Related Articles
In a country where cash has long been king, fintech innovators are at last shaking up old habits.
Matthew Brett, manager of The Baillie Gifford Japan Trust, tells Joji Sakurai about three disrupters loosening the grip of the country’s traditional megabanks.
As with any investment, your capital is at risk.
Japan is known for its technology but its banking and financial system has been relatively old-fashioned until recently
Imagine settling a big tax bill by handing over brick-like bundles of cash. Or paying for your heart operation with a splay of crisp new banknotes.
Neither transaction would raise an eyebrow in Japan, where cashiers patiently wait for customers to count out exact coinage into little plastic trays while the queue behind exhibits Zen-like tolerance.
After holding sway for centuries, this behaviour is at last making way for financial habits already familiar in other leading economies.
Driving the change, according to Matthew Brett, manager of Baillie Gifford Japan Trust, is a new breed of firms shaking up Japan’s financial industry.
Brett tells me that his recent trip to Tokyo to meet investee companies and investigate prospects consolidated his admiration for a new breed of companies cutting out intermediaries and giving slower-footed incumbents a run for their money.
‘These companies are winning with a combination of digital savvy, entrepreneurial imagination and streamlined management,’ says Brett. ‘They represent a more plausible path to sustained growth, one that belies the conventional wisdom recommending investing in Japan’s megabanks and securities houses.’
Changing habits, disrupting incumbents
From mobile payment apps to commission-free online stock trading, Japan is seeing a surge in financial innovation that is reshaping its consumer culture.
‘Restaurants that don’t accept cash and taxis allowing scannable QR [quick response] code payments were once unthinkable in Japan,’ Brett notes, referring to the ubiquitous black-and-white square barcodes.
‘Now they’re part of everyday life. That’s quickly changing the financial landscape.’
For sure, Japan’s traditionalist megabanks were on a tear in 2023. Buoyed by a post-Covid boom and higher lending rates, their performance outpaced the sector’s newcomers. But Brett thinks the nimbler players will own the future by taking advantage of changes occurring in Japan and the broader global economy.
‘When we take a step back, finance is interesting because it doesn’t have to be physical, which makes it ideally suited for the internet age,’ explains Brett.
‘Japan’s up-and-coming financial players are seizing these opportunities,’ he adds, via digital networks that stretch across ecommerce, mobile telecoms, gaming and more.
Matthew Brett, manager of The Baillie Gifford Japan Trust
Brett half-jokingly compares these upstarts to Genghis Khan after conquering part of Mongolia.
A vast world of opportunity still awaits these disrupters, in their case one full of complacent banking giants riddled with salaryman attitudes and wide open to challenge.
Japan’s three biggest banks have a market value of about ¥29tn (£155bn). That dwarfs the combined ¥5.7tn (£30bn) value of the newer financial sector players discussed below.
‘This tells us of the scale of opportunity,’ Brett says. ‘There’s a world for them to conquer. The amount of wealth and the need for more modern financial services are enormous.’
Financial sector stocks represent roughly 10 per cent of Baillie Gifford Japan Trust’s portfolio. Brett highlights three examples:
SBI Holdings
Founded in 1999 and now an international online conglomerate encompassing banking, insurance and securities trading, SBI is the leader of a new class of financial companies thriving online without a physical branch structure.
Led by visionary founder-leader Yoshitaka Kitao, SBI became the first brokerage to scrap its commission fee on trades of domestic stocks. This was a highly disruptive move in a country where private investors have traditionally faced hefty charges.
By being online-only, SBI reduces its overhead costs, resulting in a leaner, more efficient business model. It has surged past traditional rivals to become Japan’s second-largest brokerage by revenue after Nomura.
‘Traditional firms are burdened with legacy IT, born of complicated mergers and acquisitions, that hampers online innovation,’ says Brett.
‘There’s also a cultural resistance to closing local branches. Companies like SBI come from a completely different starting point – it’s been digitally native from birth.’
He adds that SBI’s boldest move was to create an alliance of regional banks. Rural depopulation and declining local economies had threatened these lenders’ survival.
But by investing in them and replacing their outdated systems, SBI has improved the personalised services they provide customers while gaining access to the wealth of Japan’s heartlands.
Rakuten is best known as Japan’s biggest ecommerce marketplace and also now offers financial services
Rakuten
Best known as Japan’s biggest ecommerce marketplace, Rakuten now offers a comprehensive range of financial services. Founder Hiroshi Mikitani, whose early career was in banking, has drawn on his experience to add financial services to Rakuten’s ecosystem.
The firm offers consumers access to everything from trading in stocks and bonds to credit cards, banking and loans, all interconnected through a single user ID. This simplifies the customer experience and helps Rakuten challenge traditional banks.
‘We’re probably more excited about Rakuten’s credit card business than its relatively low-margin bank,’ Brett says, ‘but the latter provides a good service and showcases the energy of Mr Mikitani in seizing opportunities’.
Like SBI, Rakuten melds technological innovation with a service-oriented culture. Rakuten Securities is a joint venture with Mizuho Financial Group, a Japanese megabank with a hard-earned reputation for serving the needs of its customers, particularly those making large and complex investments. Rakuten is also expanding into mobile-based banking.
LY Corporation
Masayoshi Son, the charismatic founder of Japan’s SoftBank Group, is best known for seeking tech-related global opportunities through his ¥24tn (£128bn) Vision Fund. LY Corp is one of his rarer domestic investments.
The business sprang from a merger of SoftBank’s Yahoo! Japan and the country’s favourite instant messenger service, Line Corp. Brett describes it as “a disrupter of disrupters” thanks to PayPay, Japan’s dominant payment app with 38 million users.
PayPay lets users go cashless by scanning QR codes to make payments in stores, restaurants, hotels and other venues. LY’s approach capitalises on a broader shift towards mobile technology, enabling consumers to link their bank accounts and credit cards to their smartphones.
PayPay’s success is partly due to SoftBank’s promotion and investment. Offering a generous points system, it aims to establish PayPay as Japan’s dominant QR code payment method.
As Brett puts it: ‘Mr Son has suddenly appeared from stage left with QR technology from China. Could the QR code be more important than the credit card? We don’t yet know how that story will play out.’
This article originally featured in Baillie Gifford’s Spring 2024 issue of Trust magazine.
Important information
Investments with exposure to overseas securities can be affected by changing stock market conditions and currency rates. Exposure to a single market and currency could increase risk. Investing in smaller, immature companies is generally considered higher risk as changes in their share prices may be greater and the shares may be harder to sell. Smaller, immature companies may do less well in periods of unfavourable economic conditions. The views expressed in this article should not be considered as advice or a recommendation to buy, sell or hold a particular investment. The article contains information and opinion on investments that does not constitute independent investment research, and is therefore not subject to the protections afforded to independent research.
Some of the views expressed are not necessarily those of Baillie Gifford. Investment markets and conditions can change rapidly, therefore the views expressed should not be taken as statements of fact nor should reliance be placed on them when making investment decisions.
Baillie Gifford & Co Limited is wholly owned by Baillie Gifford & Co. Both companies are authorised and regulated by the Financial Conduct Authority and are based at: Calton Square, 1 Greenside Row, Edinburgh EH1 3AN.
The investment trusts managed by Baillie Gifford & Co Limited are listed on the London Stock Exchange and are not authorised or regulated by the Financial Conduct Authority.
A Key Information Document is available by visiting bailliegifford.com
Some links in this article may be affiliate links. If you click on them we may earn a small commission. That helps us fund This Is Money, and keep it free to use. We do not write articles to promote products. We do not allow any commercial relationship to affect our editorial independence.
Source link
