Japan at an inflection point

Addressing structural challenges will determine Japan’s success in becoming an asset management powerhouse

Japan’s asset management industry has been undergoing a significant transformation in recent years, driven by government efforts to position the sector as a pillar of its financial landscape, alongside banking, insurance, and securities. These efforts build on the “Global Financial City Initiative” launched in 2020, which aims to establish Tokyo as a premier global financial hub.

Supported by government-led reforms, shifting demographics, and a growing appetite for alternative investments, the industry’s total assets under management (AUM) rose to over 1,100 trillion yen (approximately US$7.6 trillion) in 2024, up from 800 trillion yen in 2020, representing a compound annual growth rate of 8.2% over the past four years.

Reforms

Regulatory and tax reforms have been pivotal to this expansion. The revamped Nippon Individual Savings Account (NISA) program, launched in January last year, eliminated time limits on tax-free investments and expanded contribution allowances, significantly boosting retail participation and advancing financial democratisation.

By the end of last year, NISA accounts exceeded 25.6 million, with total investments surpassing 52.7 trillion yen, doubling 2020 figures. Notably, 40% of NISA accounts are now held by investors under the age of 40, up from 28% three years ago, reflecting a shift from Japan’s traditionally ageing investor base. Approximately 70% of NISA funds are now invested in equities and ETFs, as younger investors increasingly move away from savings accounts for increased returns.

As a result, about 25% of Japanese equities are now owned by individual investors, up from 17% a decade ago, thanks to NISA’s success in redirecting over 10 trillion yen from low-yield deposits to investment assets.

The Government Pension Investment Fund (GPIF), the world’s largest pension fund with 225 trillion yen in assets, has also played a central role in this transformation. Under its “Asset Management 2.0” strategy, GPIF has increased allocations to private equity, infrastructure, and real estate, raising its investments from 5.3 trillion yen in 2019 to 15 trillion yen in 2024, targeting 25% exposure by 2030.

“Our target of 25% allocation to alternatives reflects both the need for higher returns and the maturation of Japan’s private markets,” Masataka Miyazono, GPIF President, said in a 2023 interview.

This shift has spurred the private equity sector’s AUM to 25 trillion yen, tripling its 2020 level and attracting foreign managers like Blackstone, KKR, and Apollo to expand their presence in Tokyo.

Safe haven

Amid escalating global geopolitical tensions, Japan is increasingly viewed as a safe haven for investment. Foreign direct investment in Japanese private markets reached an estimated $28-30 billion last year, a year-on-year growth of 23%-28%. Private equity and real estate transactions led this growth, contrasting with a 12% decline in foreign inflows to China's private markets, which fell to $18 billion.

There are notable shifts in investor preferences. While public equities remain a core component, the transition from active to passive funds has accelerated. According to the Japan Investment Trust Association, actively managed funds recorded 117 trillion yen in assets at the end of 2024, up only 2 trillion yen from four years ago. This marks a 4% annual decline and the first annual drop since 2018, with only 32% of active managers outperforming the TOPIX index.

In contrast, passive funds have nearly doubled their 2020 assets level, reaching 82 trillion yen. NISA reforms, which added 8 trillion yen in contributions last year, along with the Bank of Japan’s ongoing tapering of ETF purchases, were key drivers of this surge.

Tokyo Stock Exchange’s corporate governance reforms have also been instrumental in enhancing the appeal of Japanese stocks to domestic and foreign investors. Its “name-and-shame” policy, targeting firms with price-to-book ratios below 1x, prompted more than half of listed companies to disclose their capital efficiency plans.

After years of outflows, Japan recorded foreign inflows of 6.8 trillion yen into its stock markets in 2023, driven by corporate governance reforms and the weak yen. The positive momentum continued into 2024, despite profit-taking reducing the net inflow to 1.23 trillion yen by the end of the year.

Alternative assets have experienced the most dynamic growth. Private equity and venture capital AUM have more than tripled over the past four years, driven by GPIF allocations and foreign inflows, aided by reduced carried interest taxes. Over 30 foreign private equity firms have expanded their Tokyo teams.

