increasing retail investment in Japan. Time will tell if the market can move in time with the demand.