Japan
16 November 2010
It鈥檚 still the largest Asian market in terms of securities lending, but it may be about to lose its crown
Image: Shutterstock
Last month, Hong Kong took over from Japan as Asia鈥檚 largest fees market for stock lenders, with pensions, mutual funds and banks earning USD 245 million from loaning the territory鈥檚 shares, compared to Japan鈥檚 USD 241 million. These figures are only one part of the story; while Japan鈥檚 growth may not be the same as in the rest of the region, it still has twice the volumes of securities on loan as Hong Kong.
The change, which is researched through Data Explorers, came as a result of investor demand for Chinese securities to be used in short sales.
Japan, say some, is on a downward trend - it has not kept up with what the market requires, and is losing ground as the focus has switched to China and the markets that support it. 鈥淛apan has been a market that鈥檚 been fading away for a long time and people are frustrated with it,鈥� says Emil Wolter, head of Asian regional strategy at Royal Bank of Scotland.
With the country鈥檚 annual GDP expected to grow by about 1.4 per cent next year, Japan is likely to continue to fall behind its neighbours - China鈥檚 GDP is set to rocket by 8.9 per cent in 2011, with Hong Kong about half that. Even South Korea - comparable in many ways in terms of its economic profile - is surging ahead.
Of course, part of the reason for Japan鈥檚 fall to second place behind Hong Kong is down to the pricing. Nearly half of Hong Kong鈥檚 shares are charged at an annual 1.5 per cent for loans, compared to less than a third in Japan. Indeed, over half of Japan鈥檚 stocks are available for loan at an annual rate of 0.5 per cent. So the volumes are still there, it鈥檚 just that lenders can earn more from other markets. The fees are generally a supply and demand scenario - there are fewer stocks to borrow in Hong Kong, and greater demand to borrow them. Undoubtedly as that market grows, the fee structures will become comparable with other jurisdictions.
Investors
In many ways, Japan is a victim of its own success. Historically, international funds that invest in Asia have divided into two parts - Asia ex Japan, and Japan equities. Because Japan has been known for years as a mature economy with stable economic growth and sensible regulation, the risk profile of the rest of the region did not fit.
But as the returns from the rest of the area have grown, with double digit growth expected even in today鈥檚 straitened times, investors are pulling out of the less risky but considerably less exciting financial centre. Japan has been hit by the global economic downturn, maybe not as much as its Western counterparts, but comparatively heavily compared to its neighbours.
鈥淭he universe of names is increasing and the quality of the companies has increased鈥� for Asian countries outside Japan, says Jesse Lentchner, the Hong Kong-based chief executive officer of BTIG LLC鈥檚 Asia Pacific operations. 鈥淚 don鈥檛 think you鈥檒l see an increase in the number of people concentrating on Japan or an increase in the assets chasing performance in Japan.鈥�
According to data from US research firm EPFR Global, international investors have been building their stakes in Asian funds, but many have been doing so at the expense of the Japanese markets - a report from the firm in mid-October said that funds that buy Japanese shares have seen net withdrawals in 14 of the past 15 weeks.
Providers
Perhaps uniquely in Asia - although China may argue its case - the domestic banking industry is generally run by domestic banks. This is not the case for securities lending, however, where all the major players have a base, and even local funds use global banks to carry out their transactions. In fact, for a country which unfairly has a reputation for being insular, the Japanese banking system is remarkably open.
One Japan-based fund manager says that the reason for domestic funds to use global banks is that Japanese firms are simply too old fashioned. 鈥淎lthough the majority of our investments are in the Japanese markets, we do have exposure elsewhere. And we see how efficient our stock exchange is, we see how efficient our clearing and settlement system is and we see how efficiently our business is conducted elsewhere. Then we look at our banks, and it鈥檚 as if they haven鈥檛 even moved from fax communication yet. We simply have to go with the most efficient provider- margins are low, especially at the moment, and if our administration costs are too high there is no point in us getting involved [in securities lending].
