[Dong Hun Jang's Patriotic Investment]Issues and Implications of Japanese Institutional Investors' Asset Management < Opinion < Article

I had the opportunity to attend the '2025 AIF APAC Investor Annual Meeting' held in Tokyo, Japan last April, following my participation last year. It was a gathering where institutional investors and capital market experts from Korea and Japan exchanged information on the rapidly changing investment environment and alternative investment market. Despite generally excellent performance last year due to the boom in the U.S. stock market, there was a palpable tension in the atmosphere as a considerably challenging investment environment has persisted since the beginning of the year.

Naturally, the focus of discussion centered on U.S. President Trump's tariff policies. Japanese institutional investors expressed disappointment with the tariff rates, and responses indicated difficulties in adapting as asset-specific outlooks differed significantly from early-year expectations. American institutional investors and asset management experts also voiced their bewilderment, noting substantial discrepancies between the anticipated policy directions during the presidential primaries and current realities. Despite the historically challenging investment environment, Japanese institutional investors were considering three main issues as most crucial in asset management.

First, Japanese institutional investors were contemplating investments in an inflationary environment. Japan's inflation rate surged to 4% in January, the highest since 1981. They were setting investment goals to hedge against inflation, considering the possibility of its persistence from an asset management perspective. Rising interest rates significantly impact asset allocation. With interest rates climbing due to inflation, attention has turned to the yields offered by Japanese government bonds. Substantial changes are expected in asset selection between stocks and bonds, domestic and foreign bonds, and domestic bonds versus currency-hedged foreign bonds.

The asset allocation of Japanese pension funds has seen a continuous decrease in domestic bond weightings, while expanding into foreign bonds and alternative investments. They were closely watching potential future changes in this trend. In pension asset management, institutional investors are showing interest in stocks and inflation-linked income assets to hedge against inflation. There is also growing interest in alternative investments to expand investments in inflation-linked income assets.

Second, there was increasing interest in various private alternative investment assets. On the demand side, institutional investors are expanding alternative investments for excess returns and diversification. Meanwhile, individual investors are increasing alternative investments due to government deregulation. Recent relaxation of investment trust product regulations has allowed investment in unlisted stocks through NISA (small-amount tax-exempt accounts). Additionally, Japan's first private fund investment platform for high-net-worth individuals has been launched. Through this, they plan to expand services to various assets including private equity, venture capital, and real estate, starting with open-ended private credit funds.

On the supply side, as part of value-up policies, strengthening stock exchange listing requirements has begun to reduce the number of listed companies. The number of unlisted companies has increased as corporate share buybacks and public tender offers have risen. The trend of activist funds intensifying shareholder activities targeting listed companies is also analyzed as a factor contributing to the increase in delistings. Therefore, the changed market structure is naturally acting as a factor increasing interest in private alternative investments.

Third, they were actively pursuing ESG 2.0. ESG 1.0 involves checking whether companies comply with various ESG criteria to select 'less bad companies', but this approach is facing increasing difficulties. Thus, ESG 2.0 was born, which aims to discover companies that declare enhancing positive value for the environment and society as their reason for existence and actively practice it. Consequently, the Japanese government is encouraging transition financing to induce and support corporate restructuring through ESG 2.0. Furthermore, it has declared that investments considering non-financial factors such as impact do not violate investors' fiduciary duty. Ultimately, they aim to enhance corporate sustainability by promoting ESG management through transition financing, impact investing, and shareholder engagement activities. This is seen as contributing to the sustainability of the value-up program.

Based on these three issues, I summarize the implications for the Korean capital market.

First, although Korea's inflation rate appears superficially lower than Japan's, inflation expectations are rising recently due to trade wars. Like Japan, with the rapid progression of aging and rapidly increasing pension assets, there is a need to actively expand investments considering inflation. Efforts should be focused on supplying excellent alternative investment products in preparation for the demand for inflation-linked income asset investments.

Second, if Korea properly implements value-up policies, it is expected that similar phenomena to Japan will occur, leading to an increase in demand for private alternative investment assets due to factors such as a decrease in the number of listed companies. However, regulations on individual investments in the private market are relatively strong in Korea, making it difficult to use alternative investments for diversification. Urgent measures are needed to support asset growth for individual investors, including pension assets, in an inflationary environment through regulatory easing.

Third, investments reflecting ESG in Korea still appear to be in the early stages. Considering the long-term development of the Korean capital market and the country's status, a more progressive approach to investment is required, centered on pension funds that require social responsibility in asset management, with more sustained interest. While the effects of ESG-reflected investments may seem ambiguous, it is important to recognize that they are a crucial axis in completing value-up policies by enhancing corporate sustainability.

(Dong-heon Jang, Advisor at Yulchon LLC / Former Chief Investment Officer at Government Employees Pension Service)

jsjeong@yna.co.kr

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Ji Seo Jeong jsjeong@yna.co.kr