That Japanese institutions are notoriously slow in changing their investment strategies was an easy point of consensus. As panelists present at sister publication Infrastructure Investor’s Tokyo Forum last week went on to discuss the reasons behind such conservatism, however, it emerged that the problem was less than straightforward to overcome.
While the Japanese are renowned for financing infrastructure projects around the globe, their interest for investing domestically has so far proven rather tepid. This in turn created a barrier for local institutions to deploy further capital overseas, said Thierry Déau
, founder and chief executive of Paris-based fund manager Meridiam Infrastructure. “How do you sell your expertise in the rest of the world when at home you are not ready to invest in your own?”
Three sets of issues were indeed highlighted as needing immediate attention.
Mitsuhiro Arakawa, executive consultant at UK asset manager Russell Investments in Japan, explained that inadequate tax incentives came first. “There are tax credits for renewables. But what about for other segments? Longer-term tax credits are necessary. Without those, it’s difficult to see interest picking up in the domestic market.”
A second obstacle to a greater involvement of Japanese investors in the region lied in their cautious approach to exchange rate issues, especially when considering South East Asian economies.
“Investors know that interest rates are lower at home and that infrastructure serves as protection for their funds. So they have to look abroad. In overseas markets however, we have to pay attention to forex risk. The Australian market gives us good hope but in other parts of the region, the situation is not good.” argued Hidekazu Ishida, an investment officer at the Osaka Gas Corporate Pension Fund.
Ishida further explained that small pension funds, which invest mostly in listed equity, have all their infrastructure assets in developed countries.
Putting more capital to work in Japan required reforms, he added. “The possibility of a developed infrastructure market in Japan should be the best possibility for us, but for this to happen we need regulatory issues to be addressed, among which transparency on construction phase in PFI [private finance initiative] projects”.
“As much as we would like to invest in [segments other than energy], we are not fully enjoying the tax benefits which we believe we need at home to diversify within the asset class. As a result we turn to the US and Europe. However, the US remains a difficult market, so Europe is still our main target.”
According to Hiroko Shibata, analyst at US rating agency Standard and Poor’s, regional banks and life insurance companies are starting to make infrastructure investments in Asia and raise allocations. Foreign exchange risk in emerging countries is still perceived as a key risk, he said, but appetite is growing for economies in the region able to offer US dollar-denominated products.
A final hurdle on the road to successful integrated PFIs in Japan, panelists said, was the lack of adequate project supply – although this seemed to be an issue relevant to most asset managers and investors in the room, no matter where they were operating.
“It is very difficult to expand faster in Japan. We have to have the abundant supply but it is very much lacking, and we are missing the track records to give the market the right confidence levels to act. Most projects are in the hands of local authorities and they lack the means to take on the necessary initiatives,” argued Kenji Tanaka, senior economist at the Development Bank of Japan.
“The airports are not the only assets we should be thinking of privatizing. We should think of water sewage, toll roads, among others. But for this, we have to have some level of attractiveness, which is simply inexistent presently, both for foreign and domestic investors.”