Aquitaine Report on Japan,
8/28/00
“If you torture the data long enough, it will
confess to anything.”
Darrell Huff,
How to Lie With Statistics, 1954¹
Letter from Tokyo – August 28, 2000
Over these past
few months, we have spent a lot of time with our clients in Japan. There is a great interest amongst
institutional investors in the Japan market. It is, after all, perceived to be
in the throes of dramatic changes, many of which we have identified and
discussed in our previous investment
commentaries. Investors are focusing on
the more obvious changes, or those mostly covered by the financial press, such
as 1) Japan’s corporate
restructuring and; 2) Japan’s attempts to successfully replace elements of the
traditional keiretsu relationships with selective
adoption of IT methods.
The recent Sogo
and NCB cases have considerably added to the debate amongst Japan investors –
some interpret the former as a positive sign of change in corporate Japan and
the latter a negative sign of Japan’s retreat to its bad old ways.
While the saga of
corporate restructuring makes headlines and creates debate amongst our
investors, we quietly point to the effects of the country’s financial reforms, and the increasing pace of the opening of
Japan’s financial systems to competition.
Realities of Japan’s Demographics
But
underlying all these headline-grabbing changes, we find the looming fact of
Japan’s demographics much more interesting as catalyst for change in that
market. Japan’s rapidly ageing population is more likely to yield deeper and
longer lasting changes on the investment landscape than the politicians’
tinkering with a rule here and a regulation there.
Demographic
statistics are boring at the best of times, coma-inducing in the worst.
However, let’s look at what this rapid ageing means for the Japanese investment
picture.
Consider the
following: In 50 years, one third of all Japanese will be over the age of 65.
Japan had its “baby boom” in the 1930s when the country’s economic health
underpinned the nation’s preparations for war. Since that time, the birth rate
has been declining.
Implications of an Ageing Japan
Spending on Pensions
& Health Benefits (as % of GDP) Source:
UN Population Division; Japanese Government
An ageing Japancreates
both problems and market opportunities. These demographics indicate arapidly
expanding market demand forhealthcaresystems,
housing, savings and investment products and leisure for the olderconsumer.
The “child market” is in decline (some of us would say “thankheavens” for that
fact, given the market’s infantile obsession with thissegment over the last few
years in Asia). And given the low birth rates, other age segments are showing
little orno growth. As Japan is the oldestcountry in Asia, it provides a good
leading indicator of trends and socialissues that will emerge in other Asian
countries.
The Pension
Problem
Oneof the most obvious problems of this demographic
picture is the underfunding ofJapan’s pension system. Given the factthat the
birth rate declined drastically post war, and the 1930s baby boomgeneration is
living longer, it is expected that in the coming two decades,each working
person will be supporting two or three pensioners. This compares with slightly
over one for thepast decade. The problem is manifested by a decrease in the
number of actualworkers in the workforce, and the demand for shorter working
weeks andhours.
Whilethe problem has been “smoothed” in other
industrialised nations such as the USby immigration, the Japanese have had no
equivalent influx to share the pensionburden. So the dislike and distrust of
the gaijin has resulted in a problemthat can only be laid at the Japanese door.
Traditionallythe Japanese pension scheme has been
based upon the “pay as you go” method,which in effect means that the current
needs of pensioners are met by thecurrent work force. This is problematic because
the work force is shrinking. Therefore, public and corporate pensionschemes are
severely underprovisioned. Added to the shrinking labour pool is the problem ofmediocre performance of domestic managersin
managing pension assets.
Ona household level, there are stunning levels of
financial assets that have beenunderperforming as a result of the mediocrity of
Japan’s IM industry. Now thereis panic, as households must make up the
shortfall in order to provide forpost-retirement life. Corporates have to physically
make up the shortfall byprovisioning in the short term and devising some way of
improving ROA in themedium term.
Estimatesof underfunding across corporate Japan seem
to be of the ¥70,000 bn (US$ 648bn) level and rising. Some corporateshave
decided to take provisions up front, allocating funds now from operatingprofits
or realising gains on securities portfolios. Corporates trying to improve ROAs
are turning toforeign fund management
firms,havingbeen disillusioned by the mediocre returns afforded by the
domesticmanagers.
Simply put, corporate defined benefit has not worked inJapan and will not provide the pension needs required by its current and futureworkforces. And it is unclear whether Japanese corporates will adapt a definedcontribution (DC) system or even a 401(k) type programme, given low acceptanceamongst the work force thus far. The Japanese worker has been used to definedbenefit, and all of a sudden he/she will have to start paying monthlycontributions in addition to commissions when purchasing/switching products. Inthe case of the 401(k) style products, the Japanese worker has to a) agree tomake decisions as to what is in his/her retirement portfolio and b) learn thatthe final value of the benefits is subject to market vicissitudes. This is a far cry from the traditionallypassive approach the Japanese have taken with their investments.
