This blog’s job is to open the door a crack on the secretive business of investing Japan’s savings – particularly those held by defined-benefit pension schemes and insurance firms.
Media coverage of this business is notably absent from Japan, in any language. Rather, a pricey bi-weekly published by a consultant is the sole substitute for the numerous publications available to North American and British institutional investors and their service providers.
This is unfortunate. Trade media play an important part in making any industry more rewarding and transparent by providing additional lines of communications between its buyers and its suppliers.
Japanese companies seem unable to understand that while their products compete with each other their pension funds do not. In what is definitely not a zero-sum war, exchanging intelligence can achieve more than reinforcing the ramparts so no one sees over the top.
Pension sponsors were not the originators of this now widespread concealment but as the business’ most important customers they could bring it to a halt – cutting costs and improving returns in the process.
Instead, by insisting that even something as simple as the award of a mandate be kept confidential, they are bent on maintaining a barrier to better returns.
Like the regulators at the Ministry of Health, Labor and Welfare, sponsor staff are aghast when shown the wealth of detail available online, and at no charge, about every US pension fund — and seem even more flabbergasted that the sky has not fallen in as a result.
The aim of this site is to do its job by providing coverage of, and comment on, current developments plus a reference library of materials not available elsewhere. These are often sourced from the Japan Pensions Industry Database with which it is associated.
Context and competition
The US, Japan and the UK are home to the world’s three largest pools of investable savings1. As a result, they are home to the three largest stock markets and three of the four biggest national bond markets.
Defined-benefit pensions still account for 98% of the assets in Japanese corporate schemes. This makes a marked contrast with the US and UK.
Before the 1995 reforms pensions management in Japan was – by design – a replica of that in the US before the Employee Retirement Income Security Act 1975 (ERISA). Thus life insurers and trust banks had almost 100% of the market. At that time these institutions were entering into a period which was to prove one of repeated restructuring. (See ‘Reference Points’ at right for graphs on “Consolidating banking system” and “Shrinking insurance sector” for where this began and how it ended.)
The liberalisation allowed domestic and foreign asset managers into the market for the first time. They quickly captured market share from the life insurers but the trust banks proved more robust and with their problems now behind them have staged a very strong comeback.
One reason that life companies and trust banks were able to hang on is their role as sokjani (of which the closest translation is ‘organiser’) which a never been liberalised. This also makes them the dominant custodians – though foreign studies of the custody market do not mention this wrinkle.
Sokanji and their roles are mentioned in several postings on the blog. Oh, and they do not see greater flows of information as being to their advantage but this is a misperception they may one day outgrow. For who is sokanji to whom see this table Life insurers and trust banks by number of pension funds to which sokanji under the “rankings” tab.
Japan’s insurance companies as well as its asset managers and other downstream service providers, such as brokers, are regulated by the Ministry of Finance.
Pension funds are regulated by the Ministry of Health, Labor and Welfare – a big fan of secrecy2 – sometimes acting through the Pension Fund Association which it set up, staffed and pays the expenses of, beyond those that it can cover with membership and other fees.
1. The need to translate numbers into a common currency in order to make comparisons can create year-on-year fluctutions in national rankings. The most obvious is that when the pound sterling in low and the yen is high the distance between Japan and the UK increases.
It is worth noting that rankings which put the UK second almost always have a weak grasp of the impact of exchange rates. Many also do not know that the Japanese financial year ends on 31 March, making its numbers either three months ahead or nine months behind those of other markets. Rankings also often use, unchecked, data from existing sources incorporating the above faults, thus compounding the crime.
2. The MoHLW’s approach to disseminating information changes both for the better and for the worse over time.
In 2004/5 it used the PFA’s switch to publishing its annual report online to stop contributing the scheme membership and beneficiaries data it had provided for decades. This was on the grounds that the information should not be seen by just anyone.
Soon afterwards it began to emerge that the Ministry’s Social Insurance Agency (now abolished) had lost the records of 50 million-plus payments into the state pension scheme and that it had a wee bit of a problem with embezzlement and fraud among its staff. This inevitably raised questions about the reliability of the Ministry’s other data and put a dent in its mandarins-know-best approach.