Goldman Sachs estimated that 10,000 Japanese private family businesses will be sold by 2030. “It’s now the golden age of private equity in Japan,” Jun Tsusaka, chief executive of buyout firm Nippon Sangyo Suishin Kiko, stated at a private equity forum held in Hong Kong in January.

Real estate is another bright spot, with foreign investors capitalising on a weak yen to acquire commercial properties at attractive yields. Blackstone’s AUM in Japan grew to over $50 billion last year, focusing on real estate and private credit, while GIC and Goodman Group expanded their Japanese portfolios.

Infrastructure and renewable energy also attracted significant investment, with Macquarie and Brookfield investing over 1 trillion yen in Japanese projects since 2021.

Fixed income, however, has lagged. The Bank of Japan’s prolonged yield curve control policies have deterred foreign buyers, driving overseas holdings of government bonds to a 15-year low. Corporate bond funds saw modest growth but remain overshadowed by equities and alternatives.

Challenges and opportunities

The industry’s asset growth has triggered ripple effects across Japan’s financial ecosystem. Asset managers, particularly foreign firms, have expanded their offices in Tokyo. Domestic brokerages have pivoted to serve retail investors. In January, online retail platform Rakuten Securities surpassed 12 million accounts, recording 16.1 billion yen of net income in 2024 after five years in operation. However, zero-commission trading and low-cost ETFs have pressured the profits of traditional brokers.

Fintech has also gained traction, as regulators embrace blockchain and digital assets. Japan now hosts over 500 fintech startups, up from 200 in 2020, and its highly regulated crypto exchange sector holds 5 trillion yen in assets. The approval of tokenised funds in 2023, including Nomura’s Bitcoin adoption vehicle, signals potential for further innovation, although institutional adoption remains slow.

This said, not all players are benefitting equally from the industry’s progress. Active equity managers continue to face fee pressures and stagnating operating incomes. The shift from active to passive funds has resulted in lower management fees, and foreign equity mandates, which account for 40% of retail inflows, leave Japanese firms with a small portion of the fees after compensating overseas sub-advisors.

While private markets thrive, Japan’s hedge fund sector remains underdeveloped. Wealth management also struggles on the global stage, as ultra-high-net-worth individuals continue to favour Hong Kong or Singapore for wealth management.

Structural challenges persist. While NISA has made strides among younger investors, the older generations remain risk-averse. Japan’s ageing population holds approximately 1,127 trillion yen of household savings in low-yield deposits, more than half of total household financial assets.

Talent shortages pose another challenge. While visa reforms have attracted over 2,000 foreign professionals to Japan over the past three years, heavy reliance on Japanese-language skills in the financial sector limits its appeal to global talent. Compensation gaps with Hong Kong and Singapore further complicate recruitment. And while carried interest reforms have attracted private equity firms, Japan’s inheritance tax, which can reach 55%, continues to deter wealthy foreigners.

To sustain growth, Japan’s policymakers and industry leaders must confront these structural challenges head-on. Expanding NISA to include private funds and REITs could further mobilise household savings, while additional tax incentives for foreign financial talents would enhance Tokyo’s competitiveness.

Efforts to internationalise the workforce must also be accelerated. The recently announced English-language special zones for financial and asset management businesses in Tokyo, Osaka, Fukuoka and Sapporo may represent a positive step forward, but implementation will be crucial.

Finally, Japan must continue to refine its digital asset framework, ensuring it remains at the forefront of blockchain adoption while maintaining market stability.

Japan’s asset management industry is standing at an inflection point. Regulatory reforms and global capital flows have spurred meaningful growth in this traditionally conservative market, but addressing demographic, talent, and tax challenges will determine whether Tokyo can emerge as Asia’s leading powerhouse in asset management. The window of opportunity is open, but speed and decisiveness are critical.

*This article was published in Asia Asset Management’s July 2025 magazine titled “An inflection point.”