- 3 months ago
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00:00Very, very basic question, why did you guys do it?
00:03Masa, let me start with you.
00:04Yes, thank you very much for having us.
00:06You know, the global custody business is a very capital intensive business.
00:10You need scale, and the market is dominant by a handful of players.
00:14And we don't have the scale.
00:16So it was very logical for us to think about selling this business.
00:19And we had a great relationship with State for many years.
00:23Ron and I have cultivated a great relationship for two years or so.
00:27And State is very good at this business.
00:30And they have extensive knowledge of this.
00:32So it was very logical for us to start talking with Ron about selling our business.
00:37And it made it through.
00:39Moving forward, I think we have two responsibilities.
00:43We want to transfer our clients to State, make sure that happens.
00:48And we will transfer our people to State for a certain period of time.
00:52Also, we want to make sure that our clients will get the demand, their demand from State.
00:58And from such purposes, we will also transfer people to them.
01:02Yeah.
01:03Ron, from your vantage, what does State Street get out of this deal?
01:06Well, we get a couple of things.
01:08As Kiarasan mentioned, this is very much a scale business.
01:12So when we have opportunities to acquire high-quality scale, like we saw in Mizuho, that's something that we're always interested in.
01:22But secondly is we're very optimistic and have been for several years now in Japan.
01:27We've got a presence there.
01:29And this was an ability, though the clients are the global custody clients, and Mizuho will remain as our local subcustodian.
01:39It is a set of Japanese clients that we will now be serving.
01:43And if our belief is, as we serve them well, reputationally, that will help us in Japan.
01:49So it was really a two-four for us.
01:52This idea of more scale in places like Luxembourg in the U.S.
01:57And then this tremendous client base.
02:00And then finally, just a great partner, an ongoing partner with Mizuho.
02:04I think the deal was announced back early this year, and of course it recently just completed.
02:08At a time of transition, there might be some concerns among clients, of course, what happens to my account, how I do this.
02:15From their perspective, is there any message you want to send clients, your clients that then become your clients?
02:21How does that transition work?
02:22Masa, let me start with you.
02:24So, so far we have been talking to our clients already.
02:27Right.
02:28And I think they are very confident that State will deliver the demands of our clients.
02:34But having said that, we want to make sure that that will happen.
02:38And we will have our people transferred to State Street so that our clients' needs will be listened by State.
02:45And I think Iran will do that.
02:47I have full confidence in that.
02:50Yeah.
02:51Part of the appeal of the transaction was that the Mizuho staff were coming to join us.
02:56Yeah.
02:57Okay.
02:58They are very high capability.
02:59And you are keeping that staff.
03:00We are keeping that staff.
03:01Yeah.
03:02And in the custodial world, which is very bespoke, very technical, but Japanese clients are known
03:11as being the most demanding service-wise.
03:14So, we try and build our entire service culture, and we have done this for years, around what do
03:20Japanese clients want and need.
03:22So, the ability to bring in more staff of that quality is very important to us.
03:28And, Ron, you mentioned that this doesn't seem like a one-off to you, that Japan is one of your fastest-growing
03:34businesses and markets out there here right now.
03:36In terms of just the amount of flows that you're seeing, how much are you still seeing going into Japan right now?
03:41Yeah.
03:42So, it seems like a long time where global investors have been waiting for this.
03:49And, in fact, for a long time, you started to hear things like, well, is Japan even relevant
03:55any longer?
03:56But if you think about the economy, think about the manufacturing base, and now think about
04:01what's happening there from a government policy perspective.
04:04A real desire to move more capital into markets, to deploy more capital, transform the savings society into an investment society.
04:16So, all those things have lined up in a way that we see a further growth spurt in Japan that we think will be sustained for quite some time.
04:26I mean, we cover markets every day, and if you told us just maybe this time last year that the Nikkei 225 would be at 50,000,
04:35I would definitely call you crazy and even pay for the ambulance to pick you up.
04:39But here we are.
04:40Yes.
04:41How is that playing out?
04:42Tell us, give us the domestic story.
04:44Like, how alive have things become?
04:46Thank you very much.
04:47I never expected that last year either.
04:49So, but I think one thing is that we have a new prime minister.
04:53She has a very good vision, I think, to make, to get Japan better.
05:06Okay.
05:07Get growth.
05:08And I think she is a very visionary, actually.
05:12So, I think that is playing well in the market right now, I think.
05:16I think that's the part.
