Inflows into Japanese stocks and bonds surged this year, showing that measures taken by the government to improve the asset management industry are working as planned.
The inflows also reflect capital leaving the U.S. after Trump’s April tariff announcement and a weaker dollar, while also showing the impact of policies introduced by former Prime Minister Fumio Kishida. Newly elected Sanae Takaichi is expected to continue them.
Established in 2023, the Policy Plan for Promoting Japan as a Leading Asset Management Center, the intention was to encourage foreign asset managers to come to the country, spur corporate governance changes at Japanese companies, and encourage people to invest.
“Japan now looks more attractive,” said Mao Dong, co-head of portfolio management at PGIM Multi-Asset Solutions in the U.S, which has been increasing its interest in the country in the wake of the shift from deflation and monetary policy normalization.
“The structural changes could bode well for investment and from an equity perspective that could mean positive flows and performance. Japan, structurally, looks very interesting.”
Corporate governance reform is working, according to Stefanie Drews, CEO of Amova Asset Management.
“You're seeing enormous moves forward in terms of how Japanese companies are restructuring themselves,” she said. “You've also got this huge digital deficit, and they have really upgraded the infrastructure of the average company, which has not been updated in a long, long time. There's a lot of great domestic stories.”
Drews said the push to get companies to report in English and Japanese and in a way that is compatible with international standards has been successful. Many small-cap companies in Japan have traditionally not published their financial reports in English. Retail distribution also has been very difficult for foreign firms because of language and cultural barriers, she said.
The changes are rippling down from the largest companies to the smallest.
“Large-cap companies are making improvements in terms of governance and are especially focused on the use and cost of capital, and this is reducing costs and increasing dividends and share buybacks,” said Masayuki Abe, chief product manager at Mitsubishi UFJ Trust and Banking Corporation (MUFG).
Last month MUFG released the ETF version of its active small-cap fund, alongside Clearbrook Investment Consulting, as it looks to attract U.S. and international investment by opening the strategy to retail investors. The company believes a dedicated research team producing research in English as well as Japanese can help promote this product.
“It started with large-cap but is now shifting to small and mid-sized companies,” said Abe. “Looking at the flows from non-Japanese investors it was slow last year but we are seeing more inflows this year.”
But there are still many improvements to be made, including the way that funds report their net asset values. “While there can be some leeway in the U.S., in Japan it's reported from two different sources and if it's off by more than 10 yen, less than one cent, it's a serious issue,” Drews said. “Japan doesn’t want to lower its standards, but at the same time it is rethinking that maybe some are slightly out of sync with what is necessary.”
The third intent of the reform was to release public capital.
Japan has one of the largest liquid markets in the world, with an estimated ¥2,000 trillion ($13.5 trillion) hidden away in household financial assets, according to the Bank of Japan. Half of this is held in cash because of historically low interest rates.
The government launched the Doubling Asset-based Income Plan, which is designed, through tax benefits, to encourage people to move money from banks into the markets.
“In the past so many potential retail investors just put the money in their banks,” said Abe. “But people have started trying to invest because also we have experienced inflation here.”
