Will Japan's Cautious Investors Roll Dice With Maturing Funds?

By MARK MAGNIER

April 23, 2000 12 AM PT

TIMES STAFF WRITER

TOKYO —

Yoshio Ishihara, 73, is suffering from a bad case of reverse sticker shock. For the last 10 years, the retiree has earned 6% interest on his postal savings, or about $600 a year. With his fixed-rate time deposit maturing, however, and Japan’s interest rates approaching zero, renewing gives him a measly $20 a year on his $10,000 investment.

Put another way, with the current transistor-size annual interest rate of two-tenths of a percent, it would take him 347 years to double his money. “For an old person like me who depends on interest, the rates are a bit disappointing,” he says. “I would expect at least 2%.”

Ishihara is far from alone. In fact, more than $1 trillion in postal savings certificates are maturing over the next 24 months, equivalent to a whopping 20% of GDP. “It’s probably the single largest movement of money in that short a period of time in history,” says Bill Wilder, president of Fidelity Investments Japan.

The issue has important implications for the world’s second-largest economy. Rapid shifts of these huge sums could be destabilizing. But to the degree that Japanese begin to part with their savings, at least some of it is likely to get spent by consumers--who hold 60% of Japan’s troubled economy in their hands.

Further out, if a significant chunk of Japan’s savings does migrate into stocks, bonds and other more productive investments, it could provide money for start-up companies, promising technologies and corporate restructuring. This in turn would help create badly needed jobs and spur economic growth. At present, most of the money is used to fund government debt and support the bureaucracy.

Although just how much of the hoard will find a new home is a $1-trillion question, financiers smell big-time opportunity. Money managers of stocks and bonds at brokerages ranging from Merrill Lynch and Morgan Stanley to Nomura Securities and Daiwa are salivating at the prospect of nibbling away at the staid old post office.

That said, they appear to have their work cut out for them. Most Japanese are conservative investors and believe stocks are risky. Early results from the redemption period, which started this month, show 56% of postal CD holders are renewing.

Ishihara, for one, says he bought stocks in the early 1980s, nearly lost his shirt and vowed not to return to the equity markets. Even banks look a bit shaky after Japan’s financial crisis, he adds. He’ll probably spend a bit and keep the rest in the post office for at least another year.

“I don’t trust stocks, and I’m not trying to get rich,” he says. “I just want to keep what I have.”

Aware of the resistance, money managers are developing a range of products and marketing strategies o cajole Japanese investors a bit further out on the limb. These include new, relatively conservative mutual funds, educational seminars and ad campaigns.

That said, good intelligence on the 35 million postal account holders, their motivations and where the market is headed is sorely lacking, even for the keeper of the mother lode. “God only knows what people will do,” says Naoto Misawa, postal savings deputy sales director at the Ministry of Posts and Telecommunications. “About all we know is that policy holders are 10 years older than they were when they put the money in.”

What’s clear is that the number of investment options, new foreign players, trading technologies and distribution channels has exploded since many of these savers socked their money away. This brave new world is driven in part by Japan’s so-called Big Bang financial deregulation and the widespread interest in Japan’s dinosaur-size nest egg.

Merrill Lynch is taking a shotgun approach. It’s offering more than 50 mutual funds along the risk curve, ranging from sleepy money market products to screaming high-tech stock plays.

“We’re preparing several dozen fishing rods with different bait and we’ll wait and see,” says Kosuke Arao, managing director of Merrill Lynch Mercury Asset Management Japan, with $5 billion in Japanese funds under management. “We don’t know which one they’re going to take.”

Fidelity, with its 21 funds and $13.8 billion in Japanese assets, has its eye on trains. Once an hour on Tokyo’s busy Yamanote line, which rings central Tokyo, a train with nothing but Fidelity ads hammers home the message that a professional money manager is a much better bet than the guys who deliver your mail. Interspersed with the straight sell are quotes from Ernest Hemingway, Albert Einstein and actor Toshiro Mifune on the importance of having and realizing a dream.

Several riders on a recent afternoon circuit gave the campaign mixed reviews.

“I’m interested in the issue, but I’m not sure this approach has much impact,” said Haruo Nomura, a fiftysomething salaryman. “A lot of people only ride the train for one or two stops, and the ads are too dense.” But Shioya Miwako, a 32-year-old office worker, said they caught her attention and made sense to her. “I’d invest in stocks, if only I had some money to invest.”

