AsianInvestor’s annual study of the Asia-Pacific region's top asset owners shows only Japanese investors, on aggregate, posted a drop this year in assets under management (AUM).

Given their elevated status within the region, they may well have further to drop too in the coming years. 

The 2019 AI300 shows Japan-based investors together still have easily the highest proportion of Asia-Pacific assets by country – especially once central banks are excluded.

But their share of total assets among the region's top-20 and top-300 asset owners is down year-on-year, broadly slipping by between 2 and 3 percentage points to 47.5% and 37.3%, respectively. 

Total AUM at Japanese institutions eased to $5.65 trillion from $5.78 trillion in 2018, the AI300 data shows.

In the individual rankings (excluding central banks), Japan Post Insurance and Dai-ichi Life Insurance dropped one place apiece to fourth and thirteenth, while Zenkyoren, a public pension for Japan’s Agricultural Cooperatives Group, dropped three places to seventh.

Both Zenkyoren and Dai-ich Life Insurance did not immediately respond to AsianInvestor’s queries on what the reasons were behind the AUM decline and the specifics of its asset allocations. Dai-ich Life Insurance's total assets as at the end of March this year dropped 1.08% to ¥35.9 trillion, based on its official financial results.

Propotion of assets share among the top 20 investors by geography
(Click for full view)

Of the top-20 investors, excluding central banks, Japanese asset owners make up 45% of the group, followed by the Chinese on 25% and Singaporeans on 15%. 

It's a similar story in terms of AUM, with Japanese investors also dominating with 47.5% of the total. Proportion of 20 investors by geography

(Click for full view)

Government Pension Investment Fund, the largest pension fund in the world, is unsurprisingly second only to the People's Bank of China in the overall AI300 list. 

AGEING POPULATION AND WEAK DOMESTIC MARKET

Within Japan, insurance companies and pension funds took the biggest hit with a 5% drop in their assets.

Japan Post Insurance was a standout faller with a roughly $70 billion drop in AUM. 

Teruki Morinaga, director for insurance ratings at Fitch Ratings, blames the countrywide decline in AUM on an ageing population and weak domestic capital market.

“What's going on in the Japanese insurance sector is, the population had already started contracting, so over the next 10 to 20 years timeframe, the size of the domestic market is expected to gradually shrink,” he told AsianInvestor.

“This is different from emerging countries like Vietnam or the Philippines. They are very young and the economy is growing. Compared to those areas, Japan is definitely more mature and saturated in terms of life insurance and pensions,” Morinaga said.

Japan's capital markets are not doing these investors any favours either.

The Nikkei index, for example, dropped just over 15% in 2018 and Japanese insurance and pension funds typically allocate between 5% and 25% to domestic equities, he said.

Added to that was the shaky performance of global stock markets to which Japanese pension funds normally allocate around 25%, Morinaga said, plus the negligible returns on domestic fixed income.

With yields on Japanese government bonds at zero, the search is on for higher-yielding assets that might boost Japanese AUM and better match the needs of the country's ageing demographics.

That includes US corporate bonds and the like.

“Based on my observations, they are not just seeking higher yields but also trying to reduce and control risks more prudently because most of the market participants, including insurers and pension funds, believe that the best time of cycle is gone already,” Morinaga said.

Even so, in his opinion they are pushing against too strong an underlying current to make a material difference in the long run.

“If we talk about a 10-year or 20-year horizon, I think the AUM in Japanese pensions and life insurance will likely decline from current levels, presuming the birth rate in Japan does not increase more than expected,” Morinaga said.

As a result, he expects the bigger Japanese insurers to begin tapping into faster-growing markets, including the US and/or Australia, through merger and acquisitions.