Text: Zhang Yu, a researcher at the Institute of International Monetary Research, Chinese Minmin University
Japan has gradually entered an era of low interest rates since the 90s; In 2016, it officially entered the era of negative interest rates; This has brought pressure on the return on asset allocation of non-bank financial institutions, and in response to this change, various institutions have also undergone great changes in asset allocation strategies. Japan's "way out" of low interest rates is a lesson for investment.
Characteristics of Japan's Low Interest Rate EraJapan has gradually entered the era of low interest rates since the 90s, and in 2016, the Bank of Japan lowered its policy rate to -0.1%, officially entering the era of negative interest rates. Since 1989, Japan has tightened its economic policy and "actively punctured the bubble", falling into the so-called "lost thirty years": the stock market, real estate and other asset prices have plummeted, the non-performing assets of banks have risen sharply, the economy has stalled-inflation and contraction has fallen into a cycle, and the private sector has entered the stage of deleveraging. In terms of benchmark interest rates, the Bank of Japan has been zero since 1999 and its policy rate has never exceeded 0.5%. In terms of market interest rates, the yields on various debt assets continued to decline, with the yield on 10Y treasury bonds falling below 2% for a long time since 1999, and continuing to be negative from 2016 to 2020, while the term premium continued to narrow. Since 1997, the effective yield of corporate bonds has fallen below 2%, and the credit premium has been negative. At the same time, the interest rate on deposits and loans fell simultaneously, and the interest rate on long-term loans of banks was reduced from 6%-8% in the 80s to about 2%, and the interest rate spread between deposits and loans was reduced to less than 1%.
Second, the scale of various non-government creditor's rights assets in the financial market has almost ceased to expand, and domestic investment is facing an "asset shortage". In terms of bank loans, the balance of loan assets of the banking industry increased only slightly and slowly in the 90s, and the balance of loan assets contracted from the end of the 90s to 2005. In terms of bonds, the scale of non-government bonds such as corporate bonds, MBS and financial bonds is shrinking, and the proportion of Chinese bonds in the bond market continues to rise, from 58% in 1998 to 84% in 2023.
In the following, we will analyze the changes in the asset allocation strategy of Japanese non-bank financial institutions in the era of low interest rates: Life insurance: high-risk appetite shifts to stability first (1) Changes in life insurance institutions in the era of low interest ratesDuring the 80s, Japan's economy grew rapidly and the return on equity assets was high, and the asset structure of life insurance institutions was dominated by holding risky assets to earn high returns. According to the data of the capital flow table of financial institutions of the Bank of Japan, in the asset structure of Japanese life insurance institutions in the early 80s, loans and equity investment accounted for 54.3% and 22.7% respectively; And with the rise of the stock market, the proportion of equity investment reached 32.2% in 1988. The high return on investment during this period also prompted the Japanese life insurance structure to launch a large number of life insurance products with high predetermined yields, laying the groundwork for the subsequent risks of the life insurance industry.
In the 90s, with the bursting of the bubble economy, the Japanese stock market plummeted, and a large number of non-performing loans appeared in banks, which had a great impact on the investment return of the life insurance structure. The decline in the rate of return on assets led to the loss of interest margins due to the inability of a large number of life insurance companies to repay their intended earnings, and finally during the 1997 domestic financial crisis, nine insurance companies, including Nissan Life Insurance, went bankrupt and reorganized. However, in 1996, Japan's financial liberalization reform allowed life insurance and property insurance to operate in a mixed business, and a large number of property insurance companies set up life insurance subsidiaries, which hedged the shrinkage of traditional life insurance companies to a certain extent, and the increase in the number of entities brought about a slight year-on-year growth of +0.9% in the total assets of Japanese life insurance institutions during the period from 1997 to 2002. From the perspective of the investment structure during this period, affected by the collapse of risk assets, the proportion of equity investment in life insurance declined rapidly, falling to a record low of 6.7% in 2002; The proportion of bond investment has increased rapidly, reaching 51% at the end of 2002, becoming the largest investment category of life insurance. Since 2001, in response to the crisis in the life insurance industry, Japan has revised its regulations on the insurance industry, which has led to the re-expansion of the insurance industry. On the one hand, the Ministry of Finance was changed to the Ministry of Finance, and the Financial Services Agency was established to be responsible for the supervision of banking, insurance and other financial industries. On the other hand, since 2001, the ban on the distribution of insurance products by banks has been gradually lifted, and in 2007, the restrictions on bancassurance channels have been completely lifted, which has brought about the expansion of the scale of life insurance institutions.