05:17What are you excited to see the most out of this new government, Ben?
05:20She has raised civil items that has to be solved.
05:25I think today she announced that she will co-invest in 17 areas.
05:31That is very important for Japan from a growth perspective.
05:35Right.
05:36So, that kind of thing.
05:37She will also try to reform the social securities for the young people.
05:43I think these two are very important for Japan.
05:45In fact, I just want to pick up one of those points because for the longest time, there
05:50also wasn't an interest rate in Japan.
05:52Right.
05:53It was zero at best.
05:54And now you have an interest rate.
05:55In fact, the debate right now is interest rates might be too low in Japan.
06:00What is your outlook for interest rates in Japan?
06:02Well, you know, it's right now the policy rate is 50 basis points, as you know.
06:06Right.
06:07I think there is a room for another hike or two hikes to solve.
06:11Okay.
06:12Given the inflationary thing that is happening right now.
06:14I guess the BOJ is waiting to see that there will be a wage hike again next year.
06:19Right.
06:20And if they get confident about that.
06:22Negotiations.
06:23Yeah.
06:24If they get confident about that, they will definitely be able to raise rates.
06:26Yeah.
06:27And Ron, you talked about all the money and the flow coming into Japan.
06:31Is there something to look at in terms of Japanese investors and putting their money
06:35outside the country and divesting them maybe out of their home countries?
06:39Is there a trend that you think that is emerging now too?
06:42I think that's likely to occur.
06:44I mean, if you look over the past two or three decades in Japan, Japanese investors have
06:52invested, but they've often invested in products or been offered products that have been very
06:58short term in nature.
07:01The fee structures weren't the greatest in terms of beneficial to them.
07:07And what you're seeing now is a comprehensive set of policies that are meant to instill confidence
07:13in savers to actually deploy capital as investors.
07:18The regulatory structure is really focused on appropriate pricing structures, making sure
07:25that mis-selling doesn't occur.
07:27So there's just a nice alignment of policy here.
07:30And so we would foresee that there'll be more investing initially in Japan.
07:36Right.
07:37I mean, not least of which is what we've seen over the last year in terms of market performance.
07:41For sure.
07:42But also more broadly in Japan and outside of Japan.
07:45I wanted to ask you to ask you about that.
07:48You know, what part of the deal, I guess the deal was also given the backdrop of in
07:53a couple of years, do you expect more flows from Japan into other markets?
07:58And is this deal specifically a way for you guys to capitalize specifically at State Street
08:04if we do get those outflows coming out of Japan into other parts of the global equity markets?
08:08And that's how we'll be positioned, right?
08:11Because now that we're the global custodian, right, for these assets, certainly any of those assets
08:17that flow out would be beneficial to us.
08:20And so we will be well positioned for that.
08:23Masahiro, you mentioned about this deal, you can focus on the domestic business more closely now.
08:29What's going to be the strategy moving forward?
08:31Well, so we focus on four areas actually.
08:36Japanese retail, asset and wealth management.
08:40And then Japanese corporates, Japanese CIB and the global CIB.
08:46So we will be able to reallocate our resources into our four areas.
08:50Yeah.
08:51What's the sense you get from your clients, corporate Japan and retail investors?
08:56Is the economic picture the way we see it in headlines?
09:00Is that what's happening on the ground?
09:02I would say that, you know, the retail is moving into investment actions.
09:07That has happened maybe a year, started from a year ago.
09:11Right.
09:12I guess this will be enhanced given all these talks from the prime minister,
09:17number one, I would say that Japanese corporates will start investing in Japan
09:22to the areas that the prime minister talked about, the 70 areas, I think.
09:28Yeah.
09:29So I guess the dynamics will change a lot in Japan in terms of that.
09:33And then we can also get foreign investors coming into Japan to invest in Japan too.
09:38Yeah.
09:39In terms of two, you're forecasting maybe two hikes for Japan coming forward.
09:43What does that mean for the bank?
09:44I mean, in terms of ROE, are we expecting us to get a lift from that?
09:48Yeah.
09:49Yeah.
09:50That's a good thing for you.
09:51That's a good thing for us.
09:52I won't say it loudly in the public.
09:54You're acting like it's a bad thing.
09:55But you know, 25 basis point increase will give us somewhere around 100 billion yen increase
10:01in our profits.
10:03So definitely, currently ROE is somewhere around 10%.
10:07It will probably go around 11%, 12%.
