At 30, Tetsushi Nakamura is a seasoned stock investor. The system engineer from Hibarigaoka, Saitama Prefecture, got his hands on stocks when he was in his fourth year of elementary school, buying shares of a construction company on his dad’s advice.

Nakamura now has about 3.5 million yen invested in various companies, despite a recent downturn in the nation’s stock market that has caused the value of his stocks to shrink by some 500,000 yen since the beginning of the year.

“The loss doesn’t shock me,” Nakamura said. “I actually wish I had more money now because this is the best time to buy stocks.”

People like Nakamura are still a minority in this country. While the reaction of most Japanese to the whims of capital markets is probably fear or panic, a new generation is taking stock of its financial future and realizing that to secure its own, risk must be fought with risk. Their migration to stocks is being viewed as the first step out of the shadows of post-war frugality and a daring embrace of modern investing.

Take his wife, for example. A neophyte investor who bought her first batch of stocks last October, she got a shock a few months ago as she watched the value of her shares in a telecommunications company plunge by the same amount as her total investment — after doubling at the end of last year.

Since most people here equate stock investing to gambling, Nakamura’s wife has probably taken more risk than the average Japanese by even investing in stocks.

The numbers speak volumes. According to the Bank of Japan, 54.7 percent of the nation’s 1.368 quadrillion yen in total household assets were in the form of cash and deposits at the end of March.

Insurance and pension funds accounted for 27.5 percent. But only 8.2 percent was invested in stocks, and 2.2 percent in investment trusts.

In other words, the majority of personal savings sits in bank or postal savings accounts, collecting pitiful amounts of interest.

This conservative trend was born from a government campaign to encourage frugality and saving after Japan’s defeat in World War II, experts say.

Even throughout the 1990s, when interest rates fell to token levels, the amount of total assets in cash and bank deposits has averaged about 60 percent, returning only minimal amounts of income to faithful depositors.

No longer afraid of risk

The risk-averse nature of the average Japanese contrasts greatly with the U.S., where individuals keep more than a third of their assets in equities. Cash and deposits occupy only 10.1 percent of America’s total household assets.

In Germany and the U.K., as well, statistics show that cash and deposits accounted for 39.3 percent and 21.1 percent of all household assets, respectively, at the end of 1998.

But Japan’s conservatism is steadily changing. A peek in bookstores reveals how-to books on personal asset management abound, whether it be day trading, long-term stock investing, or purchases of foreign currency deposits or investment trusts. Magazines with articles on hands-on investment guides for beginners are also selling briskly.

In March, Diamond, Inc., a publisher of business-related books and magazines, kicked off Zai, a monthly financial magazine targeting investment-naive workers in their 20s and 30s. The reaction was overwhelming, with nearly 300,000 copies sold in the first month, said Hisashi Fujioka, the magazine’s editor in chief.

Fujioka argues that the growing public interest in stock investing is not a fad.

“People are realizing that their pay will no longer keep going up, as it did automati

cally during the postwar era,” Fujioka said. “The lifetime employment system is falling apart, and interest rates on their bank deposits are stuck at low levels. With future pension benefits being trimmed down and a possible consumption tax hike in sight, you would be insane not to be worried about your financial future.”

Fujioka added that the stock trading boom over the past year, spurred in part by the liberalization of stock-brokering commissions last October, is not the same as the speculative behavior seen during the asset-bubble economy of the late 1980s.

Throughout the postwar era until the burst of the bubble in the early 1990s, people had looked at real estate as a low-risk, high-return investment vehicle, according to Fujioka. If people bought real estate when they were young and put the rest of their money in postal savings, which then promised a 6 to 8 percent return per annum, a rosy retirement was in store, he said.

“But now, people must expose their assets to risky financial products, whether they like it or not,” he said.

Deposits drain into trusts

Many experts also point to the expanding market for mutual funds — known as investment trusts in Japan — as another sign that Japanese investment attitude is changing. The volume of investment trusts made and managed in Japan reached 60.46 trillion yen at the end of June, an all-time high.

Akio Makabe, chief economist at Dai-Ichi Kangyo Research Institute, said the current prosperity of investment funds differs from the kind seen at the height of the bubble economy era, in that bond investment funds — which are generally less risky than stock investment trusts — account for 70 percent of the total amount. This suggests that investment trusts are emerging as a substitute for bank deposits, he said.