(2) Investment characteristics of life insurance institutions in the era of low interest rates: stability firstAfter the liquidation of the life insurance industry in the 90s, the asset allocation characteristics of Japanese life insurance institutions have switched to low-risk debt assets, which increase returns by extending the duration and going overseas, while the proportion of high-risk loans and equity investments has been at a low level for a long time. Under the influence of a stable investment portfolio, the current investment yield of Japanese life insurance institutions is not high. Feature 1: Risk appetite has declined, and the proportion of risk asset allocation continues to be low. Before Japan entered the low-interest rate environment in the 80s, loans and stocks accounted for a relatively high proportion of the investment structure of Japanese life insurance, accounting for up to 55% and 32% respectively, while real estate and stocks suffered the most damage during the bursting stage of the economic bubble, which greatly impacted insurance funds and even brought a large number of insurance institutions to bankruptcy. Since then, the proportion of equity and loan assets in the asset allocation structure of insurance funds has continued to be low, and the current Japanese long-term loan interest rate is also lower than the yield of ultra-long-term government bonds, so the cost performance of holding loans is not high, so as of 2022, loans and equity investment accounted for 8.7% and 10.2% of the total assets of life insurance, respectively. Feature 2: Overweight on foreign bonds. Due to the sharp widening of the interest rate gap between Japan and overseas, especially U.S. Treasury bonds, even after considering hedging costs, there is still a large room for arbitrage, so insurance funds have increased their allocation to foreign bonds, and the proportion of overseas securities held by life insurance has increased from about 10% in the early 90s to more than 22%, second only to domestic bonds. From the data of the two major life insurance companies in Japan, it can also be seen that Japan Life Insurance and Daiichi Life Insurance currently hold the highest proportion of domestic bonds, reaching 41% and 52% respectively; followed by foreign securities, accounting for 25% and 18% respectively; At present, the proportion of loans and real estate investment is very low, generally within 10%.
Feature 3: Increase holdings of ultra-long-term treasury bonds and increase returns by extending the duration. Since 2000, Japanese life insurance companies have continued to increase their holdings of domestic government bonds, and at present, 18.6% of Japanese government bond holders are held by insurance companies (second only to the Bank of Japan), and domestic government bonds account for nearly 50% of the securities held by life insurance companies. In the duration structure, life insurers have increased their purchases of ultra-long-term government bonds (more than 10 years) in a low-interest rate environment, and as of 2011, nearly 50% of Japan's ultra-long-term government bond holders were held by life insurance companies. Since the spread between the maturity of Japanese 30Y and 40Y government bonds is still about 100-200bp in the low interest rate environment, life insurance companies have stabilized the yield of their bond investment at about 1.7% by extending the duration. From the data of the two major life insurance companies in Japan, it can also be seen that the duration of bond assets held by Japan Life Insurance and Daiichi Life Insurance is about 11-12 years, and their overall investment yields are roughly the same as the trend of domestic bond investment income.
Pension management companies: Diversified investments to increase incomeThe vast majority of Japanese pensions are managed by the government pension investment fund GPIF. In the early days, Japanese pensions were mainly invested in government projects with low returns, but due to the aging of Japan's population, the growth of the pension "pool" has stagnated since 2000, and the pension insurance stock income of pension institutions has been maintained at 150 trillion yen. In 2001, Japan established the Government Pension Investment Fund (GPIF) to invest in the management of Japan's national pension and employees' pension insurance. As of Q3 2023, Japan's GPIF has assets under management of 224.7 trillion yen (about 1.5 trillion US dollars), making it one of the largest government pension funds in the world.
