Japan FinTech Observer #72

Welcome to the seventy-second edition of the Japan FinTech Observer.

We have re-instituted the Japan FinTech Observer weekly call, every Monday evening starting at 8pm JST on LinkedIn Audio. You can find today’s event here. Naturally, we spent most of last week’s call talking about the historic market drop, so we will leave comments on the carry trade to “The Last Word” column in this week’s edition.

The two major highlights this week were (I) PayPay becoming the first company to receive approval for salary payments directly to digital wallets and starting the service for a number of Softbank companies on August 14, and (II) Rakuten solving its liquidity crunch at least until the end of 2025 by making Rakuten Mobile “self-funded” through a sale-and-leaseback transaction of JPY 150bn to 300bn in mobile infrastructure assets.

Otherwise, here is what we are going to cover this week:

• Venture Capital & Private Markets: Hiroshima Bank has established a CVC with Hiroshima Venture Capital as its general partner; Rakuten Group and Macquarie Asset Management enter into a sale-and-leaseback transaction to fund Rakuten Mobile; Asuene has successfully raised approximately USD 5.3m; Mortgage tech startup iYell has raised a total of JPY 1.86bn; Marubeni has invested in AND Financing Corporation (AFC)
• Insurance: Sompo Holdings, Tokio Marine Holdings, and MS&AD Insurance Group reported earnings, as did Sony, including Sony Financial
• Banking: Daiwa completed the acquisition of 24% of Aozora Bank’s shares after receiving FTC approval; Sumitomo Mitsui Trust Holdings and its “bear funds”; ORIX Corporation delivered a strong performance in the first quarter; Digital Garage and Resona Holdings start short-term, small-amount online lending to restaurants; AEON Bank has launched a new “supply chain finance” service; Mizuho has withdrawn from the bid for a significant stake in India’s YES BANK, leaving SMBC Group and Emirates NBD as the main contenders
• Payments: PayPay is the first company being designated by the Minister of Health, Labour and Welfare as a fund transfer business operator that handles digital wage payments; Rakuten, reporting earnings, said its goal is to use the cash flow of the Internet Services and FinTech Segments to reduce interest-bearing debt for the group; Digital Garage reported mixed fiscal first quarter earnings, the stock continues to under-perform; GMO Internet reported flat overall results due to loss provisions taken in its Thai business
• Capital Markets: the Japan Securities Dealers Association has released a report outlining their findings and recommendations for revitalizing the nation’s corporate bond market; the Daiwa Institute of Research and NEC announced the joint development of a new core system for financial institutions’ securities businesses
• Asset Management: WealthNavi, Japan’s leading robo advisor, reported second quarter earnings for FY2024
• Digital Assets: the FSA Commissioner said “cautious consideration” is needed in deciding whether to follow the likes of Hong Kong and the US by approving crypto-linked exchange-traded funds; the Japan Virtual and Crypto assets Exchange Association (JVCEA) and the Japan Cryptoasset Business Association (JCBA) have submitted their 2025 tax reform proposal; Korea’s Kyobo Securities and SBI Digital Markets enter into a strategic partnership; Rakuten Wallet and CALIVERSE sign a strategic partnership in the web3 sector; Sompo Japan Insurance and Ginco have entered into a partnership to further promote the social implementation of Web3
• The Last Word: The world’s largest carry trade hits the skids

Venture Capital & Private Markets

• Hiroshima Bank has established the “Hirogin Innovation Investment Limited Partnership” with Hiroshima Venture Capital as its general partner, with a JPY 2bn fund size and a ten year term; through the CVC Fund, Hiroshima Bank will invest in startups and other companies that possess technologies and know-how to bring innovation to the regional economy
• Rakuten Group and Macquarie Asset Management announced that Rakuten Mobile, a subsidiary of Rakuten Group, will raise between JPY 150 billion to 300 billion in funds for the sale and leaseback of a portion of its mobile network assets with a consortium of global leading infrastructure investors, led by Macquarie Asset Management and including British Columbia Investment Management Corporation, via the Macquarie Asia-Pacific Infrastructure Fund 3
• Asuene has successfully raised approximately USD 5.3m in the 2nd close of its Series C round through a third-party allocation of shares with investors including Japan Green Investment Corp. for Carbon Neutrality (JICN), Nippon Life Insurance (via Nippon Life Strategic Fund I), JERA, Pavilion Capital, and individual investor Hidetaka Kojima; this close brings the total Series C funding to USD 33m, with aggregate fundraising reaching USD 67m
• Mortgage tech startup iYell has raised a total of JPY 1.86bn through a third-party allotment of new shares to 13 companies, including the National Guarantee Innovation Investment Business Commitment Partnership, Daito Trust Construction, AirTrip, and IDS, as well as venture debt from three companies, including Tokyo Star Bank
• Marubeni has invested in AND Financing Corporation (AFC), a mobile lending company in the Philippines and a subsidiary of AND Global, a FinTech company in which Marubeni invested in December 2020, jointly with Premium Group, an integrated car service provider listed in Japan; as a result of this investment, Marubeni and Premium will become the largest shareholders of AFC and AFC will become an equity method affiliate of both Marubeni and Premium

