The financial services industry in Japan is pretty unsophisticated. There are relatively few options for brokerages and mutual funds, and what options there are tend to be expensive. Furthermore, since pensions and taxes are generally handled by the employer there is not much reason for the average Japanese to think much about investments.

Jin Nakamura of  Money Design is trying to change that with a very interesting strategy.

In a market that is dominated by price competition, Money Design has set out to create a premium lifestyle brand that has nothing to do with finance.

And it’s working.

Money Design has become the largest robo-advisor service in Japan and is partnering with some of the largest banks here.

It’s a fascinating story, and I think you’ll really enjoy it.

Show Notes

  • Why young Japanese are not investing
  • Why it takes so long to launch a financial product in Japan
  • The danger of using AI in investing
  • How to reach $1 billion assets under management
  • How to avoid competing on price in a price-sensitive market
  • What it will take to get the Japanese public to believe in startups

Links from the Founder

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Disrupting Japan episode 98.

Welcome to Disrupting Japan, straight talk from Japan’s most successful entrepreneurs. I’m Tim Romero, and thanks for joining me.

Today, we’re going to talk about money, about investment. It’s not about exciting things like venture funding and ICOs but about simple somewhat stuffy stocks and bonds.

Jin Nakamura cofounded Money Design as a way to introduce millennials and other young Japanese to investing. Money Design has created THEO, one of Japan’s first robo-advisors. Now, robo-advisors are a lot simpler than their name implies. Basically, all that’s happening is that you contribute a small amount of money each month and the robo-advisor will invest a certain percentage of that in stocks and another percentage in bonds and will make some adjustments if the allocations get too far out of alignment. I

t’s a simple concept, really, but as Jin explains, young Japanese have shown very little interest in this kind of investing. So to reach them, Money Design created a lifestyle brand, one that had absolutely nothing to do with finance or money, and it worked. Young investors have been flocking to the THEO system and have made it the largest robo-advisor in Japan. In fact, Jin shares some of the insight that will be very important to anyone running a fintech startup or trying to sell financial services in Japan.

But you know, Jin tells that story much better than I can. So let’s hear from our sponsor and get right to the interview.



Time Romero: So I’m sitting here with Jin Nakamura, the CEO of Money Design and creator of THEO, a robo-advisory for retail investors. Thanks for sitting down with me.

Jin Nakamura: Thank you very much. Thank you for coming in our office.

Tim: Delighted to be here. I described Money Design in a very simple way but I think you can explain what you guys are doing much better.

Jin: Our product is very simple. We are providing a robo-advisory service in Japan. And then our global competitor is Betterment and Wealthfront. We are one of the first venture company to provide robo-advisory services in Japan.

Tim: For those of our listeners who don’t know, robo-advisory just means that individual investors can give you a relatively small amount of money and you invest it automatically for them.

Jin: Yes. We are providing the very simple financial product by smartphone. Once you access our website and then you answer just five questions. We showed the portfolio for each customer. Currently, we are providing over 230 portfolios for the customers. Once customer put their money into our portfolio, after that, we manage that discretionally.

Tim: Okay. You’re saying that there’s five questions.

Jin: Yes.

Tim: What kind of questions do you ask?

Jin: The first question is, ‘How old are you.’ And then second question, ‘Do you have any experience in investment?’ Third question is, ‘Are you a conservative or aggressive?’ Fourth question is, ‘What would you do if the market is going down? Are you going to put your money more or do you withdraw the money?’ And then the last question is, ‘Are you afraid of inflation?’

Tim: It sounds like basically, you’re trying to get a sense of the customer’s risk profile and sensitivity to inflation which is probably like how long they plan to invest, right?

Jin: Yes. But even you answered the very simple five questions, we put some kind of algorithm for the profiling, then we analyze not only the risk return but also your tendency for investment.

Tim: Okay. Actually, I want to dig deep into that a little later on. But before that, tell me a bit about your customer. Who’s using THEO? Who are Money Design’s customers?

Jin: Yes. Actually, 51% of our customer is under 30s and then 15% of our customer is 20s. Compared to our competitor like a large financial institution, when we look at the THEO customer, only 5% or 7% of customer is 20s. So we provide our service for the younger generation.

