Japan's stagnant mutual fund industry is hunting for revitalization amid an aging, shrinking population and unmotivated retail investors who prefer to sit on cash.
If the industry's problems are not addressed, it will lead to a severe slowdown in the availability of fresh capital, according to the Japan International Asset Management Center Promotion (JIAM), an organization that is working with Japan's government on the drive to revive the sector.
"We need to upgrade our investment capabilities in Japan, otherwise … we cannot support our aging society," JIAM's representative director, Keiichi Aritomo, told CNBC. He pointed to an example: The returns from pension funds will not be sufficient to support Japan's retirees unless there's real change, he said.
A high savings rate in the country — a result of a risk averse population — is exacerbating the issue. Money is not sufficiently being put to work, leading to low returns. Pension funds are also not doing well because their assets aren't being diversified enough, according to Aritomo.
That all could compound into a big problem: If returns are insufficient, then support for the aged would have to be financed from taxes, which is an unrealistic option as it would become too much of a burden on young workers, he said.
A mission of change
So, the country is on a mission to deal with a few problems: A sales model for funds that isn't attractive to investors, poor performing investments, and talent leaving the country.
"There are too many distribution layers between investors and fund managers. And, in Japan, the distribution cost is very high," Aritomo said, explaining the structure that leads to high fees for mutual fund investors.
"As a result, investors often lose money by investment ... and keep on saving instead," he said.
Household savings are therefore being underutilized, he said. Over half of Japanese households' assets are being held in bank deposits, as compared to about 13 percent in the U.S. and 33.2 percent in Europe.
And those who have moved their money out of bank accounts haven't always fared so well in Japan. In fact, institutional investors have long allocated as much as 50 percent of their portfolios to low-yield Japanese government bonds, Aritomo pointed out. He added that there are few products for long-term investment, which are important for retirement.
Aside from changing the distribution model and the asset allocation mix, one solution the organization is looking at is drawing portfolio managers to the country to work. They'd replace the many who have left.
For a start, the organization is working to attract 30 foreign asset management and financial technology firms to Tokyo by fiscal year 2020.
Do accomplish that, JIAM will provide support to businesses, including helping them acquire the appropriate licenses in Tokyo.
Last year, 10 such companies agreed to establish a presence in Japan's capital.
There is little that can be done, however, to address the issue of an aging and shrinking population, except to open up the country to more immigrants, according to Aritomo. But that's seen as a longstanding issue, with the country having a reputation for not being welcoming to foreigners.
Aritomo called it simply a "perception" problem, saying that the government has been welcoming immigrants. He put it down to language barriers and an expensive cross-border remittance services posing obstacles for workers.