Interview: Tokihiko Shimizu on the future of Japan’s financial industry

As Tokyo is making moves to strengthen its position as a financial centre, HFC’s Stefan Nilsson had a chat with Tokihiko Shimizu, the former CEO of Japan Post Investment Corporation and previously Director-General of Research at the Government Pension Investment Fund.

After having worked for big Japanese institutions such as GPIF, Japan Post and PFA, you have this year embarked on a different journey with several different advisory roles including Tokyo University of Science Investment Management’s endowment and Montana Capital Partners. Is it a very different life working for yourself than what you did earlier in your career?

As you mentioned, I have worked for big institutional investors in Japan for over a decade. I was in charge of managing multiple types of assets including traditional and alternative assets. As for alternative assets, I have covered hedge funds, real assets and private equity. Some of my remarkable achievements at GPIF were to rebalance the asset allocation and, in 2014, implement alternative investments for the first time. Through these experiences, my interest has significantly changed to direct investments in private markets, venture investments and technology investments. I have decided to focus on these fields for my continued career. These types of investment measures are still under development in Japan. The Japanese financial market has several missing pieces compared to other advanced countries like the US. I can see huge opportunities here. Therefore, I believe investors will be able to enjoy higher returns through these investments if we can make things work better by establishing a more active and deeper financial market as a whole. This idea came up through my experiences at GPIF when I implemented an active public Japanese equity strategy by adopting the JPX 400 index as a benchmark and hired engagement type of active managers like the Taiyo fund. My intention was to activate the public equity space. I named this an ”activation strategy”, rather than active, which tried to get returns not only from this single measure directly, but also from a passive portion through improving market beta by these measures. I have also seen secondary markets in private investments as another missing piece here. Montana Capital Partners is a solution-oriented, high-skilled secondary strategies manager with a differentiated niche strategy in small to mid-size complex transactions. Therefore, I would like to provide such solutions both to investors and players. As for Tokyo University of Science Investment Management, it plays an important role as a bridge between academia and business in terms of technology. I believe some of the most important areas in financial markets in Japan should be growth equity in private markets and deep technology investment. I am now brainstorming what the best investment strategies are in these areas.

During your career, you have lectured at several universities. Why do you teach and what about it do you enjoy the most?

I have lectured at three universities; Lecturer, Faculty of Science and Engineering at Waseda University, Visiting Professor, Management of Technology at Tokyo Institute of Technology, and Visiting Professor, Research Institute for Science and Technology at Tokyo University of Science. I was an expert in mathematical statistics and actuarial science at Ministry of Health and Welfare. Therefore, it was natural for me to share my knowledge with students at universities. For me, every single occasion teaching at universities was exciting and impressive. I have learnt many things from the younger generation who has new ideas and concerns. Through my teaching experience, I have learnt for many years that in Japan, there exists a gap, or a divide, between liberal arts and science in terms of society of business and working careers. For example, there are not so many CEOs who have a background in science. I think that economic stagnation in Japan partly comes from these gaps. Personally, I had tried to integrate the two sides and narrow the gaps via these kind of activities.

Both the Tokyo and national governments are making noises about improving Japan and Tokyo for financial firms. What, in your opinion, can Japan realistically do to make things better for asset managers, fintech firms, banks and others in our industry?

There are a number of barriers for foreign asset managers to enter the Japanese market, such as high income tax as well as language and visa issues. The Japanese government and the Tokyo Metropolitan Government have been working on improving the whole system. For example, the Japanese government usually charges individuals up to 50% income tax. However, they have decided to provide special tax schemes for hedge fund and PE managers. Their income from performance fees and carried interest will only be charged 20% tax. Having said that, I believe the Japanese financial market still needs to be more efficient. The Japanese financial market has been heavily debt-weighted compared to the US and other advanced markets which are well balanced between equity and debt. These issues have caused the low economic growth and less attractive financial market. Therefore, the Japanese financial market has to shift to a more equity-oriented money flow. I trust this is an essential step to create an advanced and attractive financial industry in Japan.

You have a lot of experience in private equity and other private markets. When it comes to alternative investments and Japanese investors, do you think we will see more allocations to private markets or will we see a comeback on the public side with hedge fund strategies and such?

I believe that the public markets and the private markets won’t conflict each other. These two spaces will complement each other to improve market efficiency as a whole. IPOs and delistings complement each other and this is the same with hedge fund investments and private investments in the long term. Recently, well-known hedge fund gatekeepers such as GCM and Aksia have entered te private equity space. Some hedge fund managers and private equity managers have been integrated into the same platform like BX and KKR, especially in the debt-related strategy area.