GPIF's investment characteristics 1: The investment direction is diversified, and the investment structure shows a trend of "going overseas". Since 2014, GPIF has reviewed and adjusted its asset investment structure every five years, and the proportion of the portfolio plan set in 2014 is 60%, 12%, 11% and 12% respectively for domestic bonds, domestic equity, foreign bonds and foreign equity assets. In 2023, the latest ratio will be adjusted to 25% for domestic bonds, domestic equity, foreign bonds, and foreign equity assets. As of 2023Q3 data, GPIF's actual holdings of domestic bonds, domestic equity, foreign bonds, and foreign equity assets each account for 25%, which is basically the same as the planned ratio.
GPIF's investment feature 2: The return on foreign assets and equity assets is higher, which increases the investment income. From the perspective of the structure of investment returns: on the one hand, equity investment is the category with the highest return in GPIF's asset structure, and the return on foreign assets is also better than that of similar domestic assets, with the average return on investment of domestic equity and foreign equity from 2014 to 2023 being 10.4% and 13.3%, respectively, while the average return on investment of domestic bonds and foreign bonds in the same period is 0.3% and 3.5%, respectively. With the diversification of GPIF investment and the strong performance of the domestic and foreign equity markets in Japan after the epidemic, equity investment has significantly increased the return on investment of GPIF since 2020, with an average return on investment of 2.9% from 2014 to 2019 and an average return on investment of 11.02% in 2020-2023Q3. On the other hand, the return on investment of GPIF can be divided into interest dividend income and capital gains, of which capital gains fluctuate greatly and can bring higher flexibility to investment returns, such as 2020, 2014 and other large equity years The total investment return can reach more than 10%, but in 2007-2008, 2015, 2019 and other years, due to the sharp decline in capital gains, the return on investment was negative. The interest and dividend income is relatively stable, which can bring a certain safety cushion for investment returns. Since 2014, the return on interest and dividend income has been stable at around 1.8%, of which foreign bonds and domestic and foreign equity assets contribute about 30% to interest and dividend income.
From an investment return perspective, GPIF's return on investment continues to be above the earnings target. The Ministry of Health and Welfare of Japan adjusts GPIF's long-term real return target (return on investment - expense ratio) every five years, with a target of 1.1% from 2006 to 2009, 1.6% from 2010 to 2014, and 1.7% from 2015 onwards. GPIF's cumulative annualized return from 2001 to the end of 2022 is 3.59%, and it has historically been above the return target.
Feature 3: In the choice of GPIF's investment method, more than 8% of it is passive investment. Since 2001, GPIF has experienced a continuous increase in the proportion of passive investment, from 50% in 2001 to 83% in 2022. According to the explanation in GPIF's annual report, the reasons behind the high proportion of passive investment may be: 1. Lower management fees and transaction costs of passive investment; 2. As a long-term investor, GPIF pays more attention to long-term market trends rather than short-term market fluctuations; Passive investment strategies can reduce dependence on individual stocks and help them achieve long-term stable investment goals. 3. The scale of GPIF investment is huge, and passive investment can improve the scale effect, help diversify investment risks, and simplify investment strategies.
Feature 4: Increase alternative investments for stable and high returns. GPIF's alternative investments include infrastructure projects, real estate and private equity, which are less liquid than traditional securities assets, but have low volatility and high returns, which can help improve the overall return of GPIF with long-term liabilities. As of the first quarter of 2023, GPIF held 2.8 trillion yen of alternative investment assets, of which infrastructure projects, real estate and private equity accounted for 51%, 32% and 16% respectively, accounting for about 1.4% of GPIF's total assets, and the annualized IRR of alternative investment as of 2022 was 9.97%, of which infrastructure projects, real estate and private equity accounted for 8.44%, 11.12% and 16.46%, respectively.
