Global Fund Insight (Japan)： Revival After Decades of Stagnation

In the last two articles, " Global Fund Insight (Europe): Focus on Luxembourg & Ireland" and " Global Fund Insight (India): Top Performer in Emerging Market ", we analyzed the investment funds in Europe  and India. Today, we will focus on the Japanese market, offering an in-depth exploration of the development history and market characteristics of investment trusts in Japan.

Since the 1990s, Japan has endured three decades of economic stagnation and persistent deflation. The country's economic environment has been sluggish, and it was once considered among the least attractive in the world. However, in 2020, Warren Buffett's investment in Japan's five major trading companies marked a turning point. This move not only rekindled global investors' interest in the Japanese market but also spurred significant capital inflows.

On March 19, 2024, the Bank of Japan raised interest rates for the first time since 2007, ending an eight-year period of negative rates. In July, the Nikkei 225 Index surpassed its previous high in December 1989. By the end of 2024, the Nikkei 225 index had delivered an annualized return of 6.56% over the past 20 years, outperforming the MSCI ACWI index.

Alongside the expansion of stock market, Japan's investment trust industry has experienced rapid growth with a compound annual growth rate of 15% over the past five years. By the end of 2024, the industry's total AUM reached 246 trillion yen, equivalent to 35.4% of the size of China's publicly offered funds. Given its significance, Japan is now one of the key fund markets covered by Wind.

Japanese securities investment trust (mutual fund) refers to a scheme for collective investment in stocks, bonds and other securities. It can be traced back to 1941, and has evolved through five stages of development and reform. Today, Japan has been one of the top ten investment fund markets globally.

The industry is highly concentrated, with the top ten fund management companies accounting for 83% of the market share. Leading players such as Nomura, Mitsubishi UAM, Daiwa, and Nikko dominate the market. Securities companies and registered financial institutions are the primary distribution channels.

Amid persistently low interest rates and an aging population, domestic bond investment trusts have continued to shrink in scale. In contrast, equity funds and overseas funds have expanded, reflecting a clear industry trend toward passivity and overseas expansion. Over the past year, equity funds, alternative investment funds (such as gold and oil), and overseas funds have outperformed other investment types, with average returns of 15.6%, 15.02%, and 11.58%, respectively.

Phase 1: 1940s-1950s. Japan's investment trusts originated in 1941, primarily to consolidate scattered funds and stabilize the stock market during World War II. Following the war, the dissolution of the zaibatsu (financial conglomerates) and the payment of property taxes in kind resulted in a large volume of state-owned stocks. To encourage public participation in absorbing these stocks and to revitalize the depressed stock market, the government enacted The Financial Instruments and Exchange Act in 1948 and introduced the Act on Investment Trusts and Investment Corporations in 1951.

Phase 2 : 1950s-1989. The outbreak of the Korean War spurred Japan's industrial recovery and a surge in the stock market. Investment trusts emerged as a key tool for combating post-war inflation, and their scale expanded rapidly. During this period, the Japanese government implemented several measures to enhance the investment trust system. These reforms not only disrupted the industry's monopoly held by securities firms but also encouraged the establishment of more specialized trust companies.

After entering the 1980s, ultra-low interest rate policies and other measures further fueled the stock market surge. Securities investment trusts emerged as a low-risk channel for individuals to participate in the stock market, attracting a substantial influx of capital. By the end of 1989, the AUM of investment trust reached a record high of 58.6 trillion yen (approximately 1.6 yuan), establishing a significant presence in personal financial assets.

Phase 3: 1990-2000. In the late 1980s, Japan's bubble economy burst, leading to a significant collapse in the scale of stock investment trusts. As a result, citizens shifted towards more stable products, causing the scale of bond investment trusts to increase substantially. To stimulate the financial market, the Japanese government introduced a series of regulatory reforms. These measures not only eased entry barriers for the investment trust management industry, allowing foreign fund companies, banks, and insurance firms to participate, but also significantly expanded the variety and investment scope of Japanese investment trusts.

Phase 4: 2001-2009. As Japan's aging population became an increasingly serious issue, the country's public pension fund faced mounting pressure. In response, the Government Pension Investment Fund (GPIF) was officially launched in 2001. The government separated public pensions from the policy-based financial system, allowing GPIF to operate professionally to address the projected gap between future pension income and expenditures. Initially, GPIF adopted conservative strategy, focusing on a high proportion of passive and low-risk investments, which contributed to the growth of index funds.

Phase 5: 2010 to present . The first Japanese ETF was established in 1995, primarily to stimulate the market and support struggling banks. In 2010, the Bank of Japan began purchasing ETFs on a large scale to help maintain stock market stability. This initiative has significantly contributed to the rapid expansion of the ETFs. Since 2013, ETFs have accounted for 47% of the total growth in the investment trust industry.

By the end of 2024, the AUM of public investment trusts reached 246.01 trillion yen (approximately 11.37 trillion yuan), positioning Japan among the top ten investment fund markets in the world.

As of December 2024, the Japanese fund market comprises approximately 5,776 funds, with a total of 216 asset management companies(AMCs). These AMCs manage 246.01 trillion yen, which is approximately 35.40% of the size of China's fund market.

The industry is highly concentrated. The top ten largest AMCs have a total management scale of approximately 204 trillion yen (approximately 9.41 trillion yuan), accounting for 83% of the industry.

Among them, three largest companies (Nomura, Mitsubishi, and Daiwa) account for 51% of the market share. The basic information of each company is as follows:

Among the top ten funds with the largest AUM (excluding ETFs registered and issued overseas), three are from Nomura, two are from Mitsubishi UAM, two are from Daiwa, and three are from Nikko.

