In 2013, there were approximately 2,167,224 HNWIs in Japan with a combined wealth of $8.8trn. In addition, sister company WealthInsight forecasts that this is nowhere near the maximum wealth Japan can reach. Between now and 2018, it is predicted that the number of HNWIs will grow by 7% to reach over 2.3m, and wealth will significantly increase by 21% to make a total of $11.1trn.
Moreover, the number of ultra-high net worth individuals (UHNWIs) is also impressive. There were 16,584 UHNWIs in Japan in 2013 with an average wealth of $176.4m each. Twenty-four of these individuals are billionaires.
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UHNWIs accounted for 0.8% of HNWIs in the country, slightly above the worldwide average of 0.7%. In fact, the amount of individuals in the ultra band increased by a whopping 56.3% between 2009 and 2013, and is expected to increase by 7% by 2018. The sheer amount of wealth in this group makes them the prime target for wealth management professionals.
Investments in Japan are varied. As of 2013, liquid assets amounted to $3.9trn, representing 44% of wealth holdings. The largest asset class for Japanese HNWIs was business interests with 30% of total HNWI assets, closely followed by equities with 26% and real estate with 19%. A few of these categories recorded growth between 2009 and 2013 with equity growing by a sharp 53% and business interests increasing by 36%. The success of investing in business is not a surprise considering that 24.2% of HNWIs create their wealth in the financial services industry, a 15% rise from 2009. The highest growth, however, was in telecommunications, which saw the number of HNWIs increase by 37.2% between 2009 and 2013.
Japan’s private banking thrives
The economic situation in Japan is going through a stage of adaptation. Japan’s government has hit a record-high debt of $11trn and has put in place a series of reforms to boost the economy, known as Abenomics. Forecasts predict positive growth after a rise in GDP of 1.9% in 2012, a drop of 2.8 percentage points from 2010. Inflation is also set to rise to promote consumer spending and reduce government debt with interest levels remaining stable.
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By GlobalDataWolfgang Humbert-Droz, market head of Japan for Julius Baer, says: "After more than two lost decades, continuing low interest rates and a depreciating currency, Japanese investors are looking for international investments with higher returns."
Despite the unfavourable market conditions in Japan and worldwide after the financial crisis of 2008, Japan’s private banking market remained one of the strongest in the world, despite its relative infancy. Currently, it holds $28.1trn in wealth. In addition, the sector has kept growing due to the increase of the number of HNWIs and UHNWIs.
In the period leading to 2018, private banks and wealth management institutions are expected to reinforce and centralise their operations as well as allocate more resources to better understand their clients, provide higher levels of success, which should, in turn, attract even more business.
Private banking services in Japan are world-renowned as fully developed and brimming with wealth managers and financial services to suit every need. The market is not only in the perfect position for local development, but also for international investors and global institutions. Domestic Japanese banks have developed a variety of unique products, based around traditional banking structures often used by HNWIs, to suit their diverse bases’ needs.
Financial setbacks
However, there have been a few hits to the country’s development in the sector. Poor GDP performance led to both HSBC and Standard Chartered withdrawing from the market.
Victor Chang, CEO of UBS Wealth Management Japan, says: "Some of our foreign competitors have scaled back or closed their private banking businesses. However, UBS views the Japanese wealth management market with considerable bullishness over the medium to long term. We see significant potential in Japan, as a majority of wealthy clients have yet to experience the full breadth of the wealth management advice that we offer."
Another reason for the dropouts were many Japanese HNWIs’ preference for more traditional forms of private banking, using different institutions to control different areas of their wealth. This led to a lot of banks not being able to gain traction despite the country having the second largest HNWI population, behind only the US.
Banks may find themselves back in Japan as many of the wealthy prefer to hold their money domestically with only 22.8% of wealth invested overseas. This is also expected to drop to 22.3% by 2018.
Furthermore, growth in private banking is heavily reliant on the growth of the HNWI and UHNWI populations, not only in Japan, but also in countries such as Russia and China. While these groups are predicted to grow and strengthen, a drop could severely affect them. In addition, the amount of wealth being generated is creating a huge amount of competition between financial services businesses.
Japanese wealth management industries are trying to increase their market shares and offer a quality of service better suited to the demographic. Cost-cutting measures are also crucial as levels of competition and demand rise. As institutions try to attract a larger share of the market, heavy costs may be incurred. One way to lessen the risk and soften the blow is to cut money already being spent to avoid major downturns in profit, while being still able to provide services to clients in order to keep them.
A move towards expansion
While there was a slowdown following the global financial crisis, Japan did not seem to notice when it came to acquisitions and mergers. There has been a high level of activity coming from Japan, due to the large number of banks wanting to increase their portfolios and international presence. Compared to European markets, Japan has been prevalent in the field, with overseas partnerships playing a particularly important role.
Partnerships allowed Japanese banks a less risky opportunity to venture abroad. While also lowering costs, they gave private banks time to learn more about the international markets while also playing a key and active role. A key reason for the lack of hesitation in M&A is the origin of the debt held by Japan. A large majority of the debt is to the country’s own people, rather than foreign individuals who would demand a higher yield, which allows them to remain adventurous in the market with fewer costs than in other countries.
In an attempt to gain new clients and business, private banks in Japan are enhancing their reputations. They have expanded their target markets to the mass affluent, which allows a wider client base, albeit one with less wealth.
In addition, their offerings are becoming more malleable to the client. While they still provide traditional wealth management and private banking services, the key now is to address the specific psychological and behavioural characteristics of Japan’s HNWI population and provide products to suit each client individually.
Humbert-Droz says: "The needs of Japanese U/HNWIs are shifting from a focus on mainly domestic investment products to an increasing need for international investment advisory services, including family office services."
Moreover, adapting to regulation and increasing transparency is another problem. After the global financial crisis, many of the wealthy population became sceptical of banking. To combat this, many agreed to new waves of regulation, including Basel III, and more conscious efforts to become more transparent to their clients.
A definite shift from discretionary to advisory services is taking place. Not only did this comply with new rules, but also gave a deeper service to HNWIs where they began to feel involved with their wealth, instead of just seeing it being used.
Chang adds: "Our client advisors focus on building long term relationships with clients. This can be quite different from other houses with tend to be more short term orientated."
Overall, the private banking industry in Japan has survived a difficult period. With the global financial crisis and huge debt within the country, its current state is something to be admired. However, as the wealthy population increases and more competition enters, in the form of local and international banks, further adaptation must be considered.
Will it be a great obstacle to the industry? Most likely not. After all, Japan did not become the world’s third-largest economy by chance.
