To the point

The Japanese government seeks to redirect household financial assets from savings to investments, fostering a virtuous cycle where corporate value growth benefits households and stimulates further investment and consumption.

Building on previous efforts targeting stakeholders in the investment chain, the government is now prioritizing reforms in the asset management sector to complete the initiative.

The 2024 amendment to the Financial Instruments and Exchange Act marks a key step in restructuring Japan's asset management industry, introducing greater flexibility and expertise through new policies.

Introduction

Japan's government believes in fostering growth and distribution by transferring household cash and deposits—which make up over half of financial assets-to investments. The objective is to boost corporate value and return benefits to households. The government is working on initiatives involving firms, financial and capital markets, households, and financial product sales companies. The government has implemented initiatives targeting firms, financial markets, capital markets, households, and companies that sell financial products.

Following these initiatives, the government will focus on household financial assets as the remaining piece of the investment chain. Aiming to reform asset management and ownership, Japan’s national strategy focuses on becoming an asset management nation. The government is making reforms to attract both domestic and international asset managers to the Japanese market.

Despite barriers such as complex entry procedures, unique business practices, and limited sales channels, Japan's government launched the Asset Management Nation Realization Plan in December 2023, aiming to upgrade the asset management sector and attract overseas entrants.

1. Revision of the Financial Instruments and Exchange Law: Institutional reform to change the structure of the investment business

The revision of the Financial Instruments and Exchange Law in 2024 was an important step in reexamining the structure of Japan's asset management business. Lifting the ban to give investment managers full authority to issue investment instructions and creating a voluntary registration system for middle and back-office brokerage businesses are crucial reforms. These changes are part of the Financial Services Agency's Asset Management Nation policy, designed to introduce a new flexibility and expertise to the Japanese investment business.

i. Lifting the ban on full investment instruction authority: Opening opportunities for small and medium-sized players 

Under the previous system in Japan, investment managers were prohibited from outsourcing all investment decisions. Managers were required to make investment decisions at least partly on their own, and there were limitations to outsourcing trading activities.

However, the 2024 regulatory revision lifted the ban on the full delegation of management authority, making it possible to outsource actual investment decisions and execution to external specialized players while investment managers focus on designing management policies and portfolio strategies.

This allows a division of roles between companies handling investment execution and those designing investment strategies in Japan, similar to business models in Europe, the United States, and Japan's "outsourced model." Small and boutique managers can now focus on innovative asset management.

ii. Voluntary registration system for middle and back-office operations: Securing reliable contractors

Another noteworthy development is the establishment of a voluntary registration system for middle and back-office operations in investment management.

Obtaining a Japanese investment management license is challenging for new, small, and overseas companies due to the need for significant equity capital, experience, and a strict internal control system. Additionally, there was no cross-industry framework for vendors and custodians undertaking middle and back-office operations in Japan’s asset management industry. Therefore, the quality of services and management systems varied from business to business. Even established investment managers have struggled with outsourcing middle and back-office operations. Under the new system, the Financial Services Agency certifies business operators with appropriate operational control systems, information management systems, and compliance systems as registered business operators. This infrastructure enables investment managers to entrust their businesses with confidence, ensuring reliable outsourcing while enhancing operational efficiency and quality.  

2. Asset owners and household financial assets: Leveraging idle cash holdings

In Japan, households have around 2,000 trillion yen in financial assets, with more than half in cash and deposits. The government expects asset owners, like corporate pension and university funds, to strengthen asset management and become key investment chain players. Asset owners should manage necessary risks to boost asset performance and investee company growth, contributing to startup funding. The Japanese government is implementing major reforms targeting asset owners and household assets as part of the "Asset Management Nation" strategy.  

i. Asset ownership reform: Formulation of asset owner principles

The Financial Services Agency has developed the Asset Owner Principles to guide asset owners—such as pension funds, insurance companies, and university endowments—in serving the best interests of their beneficiaries. These principles emphasize clarification of investment objectives and targets, the development of appropriate systems, risk management, transparent reporting of investment results, and well-defined criteria for selecting investment contractors.

In line with this initiative, a new law has been enacted in Japan to strengthen protections for beneficiaries, including insurance and pension subscribers and universities.

The government is working on a system to maximize returns for beneficiaries by improving investment management practices that support corporate growth and generate social impact, thus moving beyond a focus solely on risk aversion. As asset owners and their fiduciaries—those responsible for asset management—adopt more sophisticated practices in line with the evolving Japanese investment chain, the overall investment capabilities of the industry are expected to improve. This should promote medium to long-term growth for investee companies, enhance corporate value, and foster healthy competition among investment managers.

ii. Approach to household wealth: Promoting investment through tax incentives and financial education

In 2024, Japan introduced a new NISA system, modeled on the UK's ISA, as an investment promotion measure for individual investors. It offers a maximum tax-free investment limit of 12 million yen per person, with an indefinite tax-free period. Individual investors favor long-term, accumulated, and diversified investment, and in 2024 NISA purchases totaled 17.4 trillion yen.

Furthermore, financial literacy education for young people has been accelerated, mainly through the Japan Financial Literacy and Education Corporation (J-FLEC) established in 2024. Efforts focus on empowering individuals to manage their finances at school, work, and in their communities.

iii. Corporate governance reform and maturation of market culture

Corporate governance reforms led by the Japanese government are also a major tailwind for the maturity of the investment environment. Listed companies must consider capital costs and stock prices, while the Stewardship Code is being reinforced, leading to more meaningful engagement.

In Japan, a "market culture" where companies and investors collaborate to enhance value through dialogue has been steadily taking root. This creates an environment for overseas asset managers who are committed to the long-term and responsible investment to engage seriously with Japanese companies and create value.

3. Japan's thriving asset management market with global connections

In Japan, the government is now taking the lead in supporting the formation of an ecosystem for investment services and funding, and the entry of foreign players. By becoming an asset management nation, the local market is expected to strengthen its position as an asset management base in Asia and attract global investment capital and technology.

With significant changes in household asset allocation expected, Japan's asset management market is poised for strong growth. The Japanese government and industry leaders anticipate that global asset managers will offer advanced solutions to households, boosting Japanese companies and the economy through investment.  

The 17 trillion yen NISA purchase in 2024 may seem small from the perspective of Japanese households overall. However, looking back at the introduction of 401 K in the United States and Superannuation in Australia, 2024 might be seen as a significant turning point for Japan’s asset management market. 

With the Japanese government reaffirming the asset management business’s role in the investment chain, we believe that contributing to or entering the Japanese asset management market should be regarded as an important strategic priority for global asset management players. 

Conclusion:

• The government of Japan is reforming the asset management industry to make the local market more attractive to both domestic and international asset managers, as part of a national strategy to become an asset management nation.  
• The 2024 institutional reforms, including allowing investment managers full authority to issue investment instructions and creating a voluntary registration system for middle and back-office fiduciary services, aim to enhance flexibility and expertise in Japan’s investment management business. 
• Asset owners such as corporate pension and university funds, holding significant assets, are expected to become key players in the investment chain by strengthening their systems and improving their investment management capabilities. 

By becoming an asset management nation, the Japanese market is expected to bolster its status as Asia’s asset management hub, drawing investment capital and technology globally.