Japan’s economy has been going through a historic pivot recently, moving from decades of persistent deflation to a new reality of moderate inflation. Consequently, interest rates are rising again after being negative for years.
Those changes are affecting investor behavior: Japanese households that previously only held cash savings for the future as their main financial goal are now also focused on protecting their assets against inflation.
“We anticipate a steady increase in risk-asset investments such as stocks and mutual funds from households,” says Morgan Stanley Strategist Koichi Sugisaki. “Movement from savings to investments is strengthening among younger people, who are less trapped in deflationary thinking and more likely to receive long-term investment benefits.”
According to Sugisaki, the reallocation of household wealth of deposits, insurance policies and pension products into riskier assets is likely to have little impact on the amount of pure bank deposits, but could end up reducing liabilities for life insurers and pension funds. That suggests capacity to invest in securities should continue to increase for banks, while declining for life insurers and pension funds.
The Return of Inflation and Growth
Before the Covid-19 pandemic, Japan’s deflationary environment and slow economic growth offered few local investment opportunities. The country’s financial institutions favored the higher yields of overseas assets.
Following the pandemic, inflationary pressures grew around the world, and Japan was no exception. Consumer prices in the country rose 4% on an annual basis in January 2025, the highest in two years. The Bank of Japan (BoJ) currently forecasts inflation of around 2.5% in the fiscal year of 2025 and around 2% in fiscal 2026.
In parallel, the BoJ in 2024 ended an eight-year period of negative interest rates. Morgan Stanley Research expects the BoJ to increase the rate in September from the current level of around 0.5%.
A recent BoJ survey showed that markets, investors and companies see this new reality as a sustainable development for the country. Most of the participating firms said in the survey that increases in prices and wages are preferable for business activities. Households also responded that they prefer an environment of moderate inflation with income gains.
As companies and consumers become more optimistic, the country is experiencing a recovery in local capital investment, higher tax revenue and stock price gains. Economic growth has returned after staying flat since Japan slipped into deflation around the mid-1990s.
More Inflows to Japanese Stocks
When an economy experiences deflation, the value of cash moves upward in real terms. That explains why Japanese households have accumulated a relatively high percentage of their assets in cash compared to Europe and the U.S.
According to data from the BoJ and Morgan Stanley Research, at the beginning of 2024, Japanese households had 51% of their assets in cash compared to 12% for Americans and 34% for Europeans.
In an inflationary environment, where cash doesn’t earn interest and loses value in real terms, investors tend to place some of their assets in stocks and other risk assets. That’s what’s happening now in Japan.
Recent data on fund flows have already signaled a change in behavior of Japanese households. Inflows to cash and transferable deposits have declined, while outflows from low-interest and savings deposits have grown. Meanwhile, there has been an increase of inflows to stocks and other risk assets.
Besides the behavior change triggered by inflation, the introduction in 2024 of the new Nipon Individual Savings Account, or NISA, a tax-exempt investment system, is also now boosting investments in risk assets. NISA may be a catalyst for higher engagement of retail investors in Japan, similarly to the introduction of Individual Retirement Accounts (IRAs) in the U.S. in the 1970s.
“IRAs are an effective way for individuals to prepare for their retirement in the U.S.,” says Morgan Stanley Equity Analyst Mia Nagasaka. “We think that we’ll see a similar engagement path with NISA in Japan.”
New Opportunities for Banks
Financial assets held by Japanese households totaled 2,230 trillion yen (US$14.2 trillion) in December 2024, according to the latest funds statistics. Based on an outlook of sustainable inflation, Morgan Stanley Research forecasts those assets can rise about 15% by 2030 to reach around 2,500 trillion yen.
More money to invest, the new NISA and the appeal of risk investments in an inflationary environment will likely fuel growth of the local financial industry.
“The migration of savings into high-value products presents new opportunities for banks,” Nagasaka says. “This seismic shift among Japan's retail investors is poised to expand the net financial assets in the wealth management market, where demand is growing rapidly for more refined, customized services.”
More than half of Japan's financial assets are currently held by the ultra-wealthy and wealthy, which will be the focus for big banks in expanding their wealth-management business.
Meanwhile, the mass affluent population, or those considered non-wealthy and with assets below 50 million yen, or the equivalent of around $340,000, represents a large potential market where financial institutions haven’t been active, Sugisaki says. Online brokers, for example, are targeting this group with online services.
“Some top players started zero-commission equity trading for Japan to reach this group that could potentially be sophisticated investors in the future,” Nagasaka says.
Impacts for Institutional Investors
Changes in the economic environment and in the behavior of household investors are also likely to have impacts on the strategies of some institutional investors:
Depository institutions: In the new world of positive interest rates, bond investment will be a lower priority for these firms as they can earn sufficient interest income from their core business.
Life insurance companies: These firms will seek relatively higher-yield products, such as credit and alternative investments, to deploy their cash efficiently.
Pension funds: There shouldn’t be any material change in public pension fund portfolios as they maintained the basic portfolio weights across each asset class.
Investment trusts: The growing weight of households will translate into more demand for foreign equities, particularly U.S. stocks.
Reactions by Asset Classes
Equities: Japanese stocks are likely to get more inflows as households become more tolerant of risk and because of the incentive from NISA. Morgan Stanley Research sees individual investors as an increased source of support when stocks fall. They typically cash in gains from higher equity prices and increase their stock purchases when prices decline.
Government bonds: Over the long term, there’s potential for a mismatch in supply and demand for Japanese government bonds, leading to the steeper yield curve.
Currency: As Japanese households invest in foreign assets via investment trusts to hedge against inflation, the yen could weaken over the long term. However, that impact could be offset by public pension rebalancing out of overseas assets when the yen weakens.
For deeper insights and analysis, ask your Morgan Stanley Representative or Financial Advisor for the full report, “Understanding Investors in Japan” Reboot: Big Changes in Investment Behavior Under Way, (March 11, 2025).
