The economic policies of Japan’s prime minister Shinzo Abe – dubbed ‘Abenomics’ – aim to reinvigorate the country's economy and end its long period of deflation. The short-term effects of Abenomics, however, have been a mixed blessing for Japan’s retirees, whose investment needs are evolving. As Japan’s financial institutions adjust to these changes, they are also adapting to the longer term structural shifts from the country’s ageing population.
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“Japan is leading with these ageing issues and many countries will face them after us,” says Kazuhiro Higashi, president of Resona Holdings. He argues that Japan is not an ageing society – it has already aged, he says. “Banks need to change their business to accommodate the changes that are happening."
Of the effects of the current economic environment, Mr Higashi says: “The elderly have a lot of cash that they wish to invest. Those assets have been protected by deflation and now people are choosing yield." He adds that sales of investment trusts that distribute dividends on a monthly basis have been popular in recent months.
This point is echoed by Ken Kubo, deputy president at Sumitomo Mitsui Banking Corporation (SMBC), who says that an increasing number of Japan's retail customers are purchasing investment trusts and other investment products. “The depreciation of the yen is expected to reverse deflation, and with stock, real estate and other asset prices rising, retail customers have started to feel more positive about investing,” he says.
Changing times
The shift away from fixed income and towards equity products is, according to Kazuya Jono, president and CEO of Citibank Japan, a result of Abenomics. “This helped bring many of our customers, including high-net-worth customers, back to the market and interested in making new investments, especially US dollar-based assets, which we hold a variety of," he says.
While the short-term impact of Abenomics has generally been positive, which means that many economists are now upwardly revising their forecasts, the long-term issues of the country’s ageing population remain. “You cannot think about the ageing population without considering Japan’s fiscal condition," says Junko Nishioka, RBS’s chief economist for Japan. She says that the increased social security payments for baby boomers is the main reason for the deterioration in Japan’s fiscal condition.
There is an argument that Japan’s future economic prospects are limited because of Japan’s ageing population and shrinking labour force. However, in February 2013, former central bank governor Masaaki Shirakawa said: “The demographic change of the population ageing is itself not triggering the problem for Japan’s economy; the real issue is that Japan’s economic structure and social infrastructure have not sufficiently caught up with such demographic changes.”
Since the expansionary policy of the Bank of Japan (the country's central bank) under the current governor Haruhiko Kuroda, some retirees have benefited from the rise in stock prices, while others are worried that their savings may be eroded by inflation. A wealth gap, says Ms Nishioka, is likely to increase among the older population in the long run. However, for now, the government’s priorities are to improve Japan’s fiscal condition and focus on deflation.
“That may cause a widening of the wealth gap, but it can be helped,” says Ms Nishioka. She believes that measures can be taken to assist those who are not so well off. This generation of old people, however, are quite fortunate compared with what Japan’s future generations can expect on retirement. Ms Nishioka says that in 30 years’ time, social security income may be halved.
Demographic bulge
The burden on the younger generation having to support the social security payments of the older population is an issue facing Japan, as well as other developed countries. Shuzo Nishimura, director-general of Japan's National Institute of Population and Social Security Research, notes that the share of Japan’s working population is declining while the proportion of people more than 75 years old is increasing. “Intergenerational equity is a hot issue now,” he says. “Elderly people have many more assets, but nowadays young Japanese people have difficulty finding jobs. Many people think we should reduce the pension benefits and decrease the burden on younger people.”
When asked if Japan is facing a crisis with its ability to support the social security payments of the older population, Mr Nishimura says: “Yes, but we can postpone the crisis with several good ideas". These include increasing the working age and promoting the concept of people aged 65 to 70 working more. “Japanese people are eager to work despite them having enough pension benefits,” says Mr Nishimura, adding, however, that delaying the pension benefits in this way is politically difficult as such measures affect youth employment.
According to Japan’s International Longevity Centre (ILC), as of the end of 2012, more than one in every five people in the country was 65 or over, and more than one in 10 was 75 or over. Of a total population of 127.66 million, 23.4% are 65 or over, a portion the ILC estimates will increase to 42% by 2055.
