Japanese Retail Investors

September 18, 2014 -- guest post by Carolyn Sherry T’15 --

In April 2013, I attended admitted students weekend and the theme for the weekend was "Your Journey, You're Tuck," accompanied by a compass logo. I had no idea at the time how fitting this theme would be for my time at Tuck. In just my first year my journey has taken me around the world. I'm so grateful for the many opportunities afforded to me by Tuck to make my experience global. I participated in a Global Insight Expedition over my first-year spring break, and I plan to go on exchange in 2015 to the London Business School. I also had the opportunity to experience and study Japanese business culture thanks to a generous grant from the Mitsui USA Foundation. My proposal focused on studying Japanese retail investor behavior, and I traveled to Tokyo before starting my summer internship last June.

Retail investor behavior is of particular interest to me because I spent the past five years working in the retail investor group at Vanguard, the world's largest mutual fund company. Retail investor describes individual investors (if you have a Roth IRA or an individual or joint brokerage account, you’re a retail investor). My experience and expertise was limited to U.S. investors, and I understood them well thanks to many years in client-facing and operational roles. Since I will return to Vanguard after graduation, I am very interested in expanding my global knowledge of investors and markets around the world. The Mitsui grant offered an ideal way to gain a deep understanding of the Japanese investment marketplace from both an academic and a practical standpoint. I was focused on understanding two things: the motivations of Japanese retail investor behavior and how Vanguard Investments Japan compares to its domestic operation.

My primary goal was to answer the question “Why do Japanese retail investors currently invest about 75 percent of their assets in savings accounts or insurance and only 3 percent of their assets in mutual funds?” I focused on the nuances of the Japanese view of retirement saving and financial goal setting. This focus is relevant considering the fact that Japan’s population is aging rapidly and its birthrate is not sufficient to replace workers to support the economy. Before I departed from Hanover, I had the opportunity to learn about the economic factors influencing investors when Masaaki Shirakawa, the 30th Governor of the Central Bank of Japan, visited Tuck in May. He explained there is a slow adjustment to the new reality that Japanese people face and that boosting productivity is critical for the country’s economy moving forward. With that context, I entered my interviews and meetings in Tokyo with a foundation of knowledge about the situation that Japanese investors face as they make decisions. During the week I spent in Tokyo, I met with many Tuckies and Vanguard colleagues who were generous with their time and insights. Most of the people I met with are Japanese natives who work in some sort of financial organization. From these interviews, three key themes emerged that influence Japanese investor behavior:

1. Japan has a strong Defined Benefit retirement plan culture. There are both public and corporate-sponsored pension programs. People know that they can rely heavily on these systems in retirement, so are not as concerned about investing to grow capital but are instead more concerned with having access to cash in the years before retirement. Thanks to this system, wealth is concentrated among an older population and younger people do not have the resources to invest so they aren’t motivated to begin investing. A complication that is emerging slowly in Japan is that companies are beginning to switch their retirement plans to Defined Contribution plans. (In the U.S. the typical Defined Contribution program is a 401(k).)  I believe that this will encourage younger Japanese people to begin to pay attention to their investments since they will need to make decisions about their individual retirement accounts.
2. Cultural views of money and investing also play a role in investment behavior. In Japan, discussing money and investing is viewed as impolite. Additionally, Japanese schools and universities do not teach courses such as personal finance. In Japan you would not find multiple television channels geared toward investors like you do in the U.S. So, unless a person is interested and motivated to learn about investing, it is unlikely that they will hear about it on a regular basis. An interesting development in the past year that may begin to shift views and understanding of investing is the launch of NISA accounts, which are tax-sheltered investment accounts meant to incentivize younger investors to move from cash to equities. There are some issues with the accounts, however, such as low yen limits on the amount that can be tax sheltered and a limited timeframe for tax exemptions.
3. Japanese investors have observed years of flat or marginal growth in the Nikkei and have a general sense that stock brokers are only for the extremely wealthy. So, Japanese people trust banks and put most of their assets in cash and Japanese government bonds. Japan’s national debt is significant, but it is held primarily by Japanese citizens and companies.

My secondary goal was to understand Vanguard’s operation in Japan, which is relatively young having been established in 2000. I spent two days in the office of Vanguard Investments Japan and met everyone on the team. Compared to the 10,000 person office where I work in the U.S., it was quite a change to sit in a ten-person office. Vanguard Investments Japan is mostly staffed with Japanese citizens with one expat in the office. Hearing about their experiences working for an American company highlighted for me the challenges associated with globalization. Today, becoming more global is a hot topic in the business world and the necessity to have strong global leaders is regularly highlighted in the press and by academics. Spending time with my Japanese colleagues gave me insights into the Japanese business culture, which is very different from American business culture, and forced me to think about how I could be more effective when working on global teams. For instance, my expat colleague shared with me an anecdote about how he has had to shift the way he asks questions. In America, it is typical to ask direct questions and expect honest and direct answers. But, our Japanese colleagues hesitate to say “no” to such questions because it is seen as disrespectful or undesirable to disagree (especially when answering a high-ranking executive). So, he has to be more artful and deliberate in his approach to ensure he gets the information he needs from his team.

I feel so fortunate that I had the opportunity to spend a week in Japan. I saw many beautiful sights, was welcomed warmly by the people, and navigated one of the world’s largest cities (and the largest train stations). I have to admit I got lost every day but people were so kind in offering help. When I moved to Hanover a year ago, I did not anticipate how rich my global experience would be. Thanks to opportunities like this one provided by the Mitsui USA Foundation and the Center for Global Business and Government, I am growing as a global leader.