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Funds May Lobby for Japan's 401(k) Design

BOSTON - U.S. business executives in Japan want to enlist mutual fund companies to help lobby Japanese officials about the laws which will govern Japan's planned 401(k)-style retirement program.

A committee of the American Chamber of Commerce in Japan will ask fund companies with a stake in developing business in that country to help make presentations to members of Japan's parliament, the Diet, and other government officials, said Christopher P. Wells, a member of the Chamber's finance committee. One goal of the lobbying effort will be to urge Japan to permit employees to make 401(k) contributions on a pre-tax basis, Wells said.

Adopting pre-tax contribution rules will stimulate demand for investment trusts, the Japanese version of mutual funds, said Wells. Japanese are particularly sensitive to tax issues, said Wells, a U.S. lawyer who has lived in Japan for 16 years.

"There will be a tremendous explosion" of demand for funds if retirement contributions are on a pre-tax basis, Wells said.

Wells made his comments at a conference on Japan's pension and investment markets which The National Investment Company Service Association and the Japan Society of Boston sponsored on April 15. More than 200 mutual fund and financial services executives and accountants attended.

On Dec. 1, rules largely deregulating Japanese financial markets went into effect. That regulatory change, frequently referred to as the "Big Bang," is expected to make it easier for U.S. fund companies to offer investment trusts in Japan.

As part of the Big Bang, Japanese elected and appointed government officials now are in the midst of deciding how to set up their own version of the U.S.'s 401(k) retirement plans. Final rules are expected by next year, Wells said.

It is unclear now if retirement contributions will be on a pre-tax basis, Wells said. It also is uncertain how much investment product choice retirement plan participants will have, executives at the conference said.

Individual Japanese investors have $10 trillion or more in household savings, executives at the conference estimated. About $7 trillion of the assets are now in cash or certificate-of-deposit style products, said Edward Cameron, a consultant to mutual fund companies at PricewaterhouseCoopers of New York.

"The opportunities in Japan are what they were in the U.S. 30 or 35 years ago, when we saw the birth of the modern mutual fund," Cameron said.

While the opportunity is there, Japanese investors are highly skeptical of mutual funds as financial products, said Hidemi Fukuhara, deputy president of Merrill Lynch Asset Management Japan of Tokyo. Assets under management in investment trusts were fairly constant at three percent of household savings from 1986 to 1998, said Fukuhara. At the same time, the market share of bank deposits remained high, although it dropped from about 63 percent to 57 percent from 1986 to 1998.

Mutual funds are "one of the most unpopular products among individual investors," Fukuhara said.

Individual investors distrust the quality of money management in Japan, Fukuhara said. Japanese investors also are far more conservative than American investors, he said. A survey three years ago, for example, showed that 74 percent of Japanese investors felt that stability of principal was the most important factor in their investment decisions.

In addition, Wells said investors in the past suffered from widespread churning by securities salespeople, another factor which has contributed to Japanese investors' wariness about financial products.

"Japanese investors, right now, like to put their money in the bank," Wells said.