Top Japanese broker Nomura Securities, meanwhile, recently made a deal to link its brokerage accounts with the postal ATM network, a move also made by several of its competitors. That pipeline is reaping $5 million a day in new money for Nomura alone. Nomura also unveiled a new mutual fund, called the “Big N-Project,” which it marketed aggressively through its powerful distribution network. The results are impressive. In just three months, Nomura attracted more than $10 billion--unheard of for even the hottest U.S. fund.

And Morgan Stanley has tied in with Japan Airlines’ frequent-flier program on the grounds that Japanese often use funds left over from overseas trips to put money in foreign-denominated investments.

Faced with this competitive din and fury, the post office is stepping up efforts to protect its turf. Postal salesmen are visiting customers, calling, writing letters, airing television ads and pasting up posters. “We grow your dreams,” reads a small sign in a sagging inflatable plastic bubble on a counter of Tokyo’s Shiba post office.

Despite its abysmally low interest rates, the post office has some significant advantages. One is its distribution network, which with 24,000 post offices nationwide is unsurpassed. Particularly in rural areas, these are often the only game in town. “Ten years ago I used the postal savings system because it’s so convenient,” says retired salesman Masao Inoue, 72.

The post office also has a good reputation here. Surveys find that letter carriers and counter staff are seen as helpful, trustworthy and good local citizens--major advantages in a country where personal relationships are still extremely important.

“They’re not always the best-dressed, but they’re very friendly,” Merrill’s Arao says. “For many small-shop owners, that’s very comforting.”

How much money will ultimately leak out of the post office is anyone’s guess. But estimates are that as much as 25%--or a staggering $250 billion--could eventually move into stocks and bonds and an equal amount into banks.

If realized, this could yield some enormous dividends for individual money managers and consumers, spur more Japanese investments overseas and reduce the government’s control over the domestic financial system by forcing it to bid competitively for funds.

Started in 1875, Japan’s postal savings system is unlike any in the world. As it has grown, it’s also come under sharp criticism from Japanese bankers, analysts and foreign economists who say it distorts capital markets and blunts the nation’s financial deregulation.

The post office doesn’t pay corporate taxes, real estate taxes or deposit insurance premiums, all major advantages in competing against private institutions. And by giving the government effective control over 20% of Japan’s private assets with few checks or balances, it leaves bureaucrats with a license to waste money.

“This is hardly ideal for the financial sector of a leading industrialized country,” said a recent editorial in the Yomiuri Shimbun, the nation’s largest newspaper.

Much is made of the risk-averse nature of the Japanese. But Morgan Stanley Investment Trust President John Alkire rejects the idea that this is somehow innate or cultural.

Relative to the U.S., Japan lacks an IRA or 401(k) system that rewards investors with tax breaks, he says. And a 10-year economic and stock market slump has created few reasons to invest and lots of reasons to save.

Japan’s brokerage industry also has been involved in a rash of scandals over account churning, the paying of bribes to mobsters and payouts to big investors at the expense of the little guy--none of which engenders confidence. And Japan’s population is among the fastest-aging on earth, heading toward a time in life when caution and retirement concerns are universal.

Furthermore, it took Americans decades to become such avid stock hounds. “Even in the U.S., it wasn’t until 1995 that U.S. equity funds surpassed holdings in bond funds,” Alkire says. “It will take time.”

Most analysts agree that the shift to higher-return investments will be gradual--and generational. More than 70% of Japan’s wealth is concentrated in the hands of those older than 55, avid savers from the generation that built post-war Japan through sacrifice and hard work.

While retiree Ishihara says he’s going to have to scale down his lifestyle because of the reduction in interest rates, he also hopes to do some traveling and to give some money to his grandchildren, which could ultimately find its way into Pokemon cards or other retail channels.

What’s clear, financiers say, is that Japan is on the cusp of a major structural change in its investments. “We’ll look back and recognize that 2000 was a turning point,” Morgan Stanley’s Alkire says.

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Conservative Japan

Japanese don’t play fast and loose with their money. Household financial assets in 1998, Japan and the United States, by percent:

Japan

Savings*: 52.8%

Stocks and bonds**: 6.8%

Insurance: 27.5%

Mutual funds***: 1.9%

Other: 11.0%

U.S.

Stocks and bonds**: 54.5%

Insurance: 6.4%