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Japan: The next frontier for Asia’s private banks

Japan remains an enigma in the private banking space. The world’s third-largest economy, yet few international banks or wealth managers have significant footholds there.

With China’s reopening proving a disappointment, many eyes turned to Japan as an alternative way to capture the Asian growth story. This – along with improving corporate governance and attractive valuations – has injected momentum into the Japanese stock market, up 25% this year in yen terms. Nevertheless, the picture remains complex as flows into Japanese funds have slowed.


“We are definitely seeing more interest in terms of participating in the Japan market. More specifically, the participation of the Japanese stock market has been seeing a rising interest after the pandemic,” Liu Peiqian, Asia economist at Fidelity International, told Asian Private Banker.

Liu Peiqian, Fidelity

“Generally, we’re also expecting improving earnings of companies because of [an] improving economic outlook. There has been a general change in corporate governance, and capital market reforms in Japan, which are all leading to positive expectations of increasing dividend payouts or increasing structural improvements of the Japanese corporate balance sheet,” she said.

Source: BlackRock Investment Institute and Japan Ministry of Finance, with data from Refinitiv Datastream, June 2023.

Like China, without geopolitics

A prominent narrative surrounding Japanese markets has been the country’s ability to capture Asian growth while bypassing the tensions with the US that haunt Chinese markets.

“Japan’s reopening story is like China, but without geopolitical overhang,” Hugues Rialan, Asia CIO of Pictet Wealth Management, told Asian Private Banker in May.

According to Fidelity’s Liu, when comparing Japan to other Asian countries such as China, the former is more favourable in terms of the services and consumption sector and its regulatory support for capital markets.

“From the data we have received so far, there is a certain pent-up demand which is benefiting from the domestic dynamics of growth. And we do see that some headwinds from external factors have slowed down. But the force of domestic recovery is currently strong, and that’s why we are having a fairly optimistic cyclical outlook about Japan’s macro picture for the short to medium term,” she said.

“In terms of services and consumer sector recovery, I think Japan benefits more from broader Asia. If you look at tourism, arrivals into Japan have come up rapidly to close to 60% of pre-pandemic levels. We also expect Chinese tourists to return, which will likely give a further boost to Japan’s service sector recovery,” she added.

Matthew Chan, head of product & investment solutions, at CITIC Securities Wealth Management (HK) told Asian Private Banker that some mainland Chinese investors have been increasing allocations to Japanese stocks.

When it comes to the investment preferences of our mainland Chinese clients, we’ve observed a general openness towards global asset allocation and hedge fund strategies managed by US/European managers.”

Matthew Chan, CITIC Securities

“For instance, there’s a growing interest among these clients in Japanese stocks, as they perceive more value and independent trends in this market. However, it’s important to note that some clients still prefer investment opportunities that align with China’s economic growth and policies,” Chan said.

Building onshore momentum

There is building momentum among international businesses building out onshore operations in Japan, including private banks. For example, in June J.P. Morgan said it will look at “investing further” in its Japan and Australia businesses to take advantage of their growth potential, according to Asia Pacific CEO Filippo Gori during a media interview.

“In the current macroeconomic environment, we believe for a variety of different reasons that those two countries offer incredible opportunities over the coming few years,” he said.

In May, UBP acquired Tokyo-based Angel Japan Asset Management (Angel Japan AM), a US$1.2 billion independent investment advisor specialising in Japanese small-caps.

The Swiss pure play has had a presence in Tokyo since 2005, which provides asset management services covering traditional assets and alternative investments to local clients, as well as to global investors seeking to build Japanese exposure.

“Taking on the ownership of Angel Japan AM will not only broaden our distribution channels to onshore Japanese clients, but will also strengthen our in-house capabilities and value proposition to serve our offshore clients even better,” Nicolas Faller, co-CEO of asset management and head of institutional clients at UBP, said.

In February, Mizuho Financial Group reached a deal with Lombard Odier Trust (Japan) to provide Japanese high-net-worth individuals with private banking solutions.

Under the agreement, Mizuho will offer wealth management to its Japanese clients, which will be based on Lombard Odier’s expertise and global network.

Besides Swiss banks, some Chinese asset managers have also broadened their offerings in Japanese assets for qualified investors. Hong Kong-based asset manager Value Partners Group in May launched the city’s first ESG fund that focuses on the Asia ex-Japan food and nutrition sectors, which invests across the entire food value chain from farm to fork.

