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Germans, Japanese have good reasons for shunning equities

by Jochen Legewie

S tock markets around the world are really beginning to feel the effects of the financial crisis of 2008, with some industry watchers estimating that as much as $30 trillion of total market capitalization has been lost worldwide since 2007. This is hurting investors everywhere, big and small.

With these staggering losses in the background, a look at some of the smaller investors on a country-by-country basis reveals a few surprises.

Japan, as described years ago by the well-known Dutch social scientist Geert Hofstede, has a reputation for being a risk-averse society. Japanese believe that wealth is best earned through the sweat of one’s brow, not by playing the market.

To a certain extent, this stereotype of a “monozukuri” (manufacturing-focused) society still holds true. Japanese investors as a group have over 50 percent of their money in low-interest postal savings accounts. The amount — about ¥600 trillion ($6.5 trillion) — qualifies them as the world’s biggest savers.

By comparison, U.S. investors only have about 13 percent of their money in savings accounts. Among the Europeans, Germans stand out as being more like Japanese, with more than 35 percent of their investment funds in savings accounts.

In terms of money allocated to more risky investments, such as stocks, bonds or other funds, Americans by far are the world leaders in this area, with over 45 percent of assets in one of these vehicles. Germans are also showing some stomach for risk, with 25 percent of assets invested.

Japanese investors, however, are roughly twice as cautious, with just over 12 percent of funds at work in equities. Surprisingly, their British counterparts are also at this end of the scale, at 13.5 percent.

What is more surprising, however, is that the actual number of Japanese who own stocks is rather high at nearly 40 million individuals, according to the Tokyo Stock Exchange. Who said Japanese don’t like stocks?

This compares with Germany, where shareholders doubled from 1997 to 2000 before peaking at 12 million investors. But this number has come down quite a bit over the past year, and is now at around 10 million.

Although these figures may paint a picture of national investment trends, it is useful to look at some of the other forces at work. In Germany, for example, what led to the sudden rise in shareholders in the late 1990s?

The answer lies in Germany’s first public listing of well-known public institution Deutsche Telekom back in 1996. With almost patriotic overtones, German’s traditionally cautious investors were bombarded by television advertisements urging them to buy into the “people’s share” of the telecom giant. The first IPO set a price of 28.50 euro per share. This climbed to a high of 105 euro four years later.

But the implosion of the tech bubble from 2000 to 2001 triggered a massive selloff in technology issues worldwide, and Deutsche Telekom was no exception. By 2003, its shares were selling for 30 euro, and today they are trading at around 13 euro. Many first-time investors were badly burned by this experience, which certainly helps explain why 2 million people got out of the market between 2000 and 2008.

A similar case rocked Japanese retail investors more than two decades ago: the initial public offering of NTT in 1985.

As in Germany, the sale of this venerable public institution was presented as a kind of “people’s share,” one that was not only safe to buy, but also good for the nation. The shares were first offered at ¥1.6 million, but even accounting for a 100 to 1 stock split in 2007, NTT’s shares have fallen almost continuously since then. They now trade at a little over ¥4,000 a share.

But the trouble facing Japanese retail investors is not just limited to individual stocks; historical data show that their stock markets fail to produce strong returns.

For example, the Topix market has underperformed the FTSE 100 and the S&P 500 over the past 22 years. Market data from 1986 through 2008 show the Topix delivered a return of minus 20 percent, while the FTSE returned more than 300 percent and the S&P 419 percent.

In the meantime, the Japanese press has been churning out a lot of stories about Japan’s “Mrs. Watanabes,” the legions of housewives who have learned how to trade in the past few years, mainly in foreign currencies. They are part of the boom in online trading in Japan, which expects individual trading accounts to break 5 million this spring.

But considering the dismal performance of Japan’s markets, it is quite understandable to see most retail investors opting for the safety of post offices and banks to the stock exchange. Although there are signs that the appetite for risk is slowly rising (Nomura Securities claims that household assets in equities has nearly doubled from 2003 to 2007), it is more than probable that Japanese money will stay tucked under mattress for some time to come.

In other words, don’t expect the Japanese retail investor to jump-start the economy by suddenly dumping their savings into “more productive” investments.

Jochen Legewie is president of German communications consultancy CNC Japan K.K.