Age is just a number
Mr Nishimura argues that the concept of ageing should only be applied to those who are 75 and over, and there should also be an emphasis on longevity, rather than ageing. Rather than dragging down the economy, if this segment is still working and active they could be a source of economic demand. For banks, Japan's ageing population is not necessarily a bad thing. When asked whether the old population is a burden, Ms Nishioka says: “I would say at this moment the elderly can be a big driver to boost Japanese household consumption."
Taro Yabuta, senior manager in the personal banking coordination division at Mizuho Bank, also sees the positive side of the country's new demographic. “In Japan, almost all rich people are old people,” he says. Unleashing the spending power of this affluent segment is not easy, however. Mr Nishimura notes that older people will only be able to spend more once they feel confident about their future income and their ability to afford their healthcare.
“I think that the elderly are more concerned about protecting their income,” says Resona’s Mr Higashi. “For the elderly, their concerns are how long they will live and, if they are bed-ridden, how much it will cost, and so it is natural that they are concerned with protecting their assets.
“I believe that if the elderly... see that Japan is starting to grow and social benefits improve with fiscal policy, they will feel secure and start spending. If Abenomics is too successful and there is a spike in inflation, then that will erode pension income. But, for the time being, that is highly unlikely to happen in Japan.”
Popular products
Masahiro Yamasaki, vice-president in the product development and planning department at Nomura Securities, says that at a national level, approximately 60% of financial assets are held by elderly people and the same the ratio is true for the account balances at Nomura Securities. “To continually grow, we have to focus on the elderly market – we think there is a huge opportunity,” says Mr Yamasaki. As for the current needs of this segment, he says: “We feel the silver segment is more concerned about protecting their savings.”
Masatoshi Sakuma, who is also in the product development and planning department at Nomura Securities, says that life insurance products have been popular with older customers. He adds that double-decker funds, which combine investments in high-yield US bonds with exposure to emerging market currencies, have also been popular with pensioners who are looking to top up their income.
Citibank Japan is focused on affluent clients, and the dankai – or retired people – is one of its four segments. Mr Jono explains that this segment has the largest share of financial assets, a proportion that is expected to grow in the future. “The unique financial need of this segment is inheritance and, given the upcoming inheritance tax law change in Japan, products and services related to inheritance are growing in popularity,” he says. Mr Jono adds that many banks have been partnering with tax consultants to provide advisory services for the inheritance of private assets or business succession planning.
Mr Kubo at SMBC says that because of the revision of the inheritance tax act, inheritance-related services such as testamentary trusts are becoming popular. Of other factors affecting the elderly, he says: “In general, when employees retire after a lifetime of employment, they receive a relatively large retirement allowance from the company and, usually, they choose to take it all in one lump sum. Consequently, the older population is a major market for us. They have become the main buyers of products such as single-premium, whole-life insurance and individual annuity insurance, which were originally not designed specifically for the older population."
Mr Higashi also says the need for trust services is increasing in Japan. He points to figures that show an increasing proportion of cases in family courts are related to inheritance. Mr Higashi explains that at Resona, the trust solutions are a gateway to cross-selling. For example, for a client who has entrusted their will to Resona, there are cross-selling opportunities such as investment trusts or advisory services in business succession.
Cross-selling opportunities
Another opportunity that Mr Higashi identifies is with small and medium-sized enterprise (SME) owners. “SME owners are getting older and older. At the end of 2012, 22.9% of SME owners were 70 and older and 29.8% of SME owners were in their 60s. This means these individuals are seeking advice about their inheritance and business succession,” he says.
Under the umbrella of the financial group, Mizuho also has a trust bank that offers services such as the safekeeping of a customer’s will, execution of the will, and distribution of the inheritance. In 2013, the government introduced tax breaks for educational trusts and financial institutions have been promoting such products. Mizuho introduced the Educational Grant Trust product in April 2013, which enables grandparents to put aside money for their grandchildren’s education.
Resona offers a similar product and Mr Higashi gives the example of one customer who bought the education trust for each of his eight grandchildren. Investing Y15m ($152,832) in each, that means Resona was able to sell Y120m-worth of trust products to just one customer.