Momentum is building in onshore Japan, but only piecemeal progress is being made as its shores do not attract the same level of interest from private banks as Asia’s wealth hubs of Hong Kong and Singapore, which continue to benefit from waves of Chinese wealth. On the investment front, a strong recovery and an improving equity market show that for private banks, it is still only dawn in the land of the rising sun.

Fund inflows

The Japan hype train does not completely play out in cold hard data. According to data from investment research firm Morningstar, in May Japanese equity funds suffered net outflows of JPY120 billion.

Another factor affecting the deterioration in fund flows in May was that net inflows to world equity funds, which had driven overall fund flows, fell below JPY100 billion for the first time since the latest round of net outflows in June 2020.

Growth vs value stocks

Ronald van Genderen, Morningstar

In the Japanese stock market, over the last two years investors have favoured value over growth stocks, but this has not always been the case, according to Ronald van Genderen, senior manager and research analyst at Morningstar.

“In the up market of 2021, the MSCI Japan Value index posted a return of 13.92%, while the MSCI Japan Growth index stalled at 5.11%. Last year, Japanese growth stocks lost no less than 22.31%, but value stocks managed to achieve a small plus of just under 1%,” van Genderen shared with Asian Private Banker.

The roles reversed over the first four months of 2023, and growth stocks are now leading again, returning 4.69%. Value stocks returned 1.49%, according to Morningstar data.

Source: Morningstar


In Hong Kong, although clients can access Japanese equity strategies, APB understands that distribution coverage levels among private banks lag behind the level of interest in the market.

“We are keen to onboard one of the small-cap Japan equities strategies to some of the private banks, but the fund still needs a higher size to enter the shelf,” a senior executive from an asset manager told Asian Private Banker. They added that once the minimum size of the fund meets its requirement, the fund will be available to several end-clients from major private banks.

Fidelity also told APB that it is currently in conversations to bring a European private credit strategy to Japan, however, the process is taking longer than expected. Compared to public market strategies, it is more difficult to bring private asset strategies into Japan, and distribution and even education take more time.

Meanwhile, private bank CIOs in the region remain upbeat on Japan. UBS Global Wealth Management, for example, said in June Japanese stocks could return to levels not seen since the premiership of Shinzo Abe if corporate governance reforms and reflation maintain momentum.

Low valuations

In April, the Tokyo Stock Exchange announced new requirements intended to increase the value of listed companies to attract more investors.

“Part of that is the requirement for companies to come up with plans to increase their share price if their price-to-book ratio is below 1x. It fits in with the trend that was initiated under former Prime Minister Shinzo Abe to improve the profitability of the Japanese business community and to raise the valuation of listed companies,” according to van Genderen.

“Although progress has been made, as of April 2023, nearly 45% of companies are trading at a price-to-book value ratio below 1. By comparison, in Europe, this is the case for almost 25% of companies and in the US for only 5%,” van Genderen added, noting that a higher valuation for Japanese equities may help them to recover from the period of prolonged underperformance.

“Despite the recent uptrend in the market, the forward price-to-earnings ratio for Japanese stocks remains below the average of the past 10 years or so. And valuations of Japanese stocks compare favourably with other developed markets,” Liu told Asian Private Banker.

From the perspective of headline indices, as of the end of June, the MSCI Japan Index slightly underperformed MSCI World Index (19.1%) with a gross return of 18.6% in one year.

This is not only over the first four months of 2023 did they underperform, but also over longer periods such as five, ten and fifteen years. Japanese equities have achieved a return of 6.05% per year over the past ten years, whereas European equities achieved an annual return of 7.22%. US and global equities, however, posted significantly higher returns of 13.44% and 10.65% respectively.


One notable trend among Japanese equity funds is sustainability, however, the region still has some catching up to do with its global peers, particularly in relation to environmental, social and governance (ESG) standards.

“The Japanese equity market lagged behind the development in Europe and even the US on adopting ESG characteristics, but more recently we have seen more introductions of funds that have a sustainability or ESG angle, or conventional funds that have been repurposed,” van Genderen said.

(see table for a list of all funds that have been introduced since January 2022)

Source: Morningstar


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