The First ‘Big Bang’ to Sound Today for Japanese Investors

Hajime Omura is one of many Japanese savers who have endured endless frustration since the beginning of this decade.

Omura, 49, has assets socked away in real estate, stocks, bonds, bank savings and a postal savings account. But since 1990, property values have plunged, stocks have fallen by more than 50%, and interest rates have dropped so low that multiyear time deposits in the postal savings system--the single most popular form of savings in Japan--pay less than 1% annual interest.

“It’s depressing,” says Omura. His savings for retirement “are far from enough.”

But starting today, with the launch of sweeping foreign exchange deregulation--a key step in Prime Minister Ryutaro Hashimoto’s “Big Bang” financial system reforms--Omura and other Japanese investors will face a world of new opportunities.

Japanese households’ staggering $9.2 trillion in savings--the vast majority of it now invested in products with virtually no yield--will be freer than ever before to flow into potentially high-return overseas assets.

“Japanese capital might be invested or used more efficiently in the world economy,” says Katsuhiro Hoshi, an analyst at Kankaku Research Institute. “At least that’s what some people are expecting.”

Additional “Big Bang” legislation now before parliament, most of which is expected to take effect Dec. 1, will tear down the barriers between banks, brokerages and insurance companies, allowing them to invade each other’s turf. That is supposed to set off a fierce wave of competition in offering better deals to savers like Omura--and to make better use, at home and abroad, of Japan’s accumulated wealth.

For Japan’s own long-term future, getting a better return on savings is vital for keeping up high living standards in coming decades, when the percentage of retired people will become much greater. While Japanese institutions have long had a wide range of investment opportunities both at home and abroad, ordinary individuals have had only a narrow range of options--and have usually acted in the most risk-averse ways.

“So far, Japanese people have been really good at saving money, but they have been bad investors,” says Shigeo Watanabe, an independent economic commentator. “Japanese always choose the safer way. That’s why postal savings have been so popular.”

Just what the Japanese do with their money in coming months could have major effects on foreign markets. Massive flows of funds into U.S. treasuries, for example, could push down interest rates, while huge investments in U.S. stocks would support Wall Street’s bull market.

A flight of capital from Japan could further weaken the yen, which in turn would add steam to Japan’s huge and growing trade surplus with the United States. No one expects traditionally cautious investors to rush most of their assets abroad, but Japan’s savings are so huge that the shift of only a small portion into new investments overseas might trigger major international effects.

Just 4% of Japan’s household savings equals about $460 billion, which “is an enormous number,” notes Chang Yi, an analyst at Kokusai Securities Co. “There are many people out there who can’t stand this low interest policy, which seems likely to last for a long time. I am sure many will be willing to invest in foreign assets despite the fact there may be risks. At this point I would say between 10% and 20% of the population is willing to take this kind of risk, but after a year or two I think 30% to 40% of all the people will be interested.”

Investment in overseas assets, with a few exceptions such as foreign currency accounts at banks operating in Japan, has until now been difficult or impossible for the ordinary Japanese investor.

There also has been very little competition among Japanese financial institutions to offer customers a better deal on domestic investments. Products, services, interest rates and fees have been virtually identical among companies in any given field.

Now, with the new rules that kick in Wednesday, it will become far easier for Japanese institutions to offer a wide variety of investments in overseas assets. Perhaps even more important, some of the shackles that have kept foreign banks and securities firms from offering full retail services to Japanese customers will be lifted.

Unless Japanese institutions move promptly to offer the kinds of services Americans take for granted--such as mutual funds that can be targeted to specific industries or specific regions of the world--they risk seeing foreigners and more nimble domestic competitors leaving them in the dust.

That gives firms like Merrill Lynch--which recently announced plans to open 31 local offices in Japan--impact far beyond the direct business they win.

Japanese investors’ new freedom to seek high returns abroad could also increase pressure on Japanese corporations to be more profit-oriented.

Most Japanese firms are effectively controlled by their own managements and by the managements of other companies that usually are their major stockholders. In this system of cross-holdings, firms often own shares of other companies as much to cement business ties as to seek high returns.

The effect has been that Japan Inc. has never needed to pay much attention to the demands of individual shareholders--a characteristic that once was seen as a Japanese strength, but is now widely seen as an obstacle to the restructuring needed to give Japan a new burst of growth.

A more competitive financial world won’t end the cross-holding system overnight, but it does give individual investors more options and increase the chances that brokerages will work harder to channel funds to those companies that are most profit-oriented.

The ultimate impact of the Big Bang--which is named after an earlier deregulation of London’s financial markets--will be largely determined by the decisions of individual savers. Most of them, at least for now, have mixed feelings of confusion, hope and fear.

“Ordinary people like me don’t know what kind of events will take place and what kind of problems lie ahead,” says Mitsutoku Hirose, 57, an auditor at a vending machine company. “It is very confusing. I know that when it comes to overseas investments, we can’t make judgments based only on interest rates or yields. I will be very cautious about the exchange rate risk.”

Still, some Japanese investors are sure to take the overseas plunge. If their numbers are great enough, the world will feel the waves. And whatever happens, life for savers here will never be so simple--or boring--again.

“I have heard that making investments overseas is better because of the high returns, and I am interested,” says Masako Izuka, 36, a secretary. “But at the same time, I’ll probably be scared.”

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Etsuko Kawase of The Times’ Tokyo bureau contributed to this report.