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Japanese Asset Management Industry Suffers Diminished Allure

While the European fund industry is perceived by many to be the next best place to grow assets, the outlook in Japan is not so good. "The picture in Japan is, I'm afraid, less bright [than that of Europe]," said Deborah Smith, a VP in State Street Corp.'s international offshore business. Smith also spoke at the NICSA conference last week in Miami.

Three years ago, things looked very promising in the Japanese asset management industry. The implementation of deregulation and the emergence of new distribution channels combined with a wealthy population (household savings were at $12 trillion) gave the market there a lot of potential, even though the overall economy had been stagnating for years, Smith said. "It looked essentially like a gold mine."

From 1999 until last fall, there was some movement into funds, albeit mostly fixed-income products. Although growth rates were nowhere near those of Europe or the U.S., the industry was moving in the right direction, Smith said.

However, the rosy scenario has changed. The recent trends of the Japanese economy--deflation, public debt, corporate debt--combined with the events of Sept. 11 and the collapse of Enron, have made the outlook for the retail fund industry fairly bleak, according to Smith.

Enron's collapse had a big effect on the Japanese fund market because three or four of the nation's largest asset managers had significant holdings in the energy company. That triggered a movement out of funds and into savings vehicles.

"The Japanese retail investor is very jittery right now," said Smith. "They feel that their money is safe in the banks. I think it will take some time, roughly three to four years, for the mutual fund market to turn around. It will almost certainly follow a revival of the economy, which we will see in about two years. Once things are corrected due to initiatives and reforms, there will be a renewed comfort in investing in the products."

The outlook on the institutional side is much better, according to Smith, who sees big opportunities there, especially for foreign managers. The emergence of structured products, such as hedge funds and other alternative investments, and the increasing emphasis on pension funds will be some of the drivers of institutional growth, Smith said.