Fund: Shrinking of the bond base, passive preference for the stock base + overseas investment (1) Changes in the Japanese fund industry in the era of low interest rates The economic boom in the 80s brought about the rapid development of the Japanese fund industry. Securities investment funds are called securities investment trusts in Japan. Japanese fund products are divided into fixed income funds and equity funds, and all fund products that can be invested in stocks are classified as equity funds. In the 80s, with the rapid development of Japan's economy and the rise of stock prices, the scale of Japanese equity funds expanded rapidly, from about 4 trillion yen in the early 80s to about 41 trillion yen at the end of the 80s. During the same period, the expansion of fixed income funds was relatively slow. The bursting of the bubble economy hit equity funds in the short term, but the scale continued to expand rapidly since then; In the era of low interest rates, the development of fixed income funds has stagnated. In 1989, after Japan's tightening economic policy took the initiative to puncture the bubble, the stock market took the lead in experiencing a round of plunge, which brought about a sharp decline in the size of equity funds, from about 45 trillion yen to a minimum of about 10 trillion yen; During this period, investors' low risk appetite led to the development of fixed income funds, which grew sharply from about 11 trillion yen in 1990 to a maximum of 35.9 trillion yen. However, as Japan gradually entered the era of low interest rates + the scale of non-government bond assets shrank + the default of Enron corporate bonds in 2002 led to a large outflow of funds from fixed income funds, and its development basically came to a standstill after the scale of fixed income funds peaked in the late 90s: the scale once fell back to the lowest of less than 11 trillion yen in 2011, and then only slowly expanded, increasing slightly to 15.6 trillion yen by 2023. During the same period, the development of equity investment funds accelerated, from less than 15 trillion yen at the beginning of the 21st century to about 181 trillion yen (as of the end of 2023), accounting for 92% of the total assets of public funds.
(2) Characteristics of the investment structure of public funds 1 and 1: the development of fixed income funds has almost stagnated The development of fixed income funds in Japan mainly includes the following types of products, and it can be seen that due to the low interest rate environment, it is difficult for fixed income funds to contribute to investment returns, and the current product categories of fixed income funds in Japan are very limited, and the scale development has almost stagnated. 1) Medium-term bond fund: Founded in 1980 and liquidated in 2016, it mainly invests in 2-4 year medium-term government bonds, but due to the sharp decline in medium-term government bond yields, it is difficult to generate income for investors, so this type of product has been withdrawn from the market. 2) Long-term bond fund: In the 80s and 90s, it was the most important fixed income fund in Japan, mainly invested in long-term corporate bonds, and the long-term bond fund was valued at a theoretical price, and the expected rate of return could be announced, and the product attributes were similar to deposits, so it was more attractive to individual investors. However, since 2001, Japanese corporate bonds have been denominated in market value and no longer publish expected yields. At the same time, the yield of long-term bonds has continued to decline in the low-interest rate environment, so the market size of long-term bond funds has shrunk significantly. 3) Domestic and foreign bonds: Founded in 1984, through investment in overseas high-interest rate products, to obtain a higher product yield, in the 90s during the Japanese economic downturn, the product developed rapidly, but at present, there is no restriction on the investment of Japanese bond base in overseas bonds, so this type of fund products in 2013 also basically withdrew from the market. 4) Money Market Fund: Established in 1992 and liquidated in 2016. Money market funds invest in money market instruments such as short-term bonds, negotiable deposits and commercial paper, and since the yield on the basis of the cargo base depends on the money market interest rate, and since Japan entered negative interest rates in 2016, the overnight interest rate has fallen below zero, so the money market fund has lost its basis for existence, so this type of product is also currently out of the market. 5) Japan Currency Reserve Fund (MRF, Money Reserve Fund): Founded in 1997, almost all of Japan's fixed income funds are MRF, and it is the only fixed income fund with a certain scale in Japan's low interest rate environment. This type of fund has a high degree of principal security: it invests in low-risk assets such as short-term treasury bonds, repurchases, and commercial papers; At the same time, there are strict restrictions on the rating and term of its investment targets: MRF investors are strictly limited to individual investors; The weighted average duration is limited to 90 days; The rating requirements for holding securities are also higher than those for money market funds. Individual investors can use the funds deposited in their brokerage accounts to purchase MRF, and when investors purchase financial assets, MRF will be automatically redeemed and used for fund payment, and investors do not need to pay subscription and redemption fees; Compared with MMF, which requires a handling fee when purchasing and redeeming within 30 days, the transaction cost of MRF is lower. MRF products are mainly issued by securities companies and rely on their securities trading business to attract customers: Due to the low rate of return of MRF products, MRF products mainly attract customers in the form of trading capital pools of securities companies. At present, there are 11 MRF products in existence, and the top 5 products account for 89% of the total scale of MRF, and these 5 products are all issued by securities companies.
