The introduction in October of the much-touted U.S. 401(k)-style corporate pension system in Japan will have little impact until individual investors feel more confident about the regulatory environment and the economy, said Brian Murdoch, president and CEO of Merrill Lynch Investment Managers.
“It’s a step. . . . Nothing will happen without this legislation,” said Murdoch, who heads the asset-management branch of Merrill Lynch Securities Co. Japan. “This is not going to be an overnight change.”
The Diet enacted the law to introduce the new pension system, paving the way for its launch this fall. The next and more daunting step is to improve the rights of shareholders and the transparency of Japanese firms, he said.
Under the 401(k) format, employees make a fixed contribution each month, selecting how the funds are invested out of several options chosen by their employer. The benefits vary according to their investment performance.
The government hopes the plan, along with tax incentives still being discussed, will renew public interest in the stock market and help coax Japanese to put more of their 1.4 quadrillion yen in personal assets into equities, thereby helping revive the economy.
But bringing the public back to the stock market will be tough: Distrust in financial markets has run deep since the collapse of the bubble economy in the early 1990s.
Only 6.6 percent of Japanese household assets were invested in stocks as of March.
The potential size of the market has had foreign asset managers scrambling to make inroads in Japan ever since the plan to set up a 401(k)-style corporate pension system was first discussed by the government in 1996.
It’s no wonder, Murdoch said. “When that money (from individual savings accounts) moves, you want to be there.
“(But) what a lot of people forget about, even the Western firms that are coming to Japan to set up their businesses, is that it took 15 years for 401(k) to be a success in the U.S.,” he said.
Once things take root, however, growth could be quick.
Total financial assets for defined contribution plans in the U.S. grew 3.4 times in 10 years to $2.53 trillion in 2000.
One of the keys to drawing individual investors back is higher stock prices, Murdoch said. The key Nikkei average on the Tokyo Stock Exchange continues to hover around 13,000, compared with its range of 16,000 to 17,000 a year ago, and over 39,000 at the height of the bubble.
After major Japanese firms have unwound their cross shareholdings and bettered their financial situations, “the true issue will be whether the rights of shareholders are protected, that is, whether the company share prices reflect the true value of the company.”
“Right now, even though they (investors) suspect there’s good news for the company, they worry about whether a stock . . . is a good proxy for benefiting from the success of the company,” he said.
While discussion continues on how to promote more educational programs to familiarize the general public with the workings of securities investing, Murdoch said that politicians should credit the Japanese public for their shrewd instincts.
“(Individual) Japanese investors, as risk-averse as they are accused of being, have actually handled their money pretty well,” said Murdoch, pointing to the 249.5 trillion yen in postal savings that have refused to budge, despite record-low interest rates. “What were the alternatives?”
Although investors would likely have benefited most by depositing money in 10-year deposits and diversified in other currencies, those only investing in Japanese stocks would have lost money, Murdoch said.
“They did pretty well. They did pretty well,” he said.
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