Insurance

• The three mega insurers report fiscal first quarter earnings, and we have extracted the summary slides for Sompo Holdings, Tokio Marine Holdings, and MS&AD Insurance Group
• Sony, which will spin out its Financial Services Segment by October 2025, reported much of the same, i.e. market fluctuations in Sony Life Separate Accounts impacting financial results

Banking

• As Daiwa Securities announced in June, it was planning to acquire another ~9% of the voting rights in Aozora Bank from the Murakami Fund, pushing its ownership stake close to 24% once approved; Daiwa had filed a notification with the Japan Fair Trade Commission, and received a notice from the JFTC that, following the examination, it will not issue a cease and desist order for the Share Purchase; consequently, Daiwa acquired an additional 5,588,300 shares of Aozora Bank’s common shares on August 7
• At the end of October 2023, Sumitomo Mitsui Trust Holdings slashed its net income forecast for FY2023 by 57.5%, JPY 200bn to JPY 85bn, on the realization of hedging losses on “bear funds”; given the drawdowns in Japanese Equities over the last 10 days, such bear hedges surely would have come in handy?
• ORIX Corporation delivered a strong performance in the first quarter of FY25.3, reporting a net income of 86.7 billion JPY, a significant 38% increase year-on-year and achieving 22% of their full-year target; this translated to an annualized ROE of 8.7%; the company witnessed robust growth across all three core categories: Finance, Operations, and Investments
• Digital Garage and Resona Holdings have agreed to start a proof-of-concept experiment for short-term, small-amount online lending targeting small and medium-sized restaurants in the 23 wards of Tokyo and Saitama City, utilizing Insite Stream, an AI model that evaluates the credit risk using an industry-specific data platform and DG’s proprietary methods that continuously collect and integrate open data
• AEON Bank, a subsidiary of AEON Financial Service, has launched a new “supply chain finance” service to meet the financing needs of its customers; this service allows AEON Bank to receive real-time information on business transactions between AEON Group companies and their suppliers; by processing this information into data usable for loan applications, the bank can provide financing to suppliers at the order stage from AEON Group companies
• Mizuho has withdrawn from the bid for a significant stake in YES BANK, leaving SMBC Group and Emirates NBD as the main contenders; Yes Bank is seeking a new owner, four years after a central bank-led rescue; the State Bank of India denied selling its stake in the bank
• MUFG has published its Sustainable Finance Framework

Payments

• PayPay is the first company being designated by the Minister of Health, Labour and Welfare as a fund transfer business operator that handles digital wage payments to the accounts of fund transfer business operators; as a result, PayPay will provide “PayPay Salary Receipt” as a service that meets the designation requirements under the Enforcement Regulations of the Labor Standards Act; employees who work for businesses that support digital salary payment will continue to receive their salary in financial institution accounts or cash, and will also be able to receive their salary as PayPay Money balance in their PayPay accounts via the traditional method of bank transfer from their employers
• The biggest news for cash-strapped Rakuten Group arrived just before the earnings release, with Rakuten Mobile “self-funding” through a sale-and-leaseback transaction with Macquarie Asset Management (see above “Private Markets”); at the same time, the issuance of foreign bonds in the first half of 2024 has addressed the liquidity gap until the end of 2025, as per Rakuten; the goal is now to use the cash flow of the Internet Services and FinTech Segments to reduce interest-bearing debt for the group
• Digital Garage, which came under pressure from activist investor Oasis Management at the end of 2022, reported fiscal first quarter earnings that will not convince markets that a turnaround of its business is in sight; its consolidated pre-tax profit saw a 23% decrease, mainly attributed to foreign exchange effects, while the basic business profit demonstrated a healthy 17% increase
• During July, GMO Financial Holdings took additional provisions for doubtful accounts at GMO-Z com Securities (Thailand) for the second quarter of the fiscal year ending December 2024, and as a result, provided a dividend forecast that is significantly below the FY2023 payouts; it also implied that GMO Internet Group’s second quarter would not come out great, and indeed, despite a strong performance in the infrastructure segment, overall results were flat year-on-year due to the loss provisions taken in the Thai business