10:09Right.
10:10Yeah.
10:11I mean, for the longest time, there was always this fear and concern that you could not raise
10:15prices in Japan because the end demand wasn't there.
10:18Yes.
10:19Do you think that mindset's completely gone now?
10:20People are used to prices going up and you're confident that you can do the same.
10:23So as far as I see in the retail sector, the companies are passing on the cost to the retail
10:34actually.
10:35And that's happening actually.
10:36Although not fully.
10:37Okay.
10:38But let's say somewhere around 50% to 60% is passed.
10:41Ron, outside of Japan, what do you see the most areas in terms of geographies where you
10:46can make the most impact now?
10:48So I think what's going on, people talk about de-globalization, and I think it's really
10:53a re-globalization.
10:55Okay.
10:56And sure, there's some pullback to national countries, if you will.
11:06A lot of that is supply chain driven and securing supply chain.
11:09But the idea that everybody's going to do everything for themselves is simply not true.
11:14So what you're seeing is old trade alliances are breaking down and new trade alliances are
11:22developing.
11:23And the place that's front and center is here in Asia.
11:28As the China direct to U.S. trade becomes less important, it's not going to go away.
11:35But it'll still make it there, maybe through intermediary countries, investment out of China
11:41into other countries that then gets into the U.S.
11:44I mean, ultimately, the goal for the foreseeable future is to provide goods to the U.S. consumer.
11:51It's the largest economy in the world, 75% consumer driven.
11:55And so this idea of re-globalization is actually an important one, because you'll see new businesses
12:01developing.
12:02I mean, today, the largest port, the largest country landing in the port of Los Angeles
12:08is Vietnam.
12:09Two years ago, and for the prior 20, that would have been China.
12:13Right.
12:14And it's not that China isn't landing in L.A., but Vietnam's gotten larger.
12:18So that's an example of some of this re-globalization that's going on.
12:22Similarly, and you've heard it today at the conference, capital flow is re-globalizing, too.
12:28And where and how capital flows?
12:31We're here in Hong Kong for a very important reason, because it's a node that really connects China
12:38with not just the U.S., but China with the rest of the world.
12:43And I think of it almost as, you know, think about it as railroads.
12:47You've got this now great switching yard called Hong Kong, both for goods and as importantly,
12:53maybe more importantly, for capital.
12:55Yeah, I was about to say, you know, this re-globalization concept, right?
12:59The HKMA hosts an event like this, and everyone from the world is here.
13:04We were just talking to some people.
13:05Everyone knows each other inside this room.
13:07I want to get a sense of if, I think there's no better person to ask but you in terms of
13:12the flows you're seeing as a global custodian bank.
13:15People talk about, we're re-engaging our exposure to the Chinese markets.
13:19We're re-looking at China.
13:20What are you seeing exactly as far as, are people backing up that claim?
13:25So, maybe at a high macro level, over the past several years, the flows have been, capital
13:36flows have been to the U.S., and if you're invested in the U.S., you really couldn't
13:42go wrong.
13:43That started to change, and there was a massive overweight position to the U.S., both equity
13:49and debt.
13:50Right.
13:51And that started to change about this time last year.
13:54You started to see the overweight position coming down.
13:57It accelerated at the beginning of the year and reached probably its bottom in April,
14:05around Liberation Day.
14:07Yeah.
14:08And everybody at that time thought, okay, this really is, we're going to see massive flows
14:13now out of the U.S.
14:15Well, you haven't seen that.
14:17And a part of it has been for, I think, the fact that the tariffs are proving not to be
14:22as bad as we thought.
14:24And there's almost a pattern that's emerging now and here in terms of predictability.
14:29And remember, markets hate uncertainty.
14:33Right?
14:34You'd rather know that something is bad for certain than wonder if it's going to be bad
14:38and be uncertain about it.
14:40And then secondly, U.S. companies have proven to be so profitable and enduring.
14:45Is it less uncertain now after what happened last week in Korea?
14:48Much less uncertain.
14:49Okay.
14:50Much less uncertain.
14:51And I think that's good for the world.
14:54Now, having said that, I'm a big believer in this reglobalization concept.
14:59Will investors be rewarded by going to places other than the U.S., or I should say in addition
15:06to the U.S.?
15:07Yeah.
15:08I absolutely believe that.
15:09I mean, I think that certainly in Asia and parts of Europe, the valuation gaps still
15:15remain high, so good companies are cheaper.
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