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SuMi Trust bets on product diversification to achieve long-term targets and increase international reach

Interview - June 28, 2024

In this interview for The Worldfolio, Mr. Yoshio Hishida, President and CEO of Sumitomo Mitsui Trust Asset Management Co., Ltd., shares his in-depth perspectives on the recent surge of Japanese equities, offering a detailed analysis of the ongoing corporate governance reforms and their implications, while also elaborating on the strategic direction and future plans of Japan's largest asset manager.


Sustained by low interest rates and the lifting of COVID restrictions, Japanese land prices jumped at the fastest rate in 15 years leading into 2023. Attracted by the performance of the market, low interest rates, and the JPY’s devaluation, total foreign investors accounted for almost 25% of property investment in Japan, and they tend to be large players with deep pockets like Singapore's sovereign wealth fund, Guaranteed Investment Certificates (GIC), and the Norwegian government pension fund. Considering the current global macroeconomic environment, what makes Japan so attractive to foreign investors?

Stability is one of Japan’s key assets and constitutes the core of the message that Japan consistently conveys to the world.

Analyzing the rental market in Japan over the coming years reveals versatile opportunities, not only for office spaces but also for residential properties and logistics. In Asia, such opportunities are less common due to the size and peculiarities of each market. Some countries may have significant logistics capabilities but limited housing and office spaces. In comparison, Japan not only offers a wide range of opportunities across asset classes but also stable economic conditions and steady demand.

Furthermore, having access to liquidity through cost-effective borrowing is crucial for overseas investors. Here again, Japan delivers. While we might see a gradual increase in interest rates, market insiders are unanimous that they will remain very low, especially in comparison to foreign markets, leading to a stable yield.

Regarding the rental market for offices, vacancy rates were somewhat higher in 2023, but we have observed a decline in 2024. This indicates that occupancy rates are high, a statistic that is noticeable to global investors.

The economy has been normalizing in recent years. With the removal of lockdown measures, many people have returned to their regular office environments and working hours. In other words, life in Japan is returning to a stable norm, especially when compared to other countries.


In recent months, Japanese media and observers have voiced their apprehensions as to the performance of the real estate market for 2024 and 2025. At the core of their argument has been the possibility of further hikes in interest rates. While a move away from the negative interest rate policy was expected, the continued devaluation of the JPY to the USD is leading many to speculate that the Bank of Japan might be forced to intervene. Market players are also on edge over the risk of oversupply in certain asset classes, especially as large projects from leading developers are to be completed in 2024 and 2025. How realistic do you believe these threats to be?

The Bank of Japan is taking a very gradual approach to rising interest rates, so we do not foresee this as a significant issue. As such, the primary risk we foresee is the potential deterioration of the yen’s exchange rate to around 170 to the dollar. In such a scenario, the Bank of Japan would be compelled to raise interest rates. However, we do not anticipate this occurring imminently. If I were to outline the main risks, this would be the foremost concern.

In terms of the risk of oversupply in certain asset classes, several attractive projects are currently underway but there is also a trend towards rushing to develop new projects.

We believe that 2023 represented a crossroads because while there were ongoing projects and new supplies, the situation did not become critical. Overall, the market is in a stable position, but we must remain cautious about low-quality, hastily developed assets. In 2025, similar to 2023, there is expected to be a significant supply, particularly in the office market in Tokyo. However, if we consider the average supply level over five years from 2023 to 2028, it is lower than historical levels. Therefore, we do not have significant concerns about this.


In 2023, Japan’s core consumer price index climbed 3.1%, marking its biggest gains since the 1980s. Inflation was not just limited to consumer products, as building and construction materials have also seen a stark increase over the past five years. As a result of the return of inflation, Japan’s largest labor confederation announced in March that its member unions negotiated an average 5.28% increase in wages this year, the highest such increase in over 30 years. What impact do you expect inflation and wage growth to have on the real estate market?