Mr Yabuta at Mizuho Bank explains how the financial needs of Japan’s older population are changing. “Previously, older people wanted to leave their assets – especially real estate – to their children. Recently, the needs of older people have diversified: there are those who still want to leave assets to their children, but others want to spend their money and enjoy their lives,” he says.
In July 2013, Mizuho Bank introduced the reverse mortgage loan to cater to the silver segment. The customer uses their home as collateral to receive the loan, and on their death the property is sold and the loan repaid. Mr Yabuta says: “Every Japanese financial institution has been focusing on the rich silver segment, but I think from now on the focus will be on the silver segment who do not have enough money – that is one of the reasons for the reverse mortgage loan product.”
Often, he says, this product is used so that the customers can 'enjoy the silver life'. While there is an increasing need for such loans to be used to pay for nursing care, Mr Yabuta says: “My perception is that the need for enjoying their life and travelling, and second houses, is as big as the need to pay a deposit at a nursing home.”
Profitability, however, in targeting this mass silver segment is a challenge. Older people typically need advice and consultants, but this is labour intensive and so financial institutions typically assign consultants to the wealthier customers, and others are served by the bank counters and remote channels.
Daiwa Securities, like many other players in the industry, hopes to encourage a shift of funds from savings to investments. Hiroko Sakurai, head of investor relations at Daiwa Securities Group, says at the end of 2012, 55.2% of household financial assets in Japan were in cash and deposits, which is much higher than other G-7 countries. In the US, for example, the proportion of cash and deposits was 14.6%.
Competitive edge
There is, however, a reluctance on the part of Japanese customers to invest. “Most Japanese people are not accustomed to visit securities companies directly,” says Ms Sakurai, adding that Daiwa Securities aims to capture investment opportunities from its internet bank, Daiwa Next Bank. And the internet bank also can capture the flows of Daiwa Securities customers when they are cashing out their investments. Instead of transferring the cash to another bank, now those deposits stay within Daiwa Securities Group.
Ms Sakurai explains that Daiwa’s strategy is to focus on the retail segment and create synergies between the group’s securities and banking business. The strategy was first outlined by president and CEO Takashi Hibino in 2011, and in the same year Daiwa Securities Group launched Daiwa Next Bank. Since then the internet bank has been attracting deposits and by the end of March, 2013, Daiwa Next Bank had deposits totalling Y2200bn.
Ms Sakurai explains that because the operating costs are lower as an internet bank Daiwa Next Bank is able to offer competitive interest rates. “One reason for establishing Daiwa Next Bank was to function as a gateway for retail investors who are very risk averse. Investors [in Japan] are very conservative,” says Ms Sakurai.
The internet bank is able to take advantage of Daiwa Securities’ network of agents, who are also agents for the online bank. “It is important for older people to have the option to go to a branch,” says Ms Sakurai.
On the question of whether elderly people are more comfortable with banks or securities companies, Mr Yamasaki at Nomura Securities says: “If they are wealthy they want specialised knowledge about markets or financial products, and we think that is our strength." He acknowledges that people trust banks because banks do not offer risky products, but leaving savings in bank accounts could be a risk in the inflation world.
Ethical issues
Selling products to older customers also raises ethical issues. When Japanese people receive a lump sum on retirement, for many this is the first time they think about investing. For older customers in their 70s and 80s, care has to be taken to make sure the customers understand the risk profile of the product, and also that they are being sold a product that is suitable for someone of their age.
“Sometimes we have to persuade our customers to consult with their children and their spouses. We have to make sure our sales procedure is based on compliance,” says Mr Yabuta at Mizuho.
Mr Sakuma at Nomura Securities says: “We think the greatest challenge for us is that we have to offer products that meet the needs of the elderly. Most of them do not want to increase their assets dramatically but they want to protect them and so offering riskier products cannot meet those clients’ needs. Sometimes we talk with their children or spouse before we deal with [elderly customers themselves]. We have to be very sensitive in dealing with elderly people. There are huge opportunities for financial institutions, which is why there need to be strict rules for dealing with the elderly."
This is just one of the challenges with dealing with the financial needs of Japan’s older population. But aside from this there are numerous opportunities in this segment, both in the short term – as the effects of Abenomics take hold – and also in the long term, as Japan adjusts to the needs of its ageing society.