In terms of distribution channels, investors basically purchase investment trusts through registered financial institutions such as securities companies and banks, with direct sales accounting for only about 0.6%. In the past decade, with the expansion of the three major securities oligarchs and the continuous innovation of ETF products, securities companies have gradually regained their dominant position and become the main purchasing channel for investors.

In terms of management fee, the average ratio of Japanese investment trusts in 2024 was approximately 0.94%. The active funds had the highest ratio, averaging approximately 1.1%. In contrast, expense ratio of ETFs is very low, averaging only 0.28%.

In recent years, the individual financial assets structure shows a continued increase in the proportion of investment trust assets, which accounts for 5.75% as of 2024Q3. However, the overall investment style of Japanese remains conservative. Cash, deposits, insurance, annuities, and other low-risk assets account for over 70% of personal assets, while riskier investments such as stocks represent approximately 13.09%

Japan's public investment trusts are mainly composed of contractual and corporate types. The contractual investment trusts can be further divided into open type and unit type depending on whether additional capital can be raised after the initial subscription. At present, the AUM of open-type funds is about 245 trillion yen, accounting for about 99.75% of the public contractual investment trusts.

According to portfolio structure, contractual investment trusts can also be divided into stock investment trusts and bond investment trusts. Stock Investment trusts can invest in stocks as stipulated in the terms, while bond investment trusts are ordinarily comprised of bond exclusively.

According to sources of investment income, stock investment trusts can be divided into the five categories shown in the above figure: equity, debt, REITs, other assets (except stocks, bonds, and real estate trusts) and asset mix(hybrid), among which equity funds dominate, with AUM of about 179 trillion yen, accounting for 72.93% of public contractual funds.

Under the bond investment trusts, the main products include MMF, MRF and long-term bond investment trust. However, affected by Japan's negative interest rate policy since 2016, MMF, medium-term treasury bonds and other products have been repaid in advance. Only MRF and long-term bond investment trust products remain, accounting for only 6.39% in total.

In terms of management style, index funds have contributed considerable growth to the industry in the past few decades, and ETFs were even used as the important policy adjustment tool by the Bank of Japan. In contrast, the proportion of active fund products has shown a clear downward trend.

As of December 24, there were 1,323 index funds (including ETFs), accounting for about 56.70% of the managed scale, and 4,440 active funds, accounting for about 43.28% of the managed scale. Among the tracking indices of index funds, Nikkei 225 and the TOPIX are the mainstream indices, which account for about 34.10% of the total market.

In terms of investment regions, investment trusts can be divided into three categories: domestic, overseas and international type. After multiple institutional reforms, the investment trust market has continued to move towards liberalization and internationalization, and overseas investment has gradually become an important way to diversify investment and increase trust income.

Based on the latest statistics, the total AUM of overseas funds and international funds is 121 trillion yen, with 4,382 products under management. Among them, the top ten largest products are all equity funds, primarily investing in the United States through the structure of Family Fund structure.

Family Fund is an investment structure used in the Japanese investment trust market. Together with FOF, they constitute two special investment structures. Under Family Fund structure, pooled assets of multiple "baby funds" are ultimately invested externally by the "mother fund". In general, "baby fund" and "mother fund" are established by the same management company, and management fees cannot be charged twice at the "mother fund" level.

Currently, there are a total of 3,046 Family Funds (including baby fund shares) with AUM of 95 trillion yen. And there are 1,700 FOFs with AUM of 36 trillion yen.

According to the stock holdings by industry at the end of 2024, public investment trusts are mainly invested in Electric Appliances, Information & Communication, Retail Trade, Transportation Equipment and Banks, accounting for a total of about 49%, among which Electric Appliances leads the way.

According to the stock holdings of the latest annual reports, the top ten stocks are Sony, Tokyo Electron, Toyota Motor, Daiichi Sanko, RECRUIT, HOYA, Soft Bank Group, KDDI, Hitachi, and Shin-Etsu Chemical.

Since equity ETFs account for 90.69% of the equity funds, we further simulate the overall holdings of equity funds through the daily portfolios of ETFs. As of January 31, 2025, the top ten stock holdings are as follows:

Over the past year, the average return of overseas funds was approximately 11.58%, outperforming both international and domestic funds. Among all asset categories, equity funds delivered the highest average return at about 15.6%. This was followed by alternative investment trusts (mainly gold, crude oil, and other commodities), which achieved an average return of approximately 15.02%.

Based on the performance returns over the past year, the top ten funds are as follows. In terms of fund size, the overall scale is relatively small, with most investment areas focused on overseas markets.

If the fund size is further restricted to more than 1 trillion yen, the top ten funds with the highest returns in the past year are as follows:

2024 has been a historic year for the Japanese market. Driven by economic recovery, policy adjustments, and global capital inflows, the Nikkei 225 Index reached a record high, reaffirming Japan’s position as a key market for global investors. Despite ongoing macroeconomic challenges and uncertainties, the "Buffett effect" remains a significant catalyst for its long-term investment potential.

Wind has compiled in-depth core data on Japan's funds, encompassing essential information, net asset values, ETF quotes, performance report, and portfolio specifics, which can enable investors to enhance their understanding of Japanese funds and monitor market movements.

Furthermore, Wind's coverage of mutual fund data extends to key countries/regions including China, Hong Kong(SAR of China), the United States, Europe, Japan, and India. Moving forward, Wind is committed to enhancing data quality and user experience to better serve as an invaluable tool for global asset allocation among investors.