Japan has a serious savings problem, caused by the low financial literacy relative to peer countries, and exacerbated by social security programmes as a result of unfavourable population demographics. In order to achieve sufficient levels of savings, individuals will need to invest in potentially higher yielding, unsecured assets outside of bank savings deposits. We believe that real estate both domestically and abroad offers attractive investment opportunities, but that current regulations and investment vehicles present excessive barriers to entry for individuals. Thus, we propose a peer-to-peer real-estate equity crowdfunding marketplace as a WealthTech solution.

Japan’s demographic development is a major challenge. Japan’s population peaked in 2010 and has gradually declined since then. The government expects that, by 2060, Japan’s population will further decrease from its present figure of 127 million to 99 million, and the number of live births per year will be at least halved. Japan’s old-age dependency ratio stood at 26.7% in 2015, which is far above the global average of 8.3%, and is expected to increase to 39.9% in 2060. Eventually, a single elderly adult will be taken care of by only 1.3 individuals in the labour-productive age range of 15 to 64.¹ This will lead to serious reductions in public pension funding. According to the Ministry of Health, Labour and Welfare, the public annuity-to-income ratio was 62.7% in 2014, but is expected to drop to 50.9% at most in 2043.² In addition, the amount of employee pension declined 2.5% annually from 2003 to 2013, and the trend seems to be continuing. During the same period, the ratio of companies without a retirement benefit system increased from 13.3% to 24.5%.³ Due to this demographic imbalance, wage security is difficult for the younger generations, and their savings patterns are insufficient to cover future retirement costs. Under these circumstances, Japanese citizens are being urged to reshape their wealth management strategy.

The Japanese wealth management market differs significantly from the global market, particularly in the composition of individual asset holdings and the level of financial literacy. According to the Bank of Japan, at the end of 2016, the balance of Japanese households’ total financial assets was JPY 1752 trillion, of which cash and deposits accounted for 52.3%, reflecting the conservative Japanese approach to asset allocation.⁴ On the other hand, in the United States and Europe, cash and deposits only accounted for 13.9% and 34.6%, respectively. This trend of concentration in saving deposits has persisted through the nation’s deflationary phase. Under the low interest rate environment, successful wealth management requires a shift from passive bank deposit saving towards active equity investment. However, the low financial literacy is a challenge. According to surveys conducted by the Bank of Japan, compared with the United States and major EU countries, the percentage of correct answers given to common true/false questions regarding financial knowledge was 7–9% lower in Japan by all demographic classifications, including gender, age group and income level.⁵ While many of the Japanese respondents indicated support for financial education offerings, the proportion of respondents who had participated in financial education programmes was only one-third that in the United States. In addition, according to a poll conducted by the Cabinet Office of Japan, among Japanese citizens over the age of 60, 42.7% of respondents answered that they had done nothing to prepare for their post-retirement years.⁶ Therefore, we must reform Japanese individuals’ consciousness of wealth management. An innovative wealth management method with ease and high transparency is key to improving individuals’ financial literacy.

Japanese Financial and Real-Estate Securitization Markets

The existing financial infrastructure in Japan is dysfunctional. Along with a declining population and increase in underutilized real estate, there are an increasing number of real-estate projects for which existing financial institutions, such as banks, are unlikely to provide loans due to lack of collateral value, low risk tolerance of the institution and low liquidity of the assets. According to NRI, the average age of housing stock in Japan will increase from 22 years in 2013 to 29 years in 2030, and the number of vacant houses will be over 21 million in 2033, with a 30.4% vacant ratio of the total housing stock.⁷ Even though there is an increasing number of micro entrepreneurs who run real-estate utilization businesses, they have received insufficient funding. Japan’s financial system relies heavily on indirect finance, because of investors’ lack of confidence in direct investment, which enables Japanese banks to hold deposits cheaply. Thus, the current financial system is based on centralized traditional finance options provided by banks and the reconstruction of a financial system based on distributed peer-to-peer (P2P finance has been neglected).

The securitization of real estate in Japan is still at an early stage compared with what is seen in developed countries. Out of ca. JPY 2.4 quadrillion of total real-estate assets in Japan, 0.7% have been securitized through public real-estate investment trusts (REITs), or J-REITs.⁸ It has been 16 years since the J-REIT market was established; however, the market has experienced no real growth due to contractual limitations on investment targets and the recent hype of the Japanese real-estate market. J-REITs cannot acquire opportunistic assets such as development and renovation assets, as they have to keep a stable income cash flow for dividends. For such reasons, there are limited numbers of J-REITs with operational, yield-producing assets. Also, J-REITs need to invest in major cities and could not be a supplier of risk capital to rural areas. Individual investors in J-REITs tend to focus on dividend yield while placing less importance on principal value or net asset value. As a result, there are an increasing number of J-REITs that offer monthly unsustainable dividends by spending down their original principal. Because internal reserves are not allowed for J-REITs due to strict conduct requirements, J-REITs need to raise funds in capital markets and acquire assets at the same time. However, as J-REITs need to raise funds mainly by public offerings, they raise capital only when the offerings are expected not to dilute their listed investment units, so that they can secure investors’ dividends. Thus, fundraising methods for J-REITs are very limited. There needs to be a new capital market for real estate that can replace the J-REIT market and boost securitization of real estate.

WealthTech Provides Solutions for Japan

In recent years, technology has been evolving so quickly that our lifestyle is constantly being upgraded to adapt to new paradigms. A P2P economy is a decentralized model whereby two individuals interact to buy or sell goods and services directly with each other, without intermediation by a third party. We see this being used by companies like Airbnb and Uber. Often referred to as the sharing economy, there is no centralized control of power, allowing people to more directly profit from their goods and services rather than paying unnecessary middlemen along the way. We believe that the sharing economy model is key to provide a brand new capital market for real-estate securitization in Japan.

An online P2P direct financing marketplace can solve our issues of Japanese wealth management. The new financial scheme can carry out real-estate securitization with ease, quickness and low transaction costs, combined with digital technology such as equity crowdfunding. The new scheme allows individual investors to capitalize on both onshore and offshore real estate in small amounts on a property-by-property basis, whereas so far they are only able to buy hard assets or invest in stocks of public J-REITs that manage and operate multiple assets. Compared with J-REITs, the new equity crowdfunding investment products have relatively higher yields, higher flexibility of asset allocation (even internationally) and higher levels of information disclosure. On the other hand, it is easier for individuals who need to raise funds to procure funds from P2P financing provided by individuals with flexible standards of credit-scoring and decision-making than to procure funds from traditional financing providers such as banks, who have non-flexible screening standards. In order to provide further liquidity to the market, we need to create a distributed virtual stock exchange for secondary trading with the latest cutting-edge technologies, including blockchain. Therefore, the creation of a Japanese distributed P2P financial system will balance the supply and demand of capital by P2P transactions. This massive paradigm shift in financial infrastructure will improve individuals’ asset management options, for a longer and more financially secure life.