Digital transformation unlocks new potential for wealth management in Japan

In recent years, Japan's wealth management industry has navigated significant changes, facing both unique challenges and unprecedented opportunities. In 2022, Japan's Prime Minister, Kishida Fumio, noted that over half of Japanese individuals' JPY 2,000 trillion (USD 14.4 trillion) financial assets are held in bank deposits and cash. This has resulted in slower asset growth compared to the US and UK,  presenting both a missed opportunity and future potential.

Key reasons holding back Japanese investors from investing

A conservative mindset and historical events, such as the collapse of Japan’s economic bubble in 1991, which triggered an unprecedented bankruptcy crisis, are the main reasons why Japanese investors are among the most risk-averse in developed markets. The Financial Services Agency (FSA) attempted to stimulate diversified investments in 2001, but the 2008 recession discouraged many. By 2021, Japanese households held approximately twice as much cash as those in Germany and the UK.

Moreover, the combination of low inflation, Japan's robust pension and welfare system, and the tradition of lifetime employment with consistent salary raises, has given investors little incentive to remain invested or to adopt goal-based investment strategies that have proven successful in other developed markets. Additionally, relatively tight capital controls and limited foreign participation in the financial market have inhibited Japanese individuals from investing abroad. As a result, many Japanese investors have tended to focus on the domestic market, which has experienced slower growth compared to other markets in the past decade.

The changing wealth management landscape

Recent changes, such as the country's surging inflation and a generational wealth transfer, are already transforming the wealth management landscape in Japan. The country's core Consumer Price Index (CPI) accelerated to a 41-year high of 4.2% in January 2023. Inflationary pressures are eroding the value of cash-heavy portfolios, highlighting the need for asset diversification. This, coupled with the wealth transfer to a more tech-savvy generation, is fuelling the demand for modern wealth management products and services. For instance, over 70% of wealth in Japan is currently held by individuals over the age of 60. As these individuals grow older, the wealth is gradually shifting to a younger generation that is more open to using digital services to manage their assets.

Additionally, discussions on FSA guidelines in recent years in Japan, such as the “Principles for Customer-Oriented Business Conduct”, underscore the need for financial institutions in Japan to act as professional advisers, follow fiduciary duty, and shift their focus from a transaction-based business to recurring fee-based services that align with the needs of individual investors. All these factors are gradually reshaping the wealth management industry in Japan, forcing financial institutions to be attentive in their digital transformation journey.

At Avaloq, we recognize this trend and focus on helping financial institutions improve digitalization along the entire wealth management value chain. Read more about the new digital opportunities and step-by-step guidelines in Japan’s fast-evolving wealth management market in our report.