Capital Markets

• The Japan Securities Dealers Association has released a report outlining their findings and recommendations for revitalizing the nation’s corporate bond market; the report acknowledges the market’s underdeveloped state compared to global counterparts, particularly in the high-yield bond segment, and identifies key challenges hindering its growth
• The Daiwa Institute of Research and NEC announced the joint development of a new core system for financial institutions’ securities businesses; the system has been adopted by Daiwa Securities and went live in June of this year for back-office operations such as customer account management; the new system enables easy connection with various financial institutions’ services and achieves a highly portable system that is not restricted by the operating environment

Asset Management

• WealthNavi, Japan’s leading robo advisor, reported second quarter earnings for FY2024 on Friday; as a fee-taking business on the basis of its AUM, WealthNavi’s stock price performance is naturally correlated to the Japanese market overall; its price as of Friday’s close represents about half of what it was quoted at during the market highs during the first quarter

Digital Assets

• The head of Japan’s finance regulator said “cautious consideration” is needed in deciding whether to follow the likes of Hong Kong and the US by approving crypto-linked exchange-traded funds; many people believe cryptoassets “do not necessarily contribute to the wealth creation of the Japanese people in a stable and long-term manner,” said Hideki Ito, commissioner of the FSA, in an interview
• The Japan Virtual and Crypto assets Exchange Association (JVCEA) and the Japan Cryptoasset Business Association (JCBA) have submitted a comprehensive document outlining their 2025 tax reform proposal
• Korea’s Kyobo Securities, the first securities firm established in Korea in 1949, has signed a memorandum of understanding with SBI Digital Markets for a strategic partnership to promote the domestic and global digital finance ecosystem and token securities businesses
• Rakuten Wallet has signed a memorandum of understanding with CALIVERSE, a group company of the Lotte Group that operates a metaverse business based in South Korea, for a strategic partnership in the web3 sector; the two companies plan to discuss collaboration and cooperation on web3 services in the metaverse, including games, NFT sales, shopping, and artist live events
• Sompo Japan Insurance and Ginco have entered into a partnership to further promote the social implementation of Web3 and Web3 businesses by business companies, and will provide more safe and secure experiences; Sompo Japan is considering the development of new Web3 insurance products and insurance product-related services together with domestic and overseas business partners and group companies against risks related to Web3 products

The Last Word: The world’s largest carry trade hits the skids

As a post-mortem to the market gyrations over the past 10 days, we will quote straight from Michael Cembalest at J.P. Morgan, who published the following comments on August 6:

Years of negative policy rates enticed Japanese households, pension plans, state-owned banks and the Bank of Japan itself to create what Deutsche Bank estimates as a $20 trillion carry trade in which “Japan Inc” funds itself via low-cost bank deposits and invests in overseas assets and domestic assets of longer duration.

A lot of macro hedge funds piled on to do the same, funding in Yen. When the Fed began to hike in 2022, the Japanese carry trade accelerated, pushing the Yen to its weakest level since 1986.

Rising core inflation and wage negotiation outcomes finally prodded the Bank of Japan to raise rates just as the Fed is projected to begin easing, driving up the Yen sharply. Remarkably, the Bank of Japan spent $37 billion in July intervening to prop up the Yen due to its weakness at the time.

The recent Yen rally of 14% is among the largest seen over the last 40 years. Note how it only took a BoJ hike of 25 basis points (!!) to trigger this, which is indicative of how large the unmeasurable Yen carry trade might actually be.

Carry trade unwinds triggered a correction in global equity markets. So far, US, Europe, Japanese and Emerging Market equities are still up for the year. While the Yen is now closer to fair value based on interest rate differentials, JP Morgan FX traders believe that there could be more carry trade unwinds ahead.

If you would like to see more of our content, please head over to the Tokyo FinTech YouTube Channel or check out the eXponential Finance Podcast. Registrations for the Tokyo FinTech Meetup have moved to Luma.

We have also created two LinkedIn groups, the “Japan Startup Observer” if your interest in Japan goes beyond FinTech, and the “FinTechs of India” to capture the developments on the subcontinent. We invite you to join both these groups.

Have an awesome week ahead.