A BlackRock salesman’s $2tn quest in the ‘land of no yield’

Bloomberg/TokyoPick a spot on a map of Japan, and odds are that BlackRock Inc’s Riku Takewaki has been there this year.The 31-year-old is a travelling salesman for the world’s biggest money manager, criss-crossing the island nation to win a slice of ¥317.4tn ($2.6tn) in savings spread across more than 100 far-flung regional banks.Takewaki’s pitch is simple: with lending margins and government bond yields near record lows, banks and their customers need a cheap way to tap the higher returns on offer from domestic equities and global debt. BlackRock’s exchange-traded funds, he says, are just what they’re looking for.In some ways, ETFs seem an odd choice for regional lenders whose main expertise is funnelling cash from rural savers to local companies and households. Yet demand is booming: Takewaki’s patch is the fastest-growing part of BlackRock’s Japan ETF business, and the firm will start two new funds designed for regional banks this month. Hachijuni Bank, a lender in Nagano prefecture, says it has little choice other than to expand into such products as unprecedented central bank stimulus drives down lending rates and soaks up the supply of sovereign debt.“Loans aren’t growing as quickly as deposits, and with yields likely to fall over the long-term, our investments in securities are becoming more critical,” said Hiroshi Sakurai, an investor relations official at Hachijuni Bank, which had ¥2.4tn of its assets in investments as of March and tripled holdings of Japanese ETFs in the preceding 12 months.“Government bonds make up the bulk of the portfolio, but with interest rates so low for so long, we’re being forced to start looking elsewhere.” Purchases by regional banks, along with buying from the Bank of Japan, have contributed to a surging market for ETFs.Assets in yen-denominated funds more than doubled over two years to ¥14.5tn in September, data compiled by Bloomberg show. That compares with 35% growth in global ETF assets in the two years through August, according to BlackRock, which oversees $4.7tn worldwide.“Within the regional banks, there’s a lot of money in motion, and that presents a great chance for ETFs,” said Jason Miller, the head of BlackRock’s ETF unit in Japan. He predicts the amount BlackRock manages for regional lenders will increase between 100% and 200% within three years.Of course, BlackRock isn’t the only company pitching its products in the sleepy corners of Asia’s second-largest economy.At State Street Corp, a Boston-based money manager that oversees $2.4tn, Japan’s regional lenders are an increasingly important client group, said Hisashi Takahashi, the firm’s head of institutional sales in Tokyo. He’s considering adding staff to drum up even more business for ETFs. Like any investment, ETFs come with their own set of risks.A wild session on August 24 roiled hundreds of US-listed funds, leaving prices out of sync with the value of their underlying assets as trading halts froze more than 500 securities. Most ETFs are designed to track the returns on benchmark indexes, unlike active funds that attempt to beat the market by picking the best-performing securities. Regional banks may lack the expertise needed to manage a shift out of government bonds into more complex products, said Takashi Miura, an analyst at Credit Suisse Group AG in Tokyo.“When things are going well, it’s fine to just ride the wave,” Miura said. “But when all kinds of difficulties surface in the future, frankly I have to wonder if they will be able to cope.”At Hachijuni Bank, ETFs made up less than 1% of the lender’s portfolio in March, despite rapid growth over the previous year. Regional banks have more than 70% of their investments in sovereign, municipal and corporate bonds, according to Credit Suisse. Their combined holdings of securities totaled 127tn yen as of March, data from the Japanese Bankers Association show. There’s also hundreds of credit unions that take deposits, making the list of potential ETF investors even longer.Most of the inflows from regional lenders have gone into relatively simple funds, such as those that track the Nikkei 225 Stock Average or a basket of US investment-grade debt, according to BlackRock. The firm is listing four new ETFs in Tokyo later this month, two of which were created in response to requests from regional banks, Miller said. One focuses on securities that pay high dividends, while the other tracks a basket of stocks with low volatility.After an 18% jump in the Nikkei 225 over the past year, it’s easy to see why local lenders are keen to shift out of Japan’s sovereign debt market, where 10-year notes yielded just 0.33% yesterday. The banks dumped ¥3.5tn of JGBs in the year through August.