Subject: [cwj 20] $1 Trillion Shuttle
From: Corporate Watch in Japanese <>
Date: Fri, 19 May 2000 12:07:54 -0700
Seq: 20

MAY 19, 2000 

$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  

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
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
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
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 

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
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 

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.
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
As keiretsu unwind, the companies must find stable new homes for their 

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
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. Box 29344
San Francisco, CA 94129 USA
Tel: 1-415-561-6472
Fax: 1-415-561-6493
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