Tim: For example, you used to work at Nomura, which is the largest, probably most conservative securities firm in Japan. Do you think that the interest traditional financial companies have and these kind of robo-advisors is the new technology or do they think of it more as a way to reach millennial and younger investors?

Jin: That’s a good question. When we talk about the robo-advisory service, it is very easy to create. You can put some algorithm for their profiling. It’s very easy. Actually, in Japan, there’s over 20 robo-advisory services; however, almost all of the services is just providing for their customer. There’s no new customers. For instance, 89% of our customer doesn’t have extensive investment. 43% of customer has little experience for the investment; however, maybe they fail investing in FX.

Tim: Sure. Almost everyone fails at FX.

Jin: When we look at our customer, very young generation started the investment services for the first time and then choose THEO. That’s our customer demographic.

Tim: Okay. So it’s reaching a whole new and important customer base. You mentioned that robo-advisors themselves can be made using very, I don’t want to say, low technology but it’s simple algorithms.

Jin: Yes.

Tim: You guys were founded in 2013. You didn’t raise the first ground until the end of 2015, and you’ve launched THEO, congratulations, February 2016.

Jin: Thank you very much. Yes.

Tim: What took so long? What was going on during that time?

Jin: Before that, we didn’t have any license, local transfer license. We can advise to the clients but we cannot provide a product to the clients. First, we studied advisory services. Clients opened account in the United States and then we advise them how to invest. We got the license 2015, and then we can provide here in 2016. That’s the reason. It’s very tough to get the license in Japan.

Tim: So strictly for compliance reasons?

Jin: Compliance reasons.

Tim: I would imagine that with your first minimum viable product, it must have been very hard to reach that millennial demographic.

Jin: We differentiate, two strategy. First is a UI and the UX, second is the branding. Our UI/UX is very simple. Large finance institutions maybe put something and put something and put something and then the website get complex. Almost all of our competitors provide a very complex UI and UX. First, we make it very simple and easy to register and easy to start. That’s our first differentiate strategy. And then second is the branding. THEO is the name of Vincent Van Gogh’s younger brother. Vincent Van Gogh could sell just one picture when he lived. However, Theo supported for the mental side and also the money side. That’s the reason Gogh could write a picture for his whole life. Our concept of the THEO is we care about the money, you can enjoy the life.

Tim: Well, I can certainly see the appeal. You’re telling people who are confused by the complexity, “No, no, it’s very simple. We’ll handle it,” easy to understand interface, doesn’t cost much to get started. Let’s talk about that complexity. On the website, you’re talking about over 6,000 ETFs around the world. Is your trading universe really 6,000 ETFs, because most robo-advisors stick to between 20 or 40 ETFs.

Jin: Our ETF universe is 6,000; however, we traded about 30 to 40 ETF per customer.

Tim: So THEO really looks at 6,000 ETFs?

Jin: Of course.

Tim: All over the world?

Jin: Yes.

Tim: Wow. Some are denominated in yen, some in dollars, some in pounds?

Jin: Of course. Now, we use almost New York-listed ETF. Currently, we didn’t use Tokyo-listed ETF because the liquidity is poor and the cost is too much for the trade and the performance is not good compared to the New York —

Tim: Management fees are very high in Japan.

Jin: Yes.

Tim: Most robo-advisors like Wealthfront, for example, they seem to be based on very traditional asset allocation models with as you’re mentioning X% to US equities, Y% to international equities and bonds, and then they rebalance once a quarter or once a month.

Jin: We rebalance allocation every month. We set that balance first, right? Maybe growth 40%, income 40%, and inflation hedge 20%. And then maybe next month, the market collapse or up and then we rebalance it 40:40:20.

Tim: You mentioned that THEO uses AI to do portfolio construction. Is it actually an AI or is that something that’s more aspirational, something you want to do in the future?

Jin: We could research with the Kyoto University about AI; however, we believe that AI for the finance is good for trading; however, AI for the portfolio construction, there’s no kind of evidence what is good, what’s not. We keep researching about AI how we can leverage the AI for the profiling and then trading side also.

Tim: It’s fascinating because finance is one area that despite being incredibly rich in data, has been incredibly resistant to AI.

Jin: Yes. Problem is a factor of the investment change dramatically. You cannot forecast anything and the factor change quickly and dramatically.

Tim: I think that’s the general philosophy behind asset allocation in general, right


Jin: Yes.