The “Big Bang” financial reform, aimed at eliminating walls among securities, banking and insurance industries, has also played a role in making investment trusts more familiar to consumers, Makabe said. Investment trusts had long been marketed solely by domestic securities companies, but are now available at bank counters and through foreign financial institutions.

Financial planners in need

With deregulation, financial institutions are facing intensifying competition and searching for new ways to woo customers. The recent surge in the number of licensed financial planners underscores this trend, said Keiichi Sakuta, managing director of the Japan Association for Financial Planners.

JAFP-accredited financial planners numbered 80,212 in June, increasing fourfold from 19,330 two years ago.

Of the 80,000-plus FPs, more than 20,000 are employees of life insurance companies, while 17,000 others belong to securities firms. Workers at nonlife insurers and banks follow, with 6,800 and 6,700, respectively.

“In the past, sales reps at securities firms only needed to sell stocks and investment trusts,” Sakuta said. “Since the 1998 deregulation of sales of investment trusts at banks, securities firms have had a reinforced sense of crisis, and are moving to have their sales staff accredited as FPs.”

Faced with more options, individual investors are also getting hungry for advice. But Sakuta conceded that advice offered by corporate FPs might not always be in the best interests of customers because these FPs would naturally try to sell proprietary products.

On the other hand, independent FPs could give unbiased, impartial advice and guidance by putting the interests of clients first, experts say. Such FPs are active in the U.S., acting as brokers of financial products ranging from stocks, bonds, life insurance to mutual funds.

LPL Japan Securities K.K., the Japan subsidiary of LPL Financial Services, is a new type of securities firms that emphasize neutrality. LPL in the U.S. has contracted with more than 3,200 independent FPs, who earn fees from clients for financial products they buy.

LPL Japan, which started operations last fall, now has about 180 independent FPs who have contracted with it.

LPL’s biggest sales pitch is having no proprietary products.

“We have no conflict of interest with any of the investment trust management companies because we offer non-proprietary products only,” said Takashi Yoneda, president of CEO of LPL Japan. “We examine each fund meticulously to the point the investment trust firms would hate us.”

Shift to undercut banks

Yoneda predicts that there will be a dramatic shift in the makeup of personal financial assets in Japan in the medium or longer term.

“In five to seven years, I think the ratio of investment trusts vs. cash and deposits will rise to 1 to 4, (as opposed to 1 to 25 now),” Yoneda said.

Other experts, however, are not so sure if there will be a dramatic shift of individual assets to investment trusts in Japan.

Masayuki Kihira, an independent FP in the business for 15 years, said the growth of investment trusts in Japan will eventually taper off, citing “kaiten baibai,” a practice by securities firms to try to rack up brokerage commissions by recommending customers to switch products one after another. The practice, which hurts the performance of many funds and came under fire during the bubble period, is still prevalent, Kihira said.

The pace of change in the portfolio of individual assets might be mild, but experts agree that the changing tide will inevitably affect the overall money flow in Japan.

Throughout the postwar period, bank deposits have been funneled as loans to corporations, playing a major role in Japan’s high economic growth. Banks virtually controlled corporations by monopolizing their fundraising needs.

But now all parties — corporations, banks and individuals — are increasingly acting in line with market principle, said Naoki Murakami, economist at Dai-Ichi Life Research Institute.

Corporations are less dependent on banks because of a diversified access to funds. Banks, realizing that big companies can fetch funds by issuing stocks and bonds, are also cutting back on the traditional style of lending. And the power individuals will exert on corporations through financial markets will increase, he said.

“In the past, people used to put their money in banks with little idea (about where the money would go),” Murakami said. “As investment in stocks and investment trusts grows, individuals will start taking on a role of shareholders.”

Risk to reward risk-takers

How would this trend affect the nation in the long term? As corporations grow more dependent on markets, they will try to redistribute more of their profits to shareholders. They will also try to improve profitability by cutting personnel costs.

Murakami argues that individuals will be rewarded more as shareholders rather than as employees. The result is a bigger income gap between those who ride on opportunities offered by the financial markets, and those who don’t.

“The move toward a market-oriented society will widen income discrepancy among the public, and that includes not just salary income but also interest income,” Murakami said. “The gap between the haves and the have-nots will grow in Japan, as has happened in the U.S.”

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