Since the Japanese ‘bubble economy’ burst at the end of the 1980s, it has seen sub-par growth, recessions, deflation and a secular bear market in shares and property. These events have had a lasting impact on the funds management industry and on the long-term asset allocation strategies of Japanese institutional investors.
On the one hand, it has promoted more cautious investment strategies and a greater focus on portfolio risk management. On the other hand, the prolonged low-yield environment has heightened the need for return-enhancing strategies and increased the appetite for alternative assets.
Today, Japan’s asset management industry is on a new growth phase; its AUM (approaching 500 trillion yen) and asset management revenues both surpassed their 2007 peaks in 2016 and are likely to keep growing. Japanese institutional investors typically have longer term liabilities and over the last decade have been looking for new sources of long-term, inflation-protected returns.
This paper examines the factors that we believe will result in Japanese investors increasingly allocating to real assets.
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- Japan is on a long path towards fiscal health.
- With yields on Japanese Government Bonds near zero or negative, investors will continue to seek higher yielding alternatives.
- The shift by the Government Pension Investment Fund of Japan (GPIF) and other institutional investors away from bonds into riskier asset classes reflects a shift from cash and bonds to equity-style investing.
- Over the next three-five years it is unlikely that Japanese investors will become direct investors in infrastructure (like Canadian or Australian institutional investors). Rather, they will continue to invest through fund managers.
- Early investors in global listed infrastructure should benefit as the sector continues to mature and grow over time.
- Japanese deployment of capital offshore is positive for liquidity, and will continue to support the ongoing globalisation of the direct real estate sector.
- We expect the income stream from real assets will continue to be favoured by Japanese investors, and will also be sought by long-term asset allocators as a diversifier of risk in portfolio construction.
- As Japanese investors increasingly look to alternatives, we expect Japanese pension funds will continue to increase their allocation to both listed and direct infrastructure.
- From a real estate perspective, institutional investors need to focus on markets and assets that can deliver rental growth and occupancy increases to counterbalance the threat of rising capitalisation rates as global interest rates rise.
Read the full report here