Tim: On average, you’ll do much better with low cost diversified assets than you will trying to pick the best stocks.

Jin: The problem for the younger generation, maybe they know low cost is good and then diversification is good; however, they don’t know how to choose it. So many expert and then financial advisor or commentator said index is the best product for the investment or you should choose a low cost ETF or something like that. But what is the purpose for the investment? They want to invest the money for their retirement or maybe they invest the money for some travel or buy something; however, when you go to the bookstore or a website, everything say that the best investment is ETF or best investment, you choose the low cost but for what?

Tim: None of that advice is necessarily bad advice, it’s just it depends on what your goal is. Since you’ve been able to attract a whole new demographic, what has been your customer acquisition strategy? Have you been doing mostly social marketing or direct marketing or partners? How have you gone about getting customers?

Jin: Yes. We use three strategy. One is of course the internet advertisement and the one is media and then one is partnership. Our brand message is very unique. The media love our story, not only for the financial media but also for the fashion media or something like that. And then also, we partner with a local bank. In Japan, there is almost no unbanked customer. Almost all customer owns a banking account in Japan; however, there are too many unadvised customer in Japan. They own the banking account but they never provided some kind of advice for the financial side. Bank in Japan is just a function.

Tim: In fact, that’s one of the main drivers behind this whole fintech boom is the Japanese banks have been partially out of regulation but largely out of business culture.

Jin: Yes.

Tim: You’re going to be doing a deal with Shinsei Bank, right?

Jin: Yes.

Tim: Tell me about that deal.

Jin: Okay. The Japanese bank program is of course they own the large number of customers but the customer just focusing on deposit, send the money or something like that, just a function.

Tim: Yes. I can see it’s a huge win for both sides because you’re providing a service that Shinsei does not. But is this something that you’re doing as a white label service for Shinsei or is Shinsei just getting a commission on the business that refers to you? What’s the structure of the arrangement?

Jin: Our partnership brand name called THEO Plus Shinsei Bank or THEO Plus Local Bank. And then our partner bank introduces the customer to us and then our partner bank get some kind of introduction fee. Sometimes we shared our profit.

Tim: Okay. You’re mentioning before about reaching the millennials. Most of the millennials aren’t reading financial news and things like that. The story behind THEO, as you mentioned, was a great way to expand outside of financial news. In internet advertising, finance-related terms are the most expensive key words to bid on so it’s incredibly expensive to advertise for finance. In the internet advertising, the social advertising, did you also use that strategy of not telling the financial story but telling a related story?

Jin: Yes. We have our owned media called . We pick some very famous people for young generation like Mr. Kuriki. Mr. Kuriki is the mountain climber, and then Mr. Inoto, artist or something. We did interview for them; however, there’s no THEO advertisement but the end of the article, there is THEO. We sponsor that.

Tim: So the stories themselves, they weren’t about finance. They were —

Jin: Their life. We focus on their life. Why they enjoy their life and then we create a fan through social media. For instance, our like click of the Facebook is twice larger than our competitor. For instance, the SBI Shoken, their number of like is smaller than us.

Tim: That’s actually not too surprising. I know what you mean.

Jin: The number of the account is 400 times bigger than us but the number of fan is small.

Tim: Exactly. But this is really interesting because I think the concept of brand loyalty in Japan and brand marketing is so strong that even though the contents you’re providing has nothing to do with THEO or finance in general, that loyalty was enough to drive a whole new audience to at least consider using THEO.

Jin: Yes. It’s very tough for customers how to choose a financial service. There’s no some kind of material.

Tim: Yes. Either there’s nothing or there’s just too much information.

Jin: Yes. So they cannot choose it. Maybe some people think that the low cost product is good; however, low cost doesn’t match sometimes. Of course we provide the very local services; however, we think the concept or how you make a fan of the product is much, much better than just focusing on the function of the financial product.

Tim: What kind of stories did you write? What kind of people did you feature? You mentioned a mountain climber talking about his life.

Jin: And then the artist, and chef, the fashion designer.

Tim: Just this huge range of lifestyle?

Jin: Lifestyle.

Tim: That’s fantastic. The deal with Shinsei, is that trying to expand your user base into a more traditional, more conservative investors or does Shinsei see it as a way of expanding their business into more millennial investors?