The future
Japan is always going to be a vital market in the global financial industry. But its success is also its downfall - because it matured so early, the investors going in search of higher returns tend to think of it as too safe a haven. The emergence of China in the last decade or so, and the general preference for Hong Kong as the link to China, means that Japan may never again be the regional powerhouse that it once was. But for a market on such firm foundations, it should continue to grow at its own pace.
The change, which is researched through Data Explorers, came as a result of investor demand for Chinese securities to be used in short sales.
Japan, say some, is on a downward trend - it has not kept up with what the market requires, and is losing ground as the focus has switched to China and the markets that support it. 鈥淛apan has been a market that鈥檚 been fading away for a long time and people are frustrated with it,鈥� says Emil Wolter, head of Asian regional strategy at Royal Bank of Scotland.
With the country鈥檚 annual GDP expected to grow by about 1.4 per cent next year, Japan is likely to continue to fall behind its neighbours - China鈥檚 GDP is set to rocket by 8.9 per cent in 2011, with Hong Kong about half that. Even South Korea - comparable in many ways in terms of its economic profile - is surging ahead.
Of course, part of the reason for Japan鈥檚 fall to second place behind Hong Kong is down to the pricing. Nearly half of Hong Kong鈥檚 shares are charged at an annual 1.5 per cent for loans, compared to less than a third in Japan. Indeed, over half of Japan鈥檚 stocks are available for loan at an annual rate of 0.5 per cent. So the volumes are still there, it鈥檚 just that lenders can earn more from other markets. The fees are generally a supply and demand scenario - there are fewer stocks to borrow in Hong Kong, and greater demand to borrow them. Undoubtedly as that market grows, the fee structures will become comparable with other jurisdictions.
Investors
In many ways, Japan is a victim of its own success. Historically, international funds that invest in Asia have divided into two parts - Asia ex Japan, and Japan equities. Because Japan has been known for years as a mature economy with stable economic growth and sensible regulation, the risk profile of the rest of the region did not fit.
But as the returns from the rest of the area have grown, with double digit growth expected even in today鈥檚 straitened times, investors are pulling out of the less risky but considerably less exciting financial centre. Japan has been hit by the global economic downturn, maybe not as much as its Western counterparts, but comparatively heavily compared to its neighbours.
鈥淭he universe of names is increasing and the quality of the companies has increased鈥� for Asian countries outside Japan, says Jesse Lentchner, the Hong Kong-based chief executive officer of BTIG LLC鈥檚 Asia Pacific operations. 鈥淚 don鈥檛 think you鈥檒l see an increase in the number of people concentrating on Japan or an increase in the assets chasing performance in Japan.鈥�
According to data from US research firm EPFR Global, international investors have been building their stakes in Asian funds, but many have been doing so at the expense of the Japanese markets - a report from the firm in mid-October said that funds that buy Japanese shares have seen net withdrawals in 14 of the past 15 weeks.
Providers
Perhaps uniquely in Asia - although China may argue its case - the domestic banking industry is generally run by domestic banks. This is not the case for securities lending, however, where all the major players have a base, and even local funds use global banks to carry out their transactions. In fact, for a country which unfairly has a reputation for being insular, the Japanese banking system is remarkably open.
One Japan-based fund manager says that the reason for domestic funds to use global banks is that Japanese firms are simply too old fashioned. 鈥淎lthough the majority of our investments are in the Japanese markets, we do have exposure elsewhere. And we see how efficient our stock exchange is, we see how efficient our clearing and settlement system is and we see how efficiently our business is conducted elsewhere. Then we look at our banks, and it鈥檚 as if they haven鈥檛 even moved from fax communication yet. We simply have to go with the most efficient provider- margins are low, especially at the moment, and if our administration costs are too high there is no point in us getting involved [in securities lending].
The future
Japan is always going to be a vital market in the global financial industry. But its success is also its downfall - because it matured so early, the investors going in search of higher returns tend to think of it as too safe a haven. The emergence of China in the last decade or so, and the general preference for Hong Kong as the link to China, means that Japan may never again be the regional powerhouse that it once was. But for a market on such firm foundations, it should continue to grow at its own pace.
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