This situation has significantly impacted the industry, compelling companies to increase wages. We at SuMi Trust are no strangers to this! For the past 20 years, we have not implemented any general company-wide increases in base salary. Our philosophy was to reward personnel based on their effort and contributions rather than uniformly increasing the base salary for everyone. However, about two years ago, we started increasing the base salary, and we plan to do the same this year.

Compared to some Western countries, the cycle between inflation and wage increases presents a favorable situation in Japan. For decades, Japan experienced a deflationary environment, so to change the atmosphere and attitude of the people, we need positive cycles.


Over the past year, Japanese equities have performed unprecedentedly well, bringing the Nikkei 225 to break the JPY 40,000 barrier and attracting attention from renowned global investors, such as Warren Buffet. While many analysts argue that this rise is due to macroeconomic factors, including a weak JPY that renders Japanese equities undervalued to USD-based investors, others have pointed at a new wave of corporate governance reforms and pressures from the Tokyo Stock Exchange (TSE) to improve capital efficiency. How much of Japanese equities’ recent performance do you attribute to macro-economic factors versus internal reforms?

First and foremost, I would say that the valuation of Japanese equities is still reasonable. Over the past 10 years, market sentiment has been quite bullish. The recent rise in stock prices is attributed to healthy growth and an increase in company revenues. Across the board, we have seen a 40% rise in stock prices alongside a 10% rise in company revenues. This indicates that the previously relatively lower valuations have been lifted, and the overall valuation has increased.

Regarding the impact of external versus internal factors, I believe it is a mix of both. External economic factors have had a significant impact, but internal factors, such as the Tokyo Stock Exchange (TSE) urging Japanese companies to improve capital efficiency, have also played a crucial role. Additionally, companies are now proactively moving towards healthier corporate governance, which is contributing to this overall increase."


Should macroeconomic conditions normalize, do you believe that corporate governance reforms, together with the TSE’s strategy will be enough to push this bullish momentum forward?

The TSE’s request to improve corporate governance has been an initial catalyst, and we anticipate that the resulting increase in revenue will soon become evident. As investors, it is crucial to engage with Japanese companies to evaluate their actual steps toward improvement.

While recent trends have included more share buybacks and higher dividend payout ratios, the more important focus should be on reorganizing business segments for better efficiency.


In January, the Japanese government announced a revamp of the NISA, or the Nippon Individual Savings Accounts, a tax-free stock investment program for individuals. This move aims to turn the trillions of JPY held in cash by households into investments in riskier assets, such as the stock market. Yet, the most popular investment vehicle among Japanese households has traditionally been mutual funds tracking US and other global stocks. Do you believe that the NISA account will be successful in reversing that trend and driving more investment from Japanese households into Japan?

It is encouraging to see that the younger generation, in particular, is starting to make investments in NISA, which is beneficial for Japan. However, starting from January 2024, data shows that many household investors are increasingly investing in global equities. While this is true, there are also many new investors entering the Japanese market. Essentially, it is not seen as an either-or situation; people are investing in both Japanese and global equities.


How can companies such as Sumitomo Mitsui Trust help unlock Japanese household investments in Japanese markets?

There are a couple of ways we can promote Japanese household investments in the Japanese market. Firstly, we can offer attractive Japanese equity products. While we currently have a limited number of these products, we are working on developing more. It takes time to ensure the proper structure, but in the future, we may also bring private market opportunities. Additionally, if we see a return to higher interest rates, such as 2%, the attitudes of Japanese households would likely change. We aim to balance equities, fixed income, and capital, and foresee more attractive fixed-income products in Japan as well. In summary, we need to offer a variety of attractive products.

Secondly, even if we provide attractive products, it's challenging for household investors to get involved without sufficient information about the products and the market. We need to provide adequate information and education to make the products easier to understand and access. It's crucial to offer information related to the equities market and the economy to support household investors.


Fixed income markets haven’t performed well if you look at the past couple of years, but despite this, you have been quoted as saying that you will maintain your fixed income team. Do you think that decision was right with the changing situation? How do you foresee the evolution of fixed-income markets?