Jin: Of course millennial. The Japanese banks program, there are huge number of customers but those customers is not fan of banks.

Tim: It’s hard to be a fan of a bank.

Jin: Yes. So they can reach to them. They want to reach to them and then they want to provide some financial service to them; however, the younger generation think if the bank sent me an email about the financial product, maybe high risk and too cost for the product. They want to change the image of the services.

Tim: Okay. That makes sense. It’s a marketing function. I mean, behind the scenes of THEO Plus bank name, it’s all the same services and all the same customers?

Jin: Yes. One of the problem of the Japanese financial industry is IT vendor provide customized system for the bank or financial center. And then maybe some kind of people, “We would like to create that kind of robo-advisory services. Could you create some of our original services?” And then every vendor said, “Okay. I can create it. It cost a lot.” “It’s okay. We want our brand.” But after that, what happened? The business is not so easy and then they remunerate the cost, cost, cost.

Tim: The maintenance costs are always far more expensive than the initial development cost.

Jin: Yes. And then we provide the scalable product. THEO Plus is almost the same with THEO. So if we update THEO, THEO Plus update automatically. The banks doesn’t have to pay for the renewal.

Tim: So far all of your growth has come through this innovative social media outreach but do you view these banking and financial partnerships, is that what’s going to drive future growth?

Jin: Yes. After we launched the first year we’re focusing on organic growth because sometimes it’s easy to partners send their customer to us but there’s no strength for the products. First, we need to know the customers and we need to know the market. And then we need to know what is the best product for the conversion.

Tim: That’s true, and the partners would not take you seriously until you’ve proved that in the marketplace. At the end of last year, you guys had about $45 million under management, which is small by US standards but the biggest in Japan for the robo-advisors. What is the target asset under management you need to get profitable?

Jin: Our target is $1 billion.

Tim: That’s mainly going to be achieved through partnerships with financial institutions?

Jin: Half and half, we believe. Yes.

Tim: Okay. That’s quite an aggressive target. $500 million through social media and direct outreach?

Jin: Yes. However, we should think away of the pool ocean of financial industry. In Japan, provided by no more asset management, 86% of the customers never owns a mutual fund.

Tim: Really?



Jin: Yes, in Japan. And then when we look at equity account in Japan, their penetration rate is about 20%. So 80% of customers never owns equity accounts or the mutual fund accounts; however, every financial industry focusing on the 20%.

Tim: Right. You think you’re able to draw people who wouldn’t normally be investing in equities into this program?

Jin: Mm-hmm.

Tim: Okay.

Jin: There is over $10 trillion in deposit in Japan. So there’s a huge potential in Japanese market.

Tim: Well, over half of Japan’s financial assets are sitting in cash.

Jin: Yes, that’s correct. So everyone knows it; however, every financial institution just focusing on the function – equity, mutual fund, cost. What we should do is tell the concept of the product and then tell the concept of what we would like to provide for them. After client use our service, what can achieve? We want our customer to achieve something in their life.

Tim: It sounds like the real value you’re building up long-term is becoming a trusted financial brand.

Jin: Yes.

Tim: Are you planning on offering other financial services like insurance or —

Jin: Possibly but we cannot think it now because our AUM, Asset Under Management is too small. First, we should reach the profitable —

Tim: You have to focus on getting this right.

Jin: Yes.

Tim: Okay. But something in the future maybe.

Jin: But we believe the safest asset in the world is a diversified product.

Tim: That message, I think, is really getting out now. Both in America and in Japan, there’s Wealth Navi, Eight Security, even Yahoo has been talking about getting into this kind of thing.

Jin: Yes.

Tim: It’s not a hard business to get into from a technical side. Moving forward, do you think that you’re going to have other companies trying to copy your model, where they’ll build up a lifestyle brand or a company like Yahoo would pose a bigger threat to you because they have a stronger brand than like Tokyo Mitsubishi UFJ Bank?

Jin: Yes, true. As you said, it’s easy to copy the technically but it’s not easy to copy our concept and then our brand. What we would like to do is first have a very strong brand, very strong trust for the customer, maybe the innovator side. And then after that, expand it to the average users. When we look at the iPod or iPhone, some innovator use the iPhone. After that, it expanded to the average users. So we think about the same business model. Of course it’s easy to copy iPhone technically but there’s a core fan of iPhone in the world. I really believe THEO or robo-advisor is almost the same. It’s easy to copy it but it’s not easy to copy our concept or brand.

