Japanese savers are poised to pump US$690 billion into stocks to benefit from new tax breaks as the government tries to avert a retirement cash crunch in the nation with the world’s oldest population and lowest interest rates.
The Nippon Individual Savings Account (NISA) program, which opens for applications today, will allow individuals to buy ￥1 million (US$10,140) a year of risk assets that are exempt from taxes on dividends and capital gains for five years.
The plan will draw as much as ￥68 trillion through 2018, with 65 percent of users pulling money out of bank deposits to purchase securities, estimates from Nomura Research Institute showed.
“I am considering investing in Japanese stocks for the first time in my life,” said Toshiya Enomoto, a 42-year-old engineer.
Japan’s government is encouraging citizens to switch money out of bank accounts that pay interest of 0.02 percent, not enough to fund retirement in a nation where 26 percent of the population is already 65 or older, according to data compiled by Bloomberg.
Households held US$8.5 trillion in deposits as of March, the most ever, central bank data show.
Equities made up just 7.9 percent of household assets as of March, compared with 34 percent in the US and 15 percent in the eurozone, the most recent Bank of Japan data show.
Domestic individual investors accounted for 28 percent of Japanese share trading in August, according to Tokyo’s bourse.
While that is up from 21 percent a year earlier, foreign buyers made up 63 percent.
“The tax break could be a catalyst for a change in attitude toward investment, which is more necessary than ever given the aging society and expected inflation,” said Naoki Kamiyama, chief equity strategist at Bank of America Corp’s Merrill Lynch unit in Tokyo.
The NISA system, based on the UK’s Individual Savings Accounts, is scheduled to start in January and run through 2023.
It allows tax-free investment of the equivalent of about US$10,000 a year in stocks, exchange-traded funds and investment trusts, while bonds and currencies are not covered.
The tax exemption lasts five years and compares with levies as high as 20 percent outside the plan.
Buying stocks would be a change in behavior for most Japanese households.
Individual investors were net sellers of local equities for eight of 10 years through last year, dumping shares worth ￥21 trillion in the span, according to data from the Tokyo Stock Exchange.
“Individual investors haven’t bought Japanese stocks simply because the markets have fallen in the past two decades,” said Isao Kubo, a Tokyo-based equity strategist at Nissay Asset Management Corp.
Satoshi Nojiri, head of research at Fidelity Investments Japan, said the tax breaks will trigger a shift to equities, citing the response he saw at about 50 educational roadshows across the country since June.
“Seminars for NISA are always full and I am bombarded with questions that usually run past the scheduled closing time,” Nojiri said.
“A typical family with parents and two children can invest a total ￥20 million tax-free in the accounts. This will be a steady stream of money to risk assets,” Nojiri said.
However, Yasuhiro Yonezawa, professor of finance at Waseda University in Tokyo, said there have been other government policies that tried and failed to promote the shift of funds, and NISA is set to join them.
“NISA will have limited impact on the investment attitude of Japanese people,” Yonezawa said. “I doubt they’ll behave rationally when it comes to asset management as they’ve been unresponsive to incentives offered by the government in the past.”
The expiration of another incentive plan for investors at the end of this year will also limit NISA’s impact, according to Ichiro Takamatsu, a fund manager at Bayview Asset Management Co.
Levies on dividends and capital gains will return to 20 percent after being cut by half for the past 10 years, Takamatsu said.
“Individual investors will sell shares toward the end of the year before the tax rate is raised back,” Takamatsu said.