Subject: [cwj 20] $1 Trillion Shuttle
From: Corporate Watch in Japanese <cwj@corpwatch.org>
Date: Fri, 19 May 2000 12:07:54 -0700
Seq: 20
MAY 19, 2000 ASIAWEEK $1 Trillion Shuttle When a 106-trillion-yen pool of Postal Savings time deposits began maturing in April, it was supposed to come flooding out and rejuvenate Japan's financial system and economy. That hasn't happened - yet. But as deposit holders struggle to decide what to do with their money, the fight to win their attention is already causing financial institutions and corporations to rethink how they do business By JONATHAN SPRAGUE and MURAKAMI MUTSUKO Tokyo Takada Hiroshi and Keiko, both 52, have over $20,000 that they don't know what to do with. The money is in 10-year time deposits in the Post Office's savings system, and a large chunk will mature within the next two years. Right now the accounts yield about 6% a year. If renewed today, they will earn less than 0.2% annually. The family's other savings in the bank are earning practically nothing already. "We're thinking of investing the money [in other instruments], but we're just not confident how to go about it," says Keiko. Her one attempt so far went awry. She opened a foreign-currency bank account paying a decent interest rate, only to see the rising yen cut the deposit's value in yen-terms below its starting level. ("See, I told you not to start anything you don't understand," Hiroshi murmurs.) So the couple studies newspaper ads about investments and pores over brochures from brokerages and banks. Hiroshi plans to open an online stock trading account, but just to "study the market for a couple of years." And they wonder, what to do, what to do . . . Multiply that by a million families and you know why the Great Money Tsunami of 2000 - a huge wave of cash that was supposed to rejuvenate Japan's fi-nancial system and economy - has turned into a slowly waxing tide. At issue is 106 trillion yen (that's nearly $1 trillion) in 10-year fixed-amount Postal Savings deposits, a sum just shy of the gross domestic product of China. The accounts started maturing April 1, a process that will continue until April 2002. With yields now close to zero, deposit holders must decide where to put their cash. Their decisions could affect everything from stock prices to new business development. So far, they seem to be playing it safe, with less money than expected flowing into new investments. As of April 30, the Post Office has paid out 6.6 trillion yen - $61 billion - in matured deposits. About 54% went right back into new time deposits, despite the paltry returns. Another 12% went into current accounts. About 8% were used to pay taxes. Only 25% - $15 billion - left the postal savings system, toward the bottom end of forecasts. Does this mean the hopes of a financial revolution have proved empty? Not quite. The sheer size of the stash is already changing the way Japan works. Think of it not as a sudden tidal wave, but as a gradual rise in the sea level that is profoundly affecting Japan's economic climate. Bankers, brokers and especially fund managers have been scrambling for months to get a piece of the $1-trillion pie. U.S. mutual fund giant Fidelity Investments pitched a tent in front of Shinjuku station in Tokyo for weeks in April to show off its products. Asahi Bank retooled its automatic teller machines so they will issue free lottery tickets when clients put in large deposits. The lower-than-expected outflow, says Ron Bevacqua, senior economist at Commerzbank Global Equities in Tokyo, "draws into question the optimistic belief that a lot of this money is going to go into stocks or is going to get spent." But others argue the flow will still be a formidable one. "Expectations, as far as we can make out, are that between 25% and 30% is going to leave the [Postal Savings] system over the next couple of years," says Jesper Koll, chief economist at Merrill Lynch Japan. "That's still a very sizable element coming through." The postal savers' initial response is really not surprising. Japanese savers are a conservative lot, especially those with postal accounts - 65% are over the age of 60. Moreover, the stock market, which hit a 41-month high in early April, came 15% off its peak by early May, smothered by deflating Internet shares. Most of all, a decade of on-and-off recession, capped by a rising wave of corporate restructurings and layoffs, has made most Japanese too scared to take chances with their savings. (See story, page 59.) But things may change if citizens regain confidence in the economy, which is finally showing signs of growth, and that frozen Postal Savings may yet thaw out into spending, debt repayment, and most of all into new investments. Already, anticipation of a shift in savers' habits, combined with ongoing deregulation, has introduced more competitors, better products and higher standards into Japan's financial industry. Ten years ago, investment trusts (the Japanese equivalent of unit trusts or mutual funds) were practically a dirty word. Even when the stock market was rising 15% a year, they returned 8% because salesmen kept encouraging holders to switch funds. Commissions ate up returns. Then, when the market crashed in the early 1990s, many small investors saw their savings halved or worse. Now, most Japanese fund managers have cleaned house. "Investment trust companies realized they faced a crisis, so better performing funds are now increasing," says Konya Fumiko, senior economist at the Japan Securities Research Institute and a volunteer investor educator. The entry of foreign firms is also pushing the industry to new levels of competition and professionalism, says a deputy manager of retail strategy at Nomura Se-curities, Japan's largest. "Their entry may not be good for us as a single company, but it's good for the industry," he says. "And customer confidence in investment trusts is much higher than 10 years ago." Nomura has worked to build that confidence. To emphasize the importance of long-term performance and to wipe out old habits of account churning, the company requires sales staff to file a report every time a client wants to sell a fund held less than six months to make sure the client has a sound reason. To keep the group's own fund managers on their toes, Nomura sells funds from other companies like Fidelity, promoting whichever is best. The effort seems to be paying off. Nomura launched a Japan equity fund, Project Big-N, in February. It attracted $1 billion in a matter of weeks, making it the biggest fund on the market. "People lined up at our branches to buy the fund," the manager says, "which is something none of us had ever seen." Among Nomura's many new competitors are Japanese banks, which recently were allowed to enter the investment trust market as part of Big Bang financial re-forms. Shiraishi Haruhisa, general manager of retail banking at Dai-Ichi Kangyo Bank, says that DKB used the