Tim: Okay. So it really is a brand play?

Jin: Yes.

Tim: I think it makes a lot of sense. As a brand play, you’re not competing on price. If you look at the US market, for example, the robo-advisors are almost strictly evaluated based on price. This is still new in Japan. In the US, the average price is about 0.3%, and Money Design charges 1%.

Jin: Yes.

Tim: Do you think in the future you’re going to feel pressure to lower those prices or do you think that Japan market will remain more expensive or do you just think the THEO brand will allow you to charge a higher price?

Jin: We cannot deny about the future of the price. Maybe it depends on the market; however, we don’t want to jump on the price competition. Japanese market is made of people who never invest in investment products. As a result, their price sensitivity is not high. So if we can provide the added value to them, maybe 1% or 0.5%, it doesn’t matter. What can I get from THEO is much, much better for them. Also, we believe 1% is fair in Japan because our user put their money in yen and then we change the yen to dollar. We buy over 30 ETF and then we rebalance it. We allocate every month. And then after they withdraw it, we exchange it dollar to yen.

Tim: Yes. It’s a lot of management. Do you yen hedge the whole portfolio?

Jin: No.

Tim: Okay. It makes sense that’s where the growth is going to come from. Over half of Japanese assets are in cash which is crazy. But most individuals when they think of their long term financial planning, they are thinking about pensions and land and insurance products. Short term, it makes sense you can get a lot of the early adopters on by building a strong social brand. But how are you going to do the very hard work of convincing the bulk of Japan, particularly the older people who are the ones that have all the money to change their attitude and to invest in a diversified portfolio?

Jin: Recently, we acquired some technology companies and then we partner with Simplex, which is the best financial IT company, to create some kind of asset management system to local bank. First, when the young generation customers can use THEO for small amount of money for the investment; however, someday, they realize, “I need to invest more or I want some advice from the human.” And then they’re the stronger brand in the local bank. So customer use THEO and then they are using a THEO Plus Local Bank and then they think, “This bank provide a very good product, THEO. Maybe I can ask advice over the ask management.” And then the local banks financial can provide financial advice to the customers. At that time, we would like to provide the financial IT product to the local bank. The younger generation goes to old, at that time we can provide the financial advice too to that bank.

Tim: Okay. That makes perfect sense. So the financial institutions are using THEO to reach a younger demographic and THEO is using the financial institutions to reach that older demographic.

Jin: Yes. It’s a very long term strategy for us.

Tim: Yes. I guess it has to be. I mean, so much of the Japanese financial industry, the traditional one is built on non-transparency and high fees. I think that was fine during the bubble years where everyone was making money but I think it really hurt Japan since the early ‘90s, certainly. In the ‘90s and around 2000, the US saw a lot of disruption in the financial sector by low cost brokerages, and even forced traditional brokerages like Fidelity to drop their commissions to next to nothing. ETFs put really tremendous pressure on mutual funds to drop their fees. We haven’t really seen that happen in Japan yet. Trading costs are still high. The management fees on mutual funds are huge. Do you see that changing in Japan?

Jin: We are not disrupting the bank or brokerage but we are disrupting the mind of the user. Japanese people is too conservative. They think investment is evil and think that cash is king; however, maybe 10 years later or 20 years later, what happen we think about Japan. The growth rate of Japan is too small and then too much debt. There’s no maybe pension for the future. So they need to do something. Maybe banks or broker dealer cannot change because they have a legacy asset or legacy people. So what we should do is not disrupting bank because they’re infrastructure of the industry and infrastructure of the country. However, we can do something about the mind of the Japanese people, and then they can invest their money through THEO and then we can save the Japanese future.



Tim: I think that that probably is a big part of it. In the US, for example, the pressure that came on to lower fees was a result, I don’t think so much of new technology but because of the changing of the tax laws for personal IRAs, suddenly lots and lots of people were trading stocks and there was tremendous pressure. You were saying that so far, only 20% of Japanese trade stocks at all.

Jin: Yes.

Tim: Maybe as that number increases, there’ll be more pressure on companies like Nomura and such to lower those costs.

