Japan's structured products market saw a significant drop-off in terms of issuance and sales volumes during the month of July, with a total of 60 products being added to the SRP database, which generated sales of just over US$1.1bn. This compares with some $3.2bn from 171 products being sold in June, and over $1.2bn and 93 products in July of 2016.

The drop is in line with the broader theme of falling volumes in Japan in recent years, with sales consistently and well below maturing volumes since 2014. The outstanding volume on the market recently peaked in 2013, after strong sales over the previous three years well outpaced maturities, but has dropped off over 16% since then to $172bn as of July 31, 2017. Meanwhile, sales have more than halved since 2011 to below $20bn in 2016, while maturing volumes are down 17% over the same period, but stood at $29bn last year, nearly 46% higher than sales.

This compares with the volume of outstanding products in the whole Asia-Pacific region dropping less than 1% over the same period to $832bn, and an 8% global drop to just over $2,007bn. Furthermore, sales in Apac have dropped about 23% in 2016, as compared with 2011, although 2015 sales were nearly twice as much, at over $407bn. Global sales last year were down 26% from 2011, while 2015 sales were 10% higher from five years prior.

From a market point of view, Japan has not seen large shifts in product wrappers, with virtually all product categories of recent years, namely deposits, registered notes and funds, dropping broadly in equal magnitude and in line with the wider decline. Notes still account for about 60% of the market, while some 30% remain in deposits as of July 31, 2017, according to the SRP database.

More significant shifts have taken place in payouts, with dual currency and callable products generating a far smaller proportion of sales on the Japanese market, according to the the SRP database. The two structures were seen in 12% and 2% of the marketed volumes in 2017, respectively, as compared with 19% and 14% in 2011. Digitals have also seen a disproportionally large drop in sales, while floaters have all but disappeared. In contrast, worst-of structures are the only one of the more mainstream structures to have seen growth in sales, while protected trackers, reverse convertibles and knockout products have gained market share, and are now all seen in over 20% of the market, up from 13-15% in 2011.

Conversely, FX underlyings have seen a large drop-off in utilisation, with the Nikkei 225 climbing to account for just under 40% of sales in the market last year, up from 23% in 2011, while the S&P 500 has emerged a popular underlying in recent years to generate over 10% of sales in the first seven months of 2017.

Notably, the distribution network in Japan has grown in granularity in recent years, with the top five distributor groups accounting for just over 41% of sales in 2017, as compared with over 60% in 2011. This has been driven by lower sales proportion from the biggest providers, according to the SRP database, as opposed to a greater number of distributors. Less providers have been active recently, with a total of 50 groups generating sales on the market so far this year, as compared with 65 in 2011.

The market is largely dominated by domestic providers which have no structured products activities outside of Japan. However, there is a notable foreign presence on the market, with ANZ standing out as the largest overseas-based distributor in Japan, as the ninth largest provider over the past 6.5 years.

Notably, Natixis has announced plans to expand its presence in Japan, aiming to increase its staff by almost 50%, to 120, over the next three to five years. However, Natixis only covers institutional investors, such as banks, asset managers, securities companies, and pension funds. "We are a wholesale bank, and don't intend to directly target retail investors," said Laurent Depus, senior country manager, Japan, and president and representative director of Natixis Japan Securities, highlighting that to enter the country's retail market is always a challenge for foreign providers which lack strong distribution capabilities.

"Japan's retail market is almost impossible to crack for foreign firms and we have seen how most of the banks that were active in the retail market have folded up their operations and pulled out of the market with the exceptions of a couple of (Swiss) banks that are active in the private banking segment," said Depus. "We have seen also a number of other banks trying to enter this market and failed, so we will remain focused on the areas where we can add value to our clients."

Click the link to view the July market review for the Japanese market.

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