Japan's Push for "Savings to Investments" Faces Historical Challenges: Will Kishida's Plan Succeed?

In a recent address at the United Nations Principles for Responsible Investment (UN PRI) meeting held in Tokyo this October, Japan's Prime Minister Fumio Kishida announced a bold initiative to redirect the nation's massive household savings into investments. With over 2,100 trillion yen (approximately $14 trillion) in household financial assets, the move aims to foster sustainable growth domestically and contribute to global challenges such as climate change, natural disasters, and ageing populations.

Prime Minister Kishida's plan hinges on shifting household savings from low-return bank deposits to medium-return securities like stocks, bonds, and investment trusts. The goal is not only to better prepare citizens for retirement but also to address societal issues using funds from the securities market. The move is expected to benefit households and the financial industry, which is grappling with excess deposits and negative interest rates set by the Bank of Japan.

The "savings to investments" strategy is not new to Japan, having been part of the government's agenda since the mid-1990s. The Big Bang financial reform of 1996 sought to transform Japan's traditional bank-centric financial system into one grounded in "free, fair, and global" markets. Despite continuous efforts over two decades, the results have been underwhelming, with household financial assets remaining predominantly in cash and deposits.

The hesitancy of Japanese households to embrace securities can be traced to a critical factor: the historical failure of financial investment products to deliver attractive returns for retail customers. Even after the Big Bang reforms, data indicates that Japanese households have preferred cash and deposits over stocks, bonds, and investment trusts.

A study by the Financial Services Agency of Japan (JFSA) in 2020 highlighted the need for more trust in domestic fund-management companies, citing underperformance in publicly offered active investment trusts. The report emphasised that the average performance could have justified trust fees and other associated costs, leading to sluggish asset growth under management.

Prime Minister Kishida's "Doubling Asset-based Income Plan" comprises seven pillars, including the expansion of the NISA (Nippon Individual Savings Account) and improvements to the iDeCo (Individual-type Defined Contribution Pension Plan) system. While these measures aim to increase access to financial products, the plan's success significantly hinges on promoting asset-management companies' customer-oriented business operations.

The latest JFSA report in 2023 recommends measures such as greater independence of asset-management companies from affiliated securities firms, improved disclosures, and strengthened product governance. Suppose Japan's asset-management industry collaborates with the JFSA to establish customer-oriented operations. In that case, it may succeed in gaining the trust of retail investors, potentially leading to a visible shift from cash and deposits to securities.

However, history suggests that winning the trust of retail investors requires substantial effort, especially for those who have experienced disappointing returns. Unless the Japanese financial industry prioritises customer interests, the goal of transforming "savings into investments" may remain elusive. The success of Prime Minister Kishida's plan will depend on the industry's commitment to building trust and delivering satisfactory returns to investors.