Jin: Yes. I can give you a very interesting example. Nomura provide a DC, Distributed Contribution plan; however, almost 90% of people choose deposit for their DC plan.

Tim: Just depositing cash?

Jin: Yes. Even DC plan. Of course, we have NISA. It’s like English ISA plan; however, the penetration rate is maybe 10%. The government provides a very good structure for their investment side; however, people cannot choose it. That’s the problem.

Tim: So it’s not structural at all.

Jin: Yes. It’s not a structure problem. It’s the mind problem. If you cannot change the users’ mind, nothing would happen in Japan even there’s a good structure.

Tim: I guess products like THEO, robo-advisors might be a very good sort of middle step to becoming more involved with managing your own finances.

Jin: Yes. So we provide the THEO and then this year we started Ideko which is the DC plan for the individual site like IRA plan in the United States. Once we can change our customers’ mind, maybe they can use THEO and then they can use the DC plan and then they can put money for investment, not a deposit site.

Tim: Before we wrap up, let me ask you what I call my magic wand question. That is, if I gave you a magic wand and I told you that you could change one thing about Japan, anything at all, the education system, the way people think about risk, the way people think about investments, anything at all to make it better for startups in Japan, what would you change?

Jin: Their mind for trust.

Tim: Trust?

Jin: Yes, trust, because so many Japanese people trust legacy institution.

Tim: Okay.

Jin: Particularly for the financial side, even startup provider very good financial products, when customers compare to the traditional bank, they believe traditional banks is trustworthy. That’s the reason they cannot transfer their money from the traditional bank to startup.

Tim: Do you think that’s just a reluctance of Japanese to try new things or is it a deeper feeling that older companies or bigger companies are, by definition, more trustworthy?

Jin: This is kind of Japanese culture because when we look at the US market 10 years ago, the top 10 market value company is quite different from now; however, when we look at Japan, almost the same.

Tim: Really?

Jin: Yes. Toyota, Mitsubishi, and NTT or like that. It’s almost the same even 10 years ago or 20 years ago. Japanese people believe large corporations too much.

Tim: It sounds like it’s almost sort of chicken and an egg problem. They believe that large companies are more stable and safe because in fact they are in Japan.

Jin: Exactly.

Tim: You’d use the magic wand to let them take a few more risks, try out some smaller companies, and give them the chance to grow into those big companies?

Jin: Yes.

Tim: Excellent. Well, listen, Jin, thanks so much for sitting down with me.

Jin: Thank you very much. My pleasure.



And we’re back.

I was really impressed by Jin’s strategy and so far, successful execution of not competing on the price. In the short 10 medium term, I think that will be a sustainable strategy. When the US created the IRA in 1974, many Americans started investing. By the time the public internet rolled around at the end of the century, US investors were prime to look for low costs. Yes, don’t let anyone tell you otherwise. Low costs and low fees are extremely important to any investor. As an investing company, however, they’re extremely annoying.

Japan is not yet cost-sensitive. Traditional brokers here are quite expensive and mutual fund fees are very high. The main objections from Money Design’s customers seem to be focused on convenience and a general lack of awareness rather than on price. The fact that other Japanese robo-advisors charge fees that are 50% lower than Money Design but have only managed to attract 10% of the assets under management shows that Jin’s strategy is working, at least for now.

As we see more awareness and transparency in the Japanese financial sector, it’s fairly certain we’ll be seeing strong downward pressure on fees as well but it’s hard to say when that will happen. Also, in the working great for the time being category, is their partnership strategy. Money Design’s partnership with banks is an example of an almost perfect startup partnership. The banks are giving them access to a much larger market and Money Design is giving the banks access to a new offering. Unless there is an acquisition however, these partnerships tend to be short-lived. As both startup and enterprise start looking everywhere for growth opportunities, eventually, interest become misaligned and a falling out occurs. Of course, by the time that happens, the startup has often grown to the point where it no longer needs these partnerships, and it looks like Money Design is on a great trajectory.

If you’ve got some insight on online banking or fintech in general, Jin and I would love to hear from you. So come by and let us know what you think. And when you drop by, you’ll see all the notes and links that Jin and I talked about and much, much more in the resources section of the post.

But most of all, thanks for listening and thank you for letting people interested in Japanese startups know about the show.

I’m Tim Romero and thanks for listening to Disrupting Japan.