Guidance to the Asset Management Industry in Japan Practical guidance for global asset managers to successfully enter the market Under the Japan Revitalization Strategy of the Abe Cabinet, the Japanese economy has shown signs of growth. The asset management industry is expected to lead in economic growth as a key financial intermediary in the Japanese economy. Considering the enormous demographic transitions occurring in Japan, it is at the top of the agenda to shift massive household bank savings to investments for the long-term wealth of the Japanese nation. It is also essential to keep a supply of money to industry to sustain economic growth. The asset management industry is expected to play a key role in transforming the flow of funds in the Japanese financial markets. Institutional investors have also started diversifying investments from JGB concentration to global assets in search of higher return. The trends of these investor’s preferences continue to result in high demand for unique and innovative investment capabilities around the world. This report was commissioned by the Tokyo Metropolitan Government, with the cooperation of the Financial Services Agency, to provide a useful source of information for foreign asset managers interested in expanding their business into Japan. The Report highlights the significant opportunities in the Japanese asset management industry as well as the rules and administrative procedures for foreign asset managers to successfully enter the market. Foreign asset managers are well-positioned to draw advantages from these opportunities by leveraging their skills and expertise in Japan. It is clear from the economic fundamentals of Japan that foreign asset managers will be the future growth engine of the asset management industry. Table of Contents Executive Summary ................................................................................................................................................... 1 I. Overview of the Japanese Asset Management Industry .................................................................................... 2 II. Methods of Japan Market Entry, and Business Registration ...................................................................... 13 III. Main Requirements, Organized by Business Type ....................................................................................... 21 IV. Process Up to Commencement of Operations .............................................................................................. 26 Useful Links ............................................................................................................................................................. 34 Executive Summary Executive Summary Japanese household assets asset managers. The picture is quite different in relation to institutional asset managers, where The Japanese asset management market is poised foreign firms have been very successful in capturing for significant growth. Financial assets held by market share and dominate the market. Japanese households are worth over JPY 1,752 trillion (USD 15.4 trillion (*1)) (*2). Demographic transition and a need for high-yield investments to Strategies for success fund future pension requirements are likely to Foreign asset managers are increasingly gaining result in a shift away from conservative asset market share and thus proving that there are ways classes, such as bank deposits, towards higher- to successfully access the Japanese market. A yielding investments such as investment trust funds number of organizations have entered the market – creating growth opportunities for asset managers. by way of sub-advisory services. Others find that an effective strategy is to distribute funds domiciled in Nearly 70% (*3) of household financial assets are other countries through fund-of-fund type held by people over the age of 60. Most of these structures. And finally, those with more capital to assets are held in cash deposits and other low risk invest are choosing to launch full-scale asset products. The next generation, with improving management operations in Japan. financial literacy, will begin to take control of these assets and more actively manage their allocation. Foreign asset managers Even a small percentage shift to higher-yielding investments, such as investment trusts, will result are well-positioned in significant increases in assets under There are significant opportunities in the Japanese management. market and foreign fund managers are well- positioned to benefit. Key to success will be not Capturing the growth only understanding the market characteristics but also understanding the Japanese business culture. Japanese households are progressively increasing their investments in investment trust funds, “Toshin”. The retail investors are further (*1) U.S. dollar amounts in this document are mostly based on encouraged to gain sophistication over their statistics in Japanese yen converted at the approximate average exchange rate during the 1st quarter of 2017 of retirement planning through various renewed JPY 114 per USD. investment opportunities. Institutional investors (*2) Source: Bank of Japan, Flow of Funds, End of December have increased their allocation towards foreign and 2016 alternative investments. It is likely that more (*3) The percentage was estimated by analyzing the Family investment management activities will be Income and Expenditure Survey 2015 (Statistics Bureau, outsourced to managers with specialized Ministry of Internal Affairs and Communications) investment capabilities. (*4) Source: The Investment Trust Association, Japan, as of December 2016 Understanding the market Securities companies, banks and investment consultants control the distribution channels and, as a result, are the major gatekeepers for entering the Japanese market. Nine of the top ten retail asset managers are domestic players and household names (Fidelity has recently been ranked as number 6) (*4). Collectively, they manage 85% of retail funds’ assets. In recent years, many have introduced more foreign and specialized investment options. Given the required skills are not necessarily available in the domestic market, there has been increased outsourcing to foreign 1 I. Overview of the Japanese Asset Management Industry I. Overview of the Japanese Asset Management Industry Japanese investors - Who HNWIs hold approximately USD 6.571 trillion (JPY 749 trillion) in assets and account for a massive has the assets in Japan? 38 % of the total wealth in the Asia-Pacific region despite the rapid expansion of China and other fast Retail investors glowing countries in the region. According to the Bank of Japan, household financial assets exceed a staggering JPY 1,752 Largest HNWIs populations, 2015 (Thousands) trillion (USD 15.4 trillion) as of December 2016 (*1). While the majority of these assets are held in cash, United States 4,458 bank deposits or other risk-free financial Japan 2,720 instruments, the portfolio has gradually been shifting towards investment products. Germany 1,199 China For the past few years, under the “Japan 1,034 United Revitalization Strategy”, the growth strategy of the 553 Abe Cabinet, Japan’s regulators and government Kingdom bodies have significantly improved their investment 0 1,000 2,000 3,000 4,000 systems. The reforms for NISA and DC have reasonably succeeded in moving household assets (Source: Capgemini, WORLD WEALTH REPORT 2016, from savings to investments. There is a broadening Capgemini Financial Services Analysis, 2016) of the investment universe and more investment capabilities are needed to accelerate this movement Household investments in Japan. When households make an investment, it is often The benefits of the Japanese economic miracle in through domestic registered investment vehicles such the 20th century can be seen in the bank savings of as investment trust funds (“Toshin”). Overcoming the financial crisis of 2007-2008, there has been a steady elderly Japanese people. Nearly 70 % (*2) of Japanese household financial assets are held by increase in the amount of investments in Toshin, individuals over the age of 60. The advanced age of reaching JPY 96 trillion (USD 0.8 trillion) in these investors with experience of the bubble December 2016, about 5% of total household financial economy collapse in early 1990s has given rise to assets. conservative investment allocations such as bank However, the allocation to investment funds in deposits and insurance/pension products. Japan is relatively low compared to the United Meanwhile, investments in risker assets are steadily States and Euro area, which are 10.7% and 8.6% increasing. respectively. Together with the equity investments, the allocation to risker assets is considerably low in (*1) All statistics in this Chapter are the latest figures available Japan. as of 31 March 2017, unless otherwise stated. (*2) The percentage was estimated by analyzing the Family Income and Expenditure Survey 2015 (Statistics Bureau, Institutional investors Ministry of Internal Affairs and Communications) Institutional investors in Japan are represented by two main groups, pension funds and financial institutions. Pension funds typically make High net-worth individuals investments through their trust accounts. Trust According to Capgemini consulting firm, in 2015, accounts are the separately managed accounts there were over 2.7 million high net-worth whereby a registered asset manager is appointed to individuals (“HNWIs”) in Japan. A HNWI is carry