You have to consider what happened in Europe and the US in 2021 and 2022 when interest rates began to rise. Many household investors naturally shifted their allocation from equities to fixed income. On a recent trip to Switzerland, I met a gentleman who asked me, 'Do you like 007?' I was a bit puzzled initially, as I am familiar with and enjoy the James Bond movies. He clarified that he was referring to the title of a James Bond movie, 'The World is Not Enough,' drawing a parallel to Europe's situation. He was the head of a private banking business and used this reference when discussing investments with clients.

While Japan's fixed-income market is not yet at such high levels, I believe there is potential for growth as people begin to understand it better. This potential extends to both fixed income and equities. Historically, there have been products available for household investors.

A similar situation might be occurring with Japanese Real Estate Investment Trusts (REITs), which tend to offer higher yields. During periods of rising interest rates, they might face some challenges, but once interest rates stabilize, their yields become quite competitive. Rising interest rates might present a good opportunity for JREITs to gain momentum.


Over the past year, Japanese equities have performed historically well, bringing the Nikkei 225 to break the JPY 40,000 barrier in March 2024 and the Tokyo Price Index (TOPIX) to reach more than JPY 2.500. In contrast, the performance of the JREIT market has been more restrained. How do you explain the difference in performance between equities and JREIT? Do you believe that the JREIT market can close the gap?

The difference in performance can be attributed to concerns in the industry following the Bank of Japan's interest rate hikes. These concerns have pressured the JREIT market over the past few months. However, as the Bank of Japan moves towards a more normalized interest rate environment, I believe this could change. In fact, over the last month, investor confidence has grown in the belief that interest rates will not rise quickly. This increased confidence should lead more investors back to the JREIT market, helping to narrow the performance gap.


Since the advent of COVID-19, the role and utilization of offices has come into question and is now being redefined. Tokyo’s office segment proved more resilient than that of other international cities with vacancy rates in Tokyo at a three-year low of 5.47% in March. How do you envision the evolution and utilization of office space over the next few years? As offices represent a majority of your real estate assets under management (AUM), how is Sumitomo Mitsui Trust positioning its portfolio to benefit from these changes in demand?

The evolution of office space utilization will largely depend on people’s attitudes. In Japan, this differs significantly from the US and Europe. Hybrid office approaches in Japan reveal that many people still prefer coming into the office. This is understandable, given the small size of many apartments, but work style also plays a big role. Despite changes during the COVID-19 pandemic, offices remain crucial as corporate environments where people can gather and exchange ideas. One positive outcome of the pandemic is that people have started rethinking their work-life balance. Pre-pandemic, Tokyo’s subways were overcrowded, but now, although still busy, they are more balanced.

In contrast, in locations like the West Coast of the US, some offices do not exist physically, with employees working 100% remotely. There are also many cases where employees come into the office only once a week or even once a month. The situation tends to be quite polarized, with either a predominantly remote or predominantly on-site workforce.


As offices represent a majority of your real estate AUM, how is Sumitomo Mitsui Trust positioning its portfolio to benefit from these changes in demand?

If you are referring to our JREIT portfolio, 40% of it is comprised of office space, and we continue to see significant potential in this area. Our JREIT offers high-quality offices, which contributes to their stability. Another important aspect of office-related investments is that Japanese companies are currently facing a labor shortage due to demographic decline. High-quality office buildings can attract talented individuals, making a good office space a key selling point for companies. Therefore, investing in top-tier office properties is becoming crucial.


Reputed for their high occupancy rates, low but stable rent growth, and cash-flow stability, residential properties in metropolitan areas are again enjoying population growth. After a decline in 2020, the population of Tokyo’s Metropolitan area reached a record high in August 2023, driving demand for residential facilities. It is therefore no surprise to find that the price for new condominiums in central Tokyo doubled year on year, with luxury housing also experiencing a surge in prices. Considering Japan’s rate of urbanization and demographic decline, how do you expect the demand for Tokyo’s housing sector to evolve?

