Japan Post May Dent Banks' Mutual-Fund Business: Taking Stock

Japanese banks face a rival in the mutual-fund business, less than five years after the government let them sell funds. The newcomer: Japan Post, the state-owned postal agency that holds a sixth of the nation's 1,400 trillion yen ($11.9 trillion) in personal savings.

Banks and brokerages may lose business when Japan Post starts selling funds, as it expects to do by March. The government, which must gain lawmakers' backing for the move, is counting on postal savers to shift money into funds, boosting a stock market that reached a 20-year low in April.

“There's potential for vast amounts of money from individuals to flow into the market,'' said Hiroshi Motoki, who helps manage $387 billion in assets worldwide at Alliance Capital Management Ltd. For banks and brokerages, “Japan Post's entrance is going to be a blow,'' he said.

Investors may be the winners. Japan Post, with about 240 trillion yen in savings, plans to create its own mutual funds as well as sell those of other asset-management firms. That will broaden access to Japan's market, whose Nikkei 225 Stock Average has rallied almost a fifth from its April 28 low. The benchmark is down about four-fifths from its peak in December 1989.

Allowing Japan Post to sell mutual funds, also known as investment trusts, is the latest of many attempts by Japanese governments in the past decade to lift the stock market out of its doldrums. Banks gained entry to the fund business in a December 1998 “Big Bang'' aimed at overhauling financial markets.

Pillar of Profit

At stake for the more than 100 banks that now sell mutual funds is their commission on sales, which have amounted to about 200 billion yen to date, according to Yasushi Yoshida, a research manager at the Japanese Bankers Association.

“Mutual-fund sales are a pillar for banks to increase profits in commission-based businesses,'' he said.

Japan Post is likely to give the banks a run for their money. Its nationwide network of about 24,750 post offices is 60 percent bigger than domestic banks' combined branch operations.

The agency was created in April from the former Postal Services Agency and now runs the previously separate savings, insurance and mail services of the post office. Besides selling funds, it also plans to lend money in the overnight market. The agency expects profit of 4 trillion yen over the three financial years ending in March 2007, according to its Web site.

In May, Japan Post President Masaharu Ikuta said it plans to begin selling funds nationwide as soon as legislative approval is obtained, a step the government expects to complete before the fiscal year-end next March.

`Widely Accessible'

Japan Post will sell funds “that can be widely accessible to investors with limited experience in investing in equities,'' said Shigejiro Nishimaki, a spokesman for the agency.

That will widen the options available to postal savers. In January 2002, Japan Post's predecessor began offering U.S.-style individual retirement accounts into which employees can deposit part of their salary before taxes, often with matching company contributions. The money is invested in stocks, bonds or money markets.

“The postal agency's got a great network nationwide, and that's going to be an edge for them in attracting individuals' money,'' said Hitoshi Yamamoto, who manages about $1 billion in Japanese equities as president of Commerz International Management (Japan) Ltd.

The agency's entry may expand the proportion of Japanese who invest in the stock market. Only about 10 percent of Japan's personal savings are held in domestic stocks and mutual funds, according to Ikuta, Japan Post's president. In the U.S., individuals account for 47 percent of total investment, and in the U.K. the proportion is about 30 percent, he said at a seminar in Tokyo in May.

Market Share

“In a fully mature capitalist society, individuals should be holding about 30 percent of the market,'' Ikuta said. “Individuals are going to be the crucial buyers of stocks from now on in Japan.''

Japanese mutual funds that are available to the public had 34.4 trillion yen of net assets as of April, according to the Investment Trusts Association, Japan. In U.S.-dollar terms, that's less than a 20th of the $6.49 trillion held in U.S.-based funds in the same month, according to the Investment Company Institute, a U.S. research body.

About 16.5 trillion yen, or half of the Japanese total, is in stock funds. Banks and insurers currently have 35 percent of the equity-fund market, more than double their share three years ago, data from the Investment Trusts Association show.

The losers have been brokerages, which until December 1998 were the only companies permitted to sell funds. Their share of the market for stock funds has declined to 64 percent from 83 percent in three years, according to the trusts association.

Unfair Advantage

Banks say Japan Post will have an unfair advantage because unlike overseas postal agencies that sell funds, including France's La Poste and Germany's Post Bank, it won't have to pay corporate taxes.

The agency “could crowd out the private sector — not only banks but also brokers,'' said Naoki Kamiyama, an equity strategist at Morgan Stanley Japan Ltd.

The Japanese Bankers Association, whose 258 members include both domestic and foreign banks, says it's also wrong that Japan Post will operate under the scrutiny of the Ministry of General Affairs, which means it may escape some provisions of the Securities and Exchange Law that governs banks and brokers.

“It's just not acceptable that Japan Post gets to enter the business being a state-owned company,'' said Yoshida, the Bankers Association research manager. “The biggest risk is that Japan Post will expand its business into a different arena just because a general-affairs minister said it can do so.''

Who Would Invest?

Some fund managers say it will take more than postal savings to get Japan's stock market moving. The recent rally has been driven by optimism that economic growth is picking up in the U.S., Japan's biggest export market.

The domestic economy, by contrast, is stagnant after three recessions in a decade. Seasonally adjusted growth in the first quarter was 0.1 percent, down from 0.4 percent in the previous quarter, the Cabinet Office said on Wednesday.

Chiaki Furuta, who helps manage the equivalent of $8.5 billion as a chief investment officer at Toyota Asset Management Co., is skeptical Japan Post's entry will make much difference. “I wonder how much incentive individuals will have to invest in mutual funds that don't guarantee principal in a market like this,'' Furuta said.

Some analysts, though, say encouraging more investors to buy funds will help stocks recover.

“Given the state of the nation's stock market, allowing the postal agency to start selling mutual funds is crucial,'' said Mitsuru Yoshikawa, general manager of the legal and tax department at Daiwa Institute of Research, a unit of Daiwa Securities Group Inc., Japan's second-largest brokerage. “We need individuals' participation to revive the market.''