2. Feature 2: Equity funds are developing rapidly, and equity funds in the era of passive and overseas investment have become the main product types of Japanese public funds in the era of low interest rates. By the end of 2023, the total assets of equity funds will reach 181 trillion yen, accounting for 92% of the total scale of public funds, compared to only 30% in 2000. At present, equity funds present the following characteristics: (1) Passive investment is the mainstay. As of May 2024, the total size of passive equity funds (including ETFs and index funds) is 128.7 trillion yen, accounting for 60% of equity funds, compared to 23% in 2014. The reasons behind this are: a large-scale purchase of ETFs by the Bank of Japan since October 2010, through which the base currency is injected and the market risk appetite is increased, which further promotes the issuance of ETF products; The BOJ's share of equity ETFs in the total size of ETFs peaked at 70% in 2018, and in 2024 the BOJ stopped buying ETFs, but it still holds 42% of ETFs. Second, ETFs are inexpensive, and actively managed funds do not perform better, so investors prefer passive funds. Third, Japan's pension investment is developing rapidly, and the demand for passive investment strategy products is higher for such products.
(2) The proportion of overseas investment is higher, and the proportion of actively managed investment overseas is higher. The proportion of overseas investment of Japanese equity funds reached 56.9% (2009), and during the period from 2010 to 2019, with the support of the Bank of Japan's easing policy + ETF purchases, the domestic stock market continued to rise, bringing the proportion of overseas investment to fall, but since 2020, with the strengthening of overseas stock markets, the proportion of overseas investment of Japanese equity funds has increased again, increasing to 33.4% as of 2023. In the same year, the proportion of overseas investment in equity funds excluding ETFs was 55.6%, that is, the proportion of overseas investment in actively managed funds was higher than that of ETFs.
3. Feature 3: The concentration of public funds is high, the average rate is declining, and the competition of Japanese public funds is fierce, and the current industry head institutions are stable and highly concentrated. As of March 2024, the scale of the top 5 public offering management institutions in Japan accounts for 70% of the entire industry, and the industry head effect is obvious. Among the leading institutions, Nomura Asset Management Co., Ltd., Daiwa Asset Management Co., Ltd. and Nikko Asset Management Co., Ltd. are typical "brokerage" asset management companies, which have stabilized their top 3 positions in the industry since 2015. At the same time, Japan's public offering industry has expanded its scale through mergers, and several new leading companies have been established: in October 2016, DIAM, Mizuho Investment Trust, and Shin Kong Investment Trust merged into AM-One; In 2018, Sumitomo Mitsui and Daiwa Sumitomo Bank merged to form Sumitomo Mitsui DS, and Sumitomo Mitsui Trust merged its asset management company to form Sumitomo Mitsui TA, which currently ranks among the top 5-7 public funds in Japan AM-One, Sumitomo Mitsui DS and Sumitomo Mitsui TA. In response to competitive pressure, public funds have also generally adopted fee reduction measures. According to the data of the Investment Trust Association of Japan, since 2016, the sales commission expense rate and management expense rate of public funds have continued to decline, and the overall rate of equity funds has decreased from 2.57% and 1.12% in 2016 to 1.89% and 0.96% respectively. In terms of management expense ratio, as of May 2024, the average management fee of Japanese ETFs is 0.29%, of which the management fee of ETFs tracking domestic indices is generally below 1.5%, such as the management fee of Nikko TOPIX ETF is only 0.05%.
Article source丨Huachuang Securities
Editor-in-charge丨Ding Kaiyan, Lan Yinfan
Preliminary trial丨Xu Lanying
Final Review丨Zhang Wei
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