Therefore,the adoption of a DC format requires achangein mindsetfor the Japanese
worker, underpinned byconsiderable
government/industry education in investment productsand how they are used
for retirement planning.
Froman investment standpoint, we are interested in
the distribution channels forthese products. Given the logical conclusion of
financial reform, it isexpected thatbanks
(regional and other),trust banks, securities houses, insurers and ITMswill
be allowed to sellall manner of new pension products and funds. Thus far, the
life insurers have been the most successful indistributing personal pension
products because of special tax advantagesafforded to life insurers as a result
of a particularly strong insurancelobby. However, as the underfundingproblem
becomes more acute, it is expected that the winners of the distributionstakes –
domesticsecurities houses andbanks–
will overtake the life insurers in terms of market share. Lifeinsurers, as well
as trust banks, have had their reputations tarnished by poorinvestment
decisions and the more obvious bailouts.[*]
The Leisure Segment – Japan’s
MerryWidows
It’snot only a question of how many Japanese are
ageing, but also one of who isageing. Women live on average 4-5 years longer
than men in Japan. Across Asia,as the population ages, and there is the
propensity of women to live longerthan men, widows as a new high growth segment
is emerging across the region.
Years Ahead at
60[*]
East Asia
Men
Women
China
16
19
HongKong
20
24
Japan
21
25
NKorea
16
20
SKorea
16
20
AcrossAsia, the amount by which the number of women
exceeds men aged 60+ increases ata rate of 4.6% p.a. during the 1999-2020 period.
In the more affluent countries like Japan and HK, that rate ofgrowth is as high
as 100% p.a., creating some interesting growth sectors. Travelis expected to remain the most popular segment of Asia’s leisure
industry,and it will exhibit tremendous growth from this age group. This
ain’t theDisneyland crowd - this is the cruise crowd. Anytravel and leisure activitiescatering to older women will
showinvestment potential.
Healthcare and
Housing Implications
Percentage of Japanese elderly living with their
children Source:
UN Population Division; Japanese Government
The ageing issue
inJapan is not just an exercise in numbers. Foreign investors tend to apply
theirown cultural and social filters when dealing with foreign markets.
Consider thecultural, political, and social factors surrounding Asia’s ageing
population.These are usually overlooked by the foreign investor (especially
those with aMedicaid or NHS mindset): There is a long history offilial responsibilityfor elder care,
and little history ofgovernment
entitlements. The mobilityof younger generations and the decreased sizes of
families due to lower birthrates over the last two decades are forcing
governments to increase or evendraft new legislation requiring family responsibility
for elder care. And thereis slowly evolving a cultural re-interpretation that
allows for a monetisationof elder care.
Japan’swomen will determine the landscape ofhealthcare,given the inevitable trend
of thefeminisingof old age. Its
healthcare care services and providers will follow thistrend, as Japan’s
male-dominated health system will be adjudged to beunresponsive to the mostly
female elderly. Other support systems for the elderly will likewise be
feminised,opening opportunities in a very specific segment of the eldercare
industry, inaddition to the pharmaceutical industry.
Interms of housing, we are assuming that the private
sector would recognize thefact that filial piety cannot house all Japan’s
elderly and that housing mustbe provided. In terms of investment, wewould look
atreal estate investmentsthat
recognized the preference for independent living among the elderly, suchasassisted living schemes.Independent
living for the elderly would also result in building theservice segmentthat provides nursing,home-help services and other
support services to the elderly.
SUMMARY
Theinvestment procedure forAQ’s JapanLong-Short Fundtakes into account these changing
demographics as appliedto Japan with respect to long term investment themes. Therefore,
we look forinvestment opportunities in the following industries, with
particular emphasison political or social catalysts for change:
Insuranceand pensions products
Financialservices and products
Pharmaceuticaland healthcare
Eldercareproducts and services
Recreationand leisure
Realestate – medical and assisted living
Distributionchannels for all of the above
Likewise,on the private equity side, theAQTransitional Asia Fundsearches for these
themes across the Asian region,with particular emphasis on the Greater China
and Japan markets.
MarleneR Wittman
GroupManaging Director
AquitaineInvestment Advisors Ltd
Suite1005, Far East Finance Centre
16Harcourt Road, Central
HongKong
tel: 852 2528 1600
fax: 852 2528 1900
e-mail:mwittman@aquitaine.com.hk
¹
DISCLAIMER
¹From The Ultimate
Bookof Investment Quotations, by (and with thanks to) Dean
LeBaron&RomeshVaitilingam with Marilyn Pitchford, Capstone US 1999.
