Strategy&PwC: Spotlight on wealth management in Japan

It is a well-known fact that Japan has the oldest population in the world – its citizens are now being urged to re-examine their pension plans following COVID-19 by consultants Strategy&PwC. Japan is a country which has weathered the market crash of the early 90s known as the “lost decade” and survived the impacts of the Lehman crisis but the global pandemic has further blunted the economy. 

“There is no doubt that this will have an impact on wealth creation both now and in the future,” warns Strategy&PwC who has identified eight customer segments (from a poll of 3,600 respondents) that should be receptive to the best wealth-management offerings. 

“The shortfall in retirement funding and the underlying need for wealth creation has not gone away because of the COVID-19 crisis,” comments Strategy&PwC in the new report, Wealth Management in Japan: Everlasting Mirage or the Turning of the Tide?

“We must understand who the future wealth customer will be. Beyond simple demographic and affluence-based segmentations, we consider broader life-stage needs and commensurate approaches to managing wealth. 

“Based on our survey, we identified eight broad segments of the Japan market with three comprising attractive non-investing customer groups that could be tempted with the right proposition,” comment Strategy&PwC.

The eight customer groups range from:

• Recently married couple in their (30-40s)
• Risk-averse married couple (40s) 
• Adult single men (50-60s)
• Married couple with children (40-50s)
• Cash sufficient but time limited (50-60s)
• Married but after child independence (50-60s)
• Low-income pre-retiree (60s)
• High income pre-retiree aged (60-70s)

“Firms should tackle the challenge of financial literacy head-on and give customers the confidence to stay invested. Companies must also shift towards goal-oriented and lifestyle-based approaches and recognise that these things change over time.”

“We believe there is no shortage of players that can credibly offer a customer-focused wealth- management service. As their management teams start thinking about this, they should ask themselves six key questions:

• Who will be our customers and what is our unique proposition?
• How will we respond to the six requirements of a customer-centric wealth-management business?
• What is the role of digital in this new business model?
• How can we use existing distribution to access customers - is that enough?
• How do we efficiently source products?
• How can we meet our societal responsibility to drive financial literacy?

Despite the challenges faced by the country over the past 30 years, two constants have remained: First the high level of cash-based savings and limited focus on asset growth among Japanese citizens. The second is the role employers and the government play in providing a retirement safety net. 

“However, a perfect storm of demographic and market factors means that Japan must re-examine how its citizens think about retirement,” comment Strategy&PwC which outlines six factors:

1 Rise in life expectancy

This has steadily increased, but retirement age and wages have not kept pace - citizens need to fund longer retirement periods.

2 Smaller working population

An aging population has resulted in a smaller workforce, placing pressure on government finances and social safety net for the Japanese populace.

3 Rural to urban migration

The steady migration, particularly of younger people, from rural to metropolitan areas, such as Tokyo and Osaka are further concentrating wealth in a few areas while depleting that of outlying regions.

4 Erosion of ‘jobs for life’

The concept of “jobs for life” has steadily eroded and younger generations are more open to changing careers which limits their ability to build assets within a single employer-sponsored pension scheme.

5 Higher fees and commissions

On a net basis, the value gained by Japanese financial service customers has been limited. The fees and commissions charged to customers are higher than those in other markets. 

6 Push on financial products

Financial products in Japan are largely “pushed,” meaning that there is little pull through demand, and there is a limited focus on educating customers about long-term choices and impacts. 

“Given the acute retirement-income challenge and the limited customer-oriented offerings available in the market, the question has to be asked, “is there an opportunity to solve the retirement income problem for Japanese citizens? Our belief is that ‘yes,’ this is possible through a wealth-management model that: 

• Meets the needs of customers 
• Provides new opportunities for incumbent financial services players 
• Enables employers to meet their social obligations 
• Nurtured by long-sighted government policy

Over the past decade, the Japanese government and regulators have taken measures to make wealth management more accessible to a broader set of customers. Programmes like the Nippon Individual Savings Account (NISA) and the government-recommended contribution schemes offered by larger employers are steps in the right direction.

“However, much remains to be done to improve access and participation,” highlighted the report. “More recently, the FSA’s publication on the JPY20m savings gap was an explicit admission of the impending retirement funding shortfall, and the start of an important dialog among the government, financial institutions, and consumers. 

“Furthermore, 55% of our survey respondents indicated they had or expected to receive a large inheritance in addition to wealth creation. Therefore, the wealth-management industry in Japan needs to actively solve the intergenerational wealth transfer problem.”

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