opportunity not only to expand but to transform its business. "Most banks sell investment trusts at a few branches," Shiraishi says. "We decided to sell them at all branches because we wanted to spark a mental revolution among all our staff." That meant a year-long training effort to get employees to understand markets and risk, get a grip on investment trusts, and start looking after the entire financial needs of customers instead of simply taking deposits. Together with partner J.P. Morgan, DKB gathered extensive data on its customers and created a portfolio of tailor-made investment trusts. Funds under management went from $270 million in March 1999 to $3.3 billion in March 2000 - small by Nomura standards, but tops for a bank. Not only the financial industry but corporations are starting to wake up to the growing importance of individual in-vestors. They need to. Individuals accounted for 16% of trading on the Tokyo Stock Exchange in the first four months of the year, compared with 9% in 1998. Elec-tronics giant Sony Corp. says Japanese individuals held 18.7% of the company in March 2000, up from 12.9% in 1998. The company wants to increase that further. In February, Sony telecast a briefing on its results to all Nomura branches throughout Japan via the broker's inhouse satellite television system, something common for analysts but rarely done for small shareholders. About 3,000 people watched. The pressure to woo individuals, who tend to be long-term investors, is even stronger for companies which used to be part of old-line keiretsu, corporate groups held together by cross-shareholdings. As keiretsu unwind, the companies must find stable new homes for their shares. And it's not just corporate giants that have to woo investors. Nikko Beans, the online stock trading arm of Nikko Securities, launched a service in March allowing companies to give multimedia briefings to investors via the Internet. The president of Tokyo-based Inaba Seisaku-sho, a top maker of outdoor storage units with shares listed on the over-the-counter market, became the first to try it out. Why? Because investors are where the money is. Inaba's products are well known through its TV commercials, but few people know the company itself, says director Nagato Yasuharu. And while Inaba does not need additional capital now, it may need to tap the market in the future to fund growth. "These days we have to manage in a way that looks toward shareholders," Nagato says. "Japanese industry is finally looking toward direct financing [rather than bank financing], so this is going to become more and more important." All these point to some of the most important, if amorphous, effects the outflow from Postal Savings into stocks and bonds could have - a change in the relation between Japanese savers as the source of capital, and Japanese corporations as the users of capital. As direct financing via equity or bonds becomes more important, corporations will have to pay increasing attention to shareholder demands and strive to allocate capital as efficiently as possible. And the public has to play its part. "Without people to take risks and fund entrepreneurs setting up new businesses," says economist Konya, "Japan's economy will not regain its energy." No, conservative Japanese savers do not have to become venture capitalists, but they have to contribute to the pool. They have a long way to go. Only 9% of Japanese household financial assets are in stocks, bonds and investment trusts, compared to 67% in the U.S. That means savers, many of whom place safety above all, must learn that risk is worthwile if the reward is sufficient. "People complain that stocks are like gambling, but I tell them life is a gamble, marriage is a gamble, the future is a gamble," Konya says. Of course, even if Japanese financial institutions and corporations are talking the talk about good governance and shareholder value, they have only just started walking the walk - and with a few stumbles at that. "You certainly hear the mantra now more than you ever heard it before. But what you often find is that [executives] find it very difficult to explain what shareholder value is," says Russell Jones, chief economist at Lehman Brothers Japan. "So I remain a little bit sceptical." And all the corporate reform can only go so far if personal savings do not move further into the capital markets. "Ultimately what you want to see is assets being put to use more effectively than they have been," says Commerzbank's Bevacqua. "You have industry that's preparing to do so, but you have an investor base that has no interest in doing so." To be fair, savers and investors are supposed to focus on returns, not reforms, and many are saying that the near-absolute safety of Postal Savings is preferable to the risky returns of other vehicles. Until that changes and money flows to fund managers and industries, good intentions alone cannot lift Japan. One other key impact of the savings outflow is on government finances. The money now deposited in Postal Savings is transferred to the Finance Ministry, which then uses it to fund many quasi-governmental bodies - and a large part of the Japan's pork-barrel spending. With the amount in postal savings expected to fall, Tokyo is being forced to cut down on the worst excesses. The transfers to the finance ministry will be cut off entirely by law from next year. The government will instead raise replacement funds through bond issues, which have the advantage of being tied to specific projects or agencies and are hence more transparent. And if Postal Savings money flows to private institutions, it will be allocated on economic, not political, grounds. If the the Postal Savings outflow in April was a bit slow, DKB's Shiraishi says the battle has only just begun. "That money used to be locked away. Now it's not," he says. Money in postal current accounts can emerge at any time, and even new 10-year deposits can be withdrawn after six months. The Nomura retail strategist says the company's investment trusts attracted about $4 billion in April, compared with last year's monthly average of around $1 billion. And while most of it went into less-risky government and corporate bond funds as the stock market tumbled, interest in Project Big-N was still fairly keen, he says. So are Japan's conservative savers about to turn into investors ready to ante up the risk capital needed to turn over the economy's stalled engine? No. But they're thinking about it. "People who had considered all financial risk to be bad are now starting to feel high risk is okay if they can get a high return," says Konya. "Or perhaps middle risk, middle return." That may only be giving the economy a middling push, but it is slowly bringing momentum back to Japan. ------------------------------------- Corporate Watch in Japanese Transnational Resource and Action Center (TRAC) P.O. 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