Tokyo is quite an efficient city, and we are witnessing a trend toward centralization in Japan. In this context, the demand for housing in Tokyo appears to be quite stable. We have a presence in Hong Kong and Bangkok, and compared to these cities, the centralization of Japan around Tokyo is relatively low. For instance, around 50% of Korean population resides in the Seoul and greater Seoul area, so Tokyo is not as extreme. Being from the Kansai area myself, I can say Japan is still relatively decentralized. Cities like Sapporo and Fukuoka highlight the importance of having advanced infrastructure to attract residents and become a regional hubs. However, excessive centralization can lead to significant social issues.


In February 2024, Nikkei Asia Magazine reported that Sumitomo Mitsui Trust’s assets from global investors had more than doubled over the past five years, jumping from USD 13 billion in 2018 to roughly USD 30 billion today. Middle East-based wealth funds and institutional investors were the first region of interest, followed by Europe and Asia. Looking back at the past five years, what have been the main reasons for success in attracting foreign investors? What key strengths allow Sumitomo Mitsui Trust to win global mandates over European and American asset managers?

First and foremost, we provide high-quality products to our investors. However, beyond that, our flexibility in client services is a significant strength. Middle Eastern, large-sized institutional investors are very demanding. Unlike the largest asset management firms like BlackRock, which may have a gap in personalized service due to their size, we offer more flexible, tailor-made products and solutions. Our clients appreciate that their opinions are heard and that we can adapt to their specific needs.


Looking at the future, which investor regions would you like to tap into further?

We already have a strong client base in the Middle East and aim to expand further there. Additionally, we see opportunities to grow in Europe and Asia, regions that may be slightly easier to penetrate. In Asia, particularly, there is a strong demand for Japanese investments, partially due to the weaker Chinese economy, making Japan an attractive alternative. We are well-positioned to offer high-quality products.

In the US, we are just starting our business, so our foundation is still in its early stages. Despite this, the market situation seems stable enough for us to develop a solid foundation, and we are seeing demand for Japanese investments. Although the US market once appeared challenging, it now shows a lot of promise.


Expanding in the US will lead you to compete against large, historical players, which benefit from a robust track record and client base. How do you plan to differentiate yourself?

We have to carefully choose the type of product we promote. Of course, we have a strong edge in Japanese-related investments so we can provide such products as local professionals to US investors. I think this is the starting point for us for us to create our footprint.


Japan’s private markets experienced a surge in activity in 2023, with large-scale M&As from foreign players such as BAIN CAPITAL grabbing headlines. What opportunities do you see in this market?

These M&A activities provide good investment opportunities for private equity funds, but they are somewhat different from the general equity market. Many private equity funds view Japan as a creator of industries, and we anticipate more investment opportunities in the buyout area.

Looking at the future, we could offer a combination of opportunities to the global market. While we have not yet determined the exact product structure, private equity funds could be an interesting option for global clients. There is also potential for crossover investments in private or unlisted companies, which could be quite appealing.


As part of its strategy for the upcoming years, Sumitomo Mitsui Trust unveiled numerical targets to reach before 2030. One of the core objectives of the company is to achieve over JPY 100 trillion in assets under management by FY 2030. What have you identified as the key strategies to achieve this target?

We plan to further strengthen our diverse range of products for investors. The key drivers will be the Japanese market and the overall global market. For the Japanese equity market to experience real growth, significant changes are necessary. We intend to further develop engagement investment funds.

In the private sector, we aim to expand our private equity offerings. We are also interested in private debt and credit markets. While banks still dominate the finance market in Japan, we hope that private debt and credit will expand here, similar to what has happened in Europe. We have a talented group of investors within our organization, and I would like to bring them in to operate in this area. Overall, we see many opportunities in both public and private markets.


Imagine that we come back in eight years and have this interview all over again. What goals or dreams do you hope to achieve by the time we come back for that new interview? 

I'm not certain if I will still be here, but I hope that Sumitomo Mitsui Trust Management will grow to become one of the leading asset managers not only in Japan but also globally. We aim to have a larger presence in Japan and expand into various regions and countries. It’s not necessarily the size of the assets that matters most to us, but rather building strong relationships with excellent clients, as this is the best way for us to grow.


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