Japanese savers are poised to pump $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

Nomura Sees Tax Breaks Driving $690 Billion Into Stocks

Japanese savers are poised to pump $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 program, which opens for applications tomorrow, will allow individuals to buy 1 million yen ($10,143) 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 yen through 2018, with 65 percent of users pulling money out of bank deposits to purchase securities, estimates from Nomura Research Institute show.“I am considering investing in Japanese stocks for the first time in my life,” said Toshiya Enomoto, a 42-year-old engineer whose parents likened equities to gambling. “With the heavy tax burden in Japan, these accounts are really attractive.”

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 $8.5 trillion in deposits as of March, the most ever, central bank data show. Diverting some of that money into stocks, where the Topix (TPX) index surged 42 percent this year, would help Prime Minister Shinzo Abe provide capital to spur growth in the world’s third-largest economy.

Equities made up just 7.9 percent of household assets as of March, compared with 34 percent in the U.S. and 15 percent in the euro zone, 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’s up from 21 percent a year earlier, foreign buyers made up 63 percent.

Topix Surges

The Topix soared 69 percent since elections were announced in November that brought Abe to power. Shares have risen more than any other developed market as record stimulus from the Bank of Japan improves the outlook for growth. Investments in Japanese equity funds climbed by the most in May since the Investment Trusts Association started compiling such data in March 2010.

“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. “Coupled with the government’s policies to get the country out of deflation, the program will promote the shift of people’s money to stocks.”

Retirement Savings

While Japan’s pool of retirement savings outstrips that of any other nation, it’s not growing fast enough. The nation’s 2010 population of 127 million was the world’s oldest and will shrink 17 percent by 2055, the fastest decline among developed economies, according to United Nations data.

Abe is caught between trying to curb a national debt that the International Monetary Fund estimates will reach 245 percent of gross-domestic product this year and funding pensions. The government projected in 2009 that the 140 trillion yen set aside for 34 million workers will run out by 2031.

“I have fears for my future as the public pension is expected to dwindle given worsening government debt,” said Reiko Takagi, a 66-year-old housewife who started investing in the 1980s. “I’m always seeking a way to increase funds on hand so it would be silly of me to not take advantage of this tax-break program.”

Tax-Free Investing

The NISA system, based on the U.K.’s Individual Savings Accounts, is scheduled to start in January and run through 2023. It allows tax-free investment of the equivalent of about $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.

The U.K. plan, which began in 1999, allows as much as 11,520 pounds ($17,400) in tax-free investment each year. There were 2.9 million active accounts as of September 2012, according to government figures.

Abe’s government said in a growth strategy report published in January that the NISA program is designed to help Japan’s households boost their retirement savings and expand the flow of funds necessary for the country’s economic growth.

Preliminary account applications before the official enrollment period starting tomorrow had reached 3.2 million by Aug. 9, according to a survey of 128 brokerages conducted by the Japan Securities Dealers Association.

Behavior Change

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 2012, dumping shares worth 21 trillion yen in the span, according to data from the Tokyo Stock Exchange. The Topix is 58 percent below its all-time peak in 1989. Some 363 trillion yen of wealth was erased between then and the market’s bottom in 2003.

“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., which oversees about 6.1 trillion yen ($63 billion). “Elderly people have more funds to invest but they tend to avoid risk.”

More than 90 percent of Japan’s sovereign bonds are owned locally and the 10-year yield of 0.68 percent is the world’s lowest. Outstanding government debt exceeded one quadrillion yen in June, according to the Ministry of Finance.

Equity Shift

Satoshi Nojiri, head of research at Fidelity Investments Japan, says 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,” said Nojiri. “A typical family with parents and two children can invest a total 20 million yen tax-free in the accounts. This will be a steady stream of money to risk assets.”

The public interest hasn’t gone unnoticed by brokerages, which are making special offers to lure new clients. SBI Securities Co., Japan’s biggest online brokerage, announced this month it will waive stock-trading fees on the NISA accounts for the first year. Shares of parent company SBI Holdings Inc. surged 66 percent this year. Matsui Securities Co. (8628), which will also defer trading charges, jumped 44 percent.

“We’ve been receiving many more applications for the accounts than we expected,” said Ken Suzuki, general manager in the corporate planning department at SBI Securities. “NISA will be an great opportunity for people to start investment and that’ll lead to more active stock trading.”

Other Attempts

There have been other government policies that tried and failed to promote the shift of funds, and NISA is set to join them, said Yasuhiro Yonezawa, professor of finance at Waseda University in Tokyo.

“NISA will have limited impact on the investment attitude of Japanese people,” said Yonezawa. “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.”

In the five years after stock trading fees were deregulated in 1999 to draw more investors, the proportion of equities as household financial assets fell to 9 percent from 9.9 percent, according to Bank of Japan data.

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.

Taking Profits

“Individual investors will sell shares toward the end of the year before the tax rate is raised back,” said Takamatsu. “Many are holding unrealized gains due to the Abenomics rally and that will spur profit-taking.”

More than 174 trillion yen was added to Japanese stock values from a November low through Sept. 27 as the Topix recorded the biggest gain among developed markets. The gauge’s 27 percent climb from November through January was its steepest three-month advance since 1993. Japanese equity trusts saw inflows for seven consecutive months through August and 934 billion yen was invested in May, Investment Trusts Association data show.

Of the 5,000 people surveyed by Nomura Research Institute (4307) in July, 65 percent said they’d transfer funds from bank deposits into NISA, while 23 percent said they’d sell equities held in normal accounts and replace them with NISA assets. The responses suggested 28 trillion yen to 68 trillion yen will flow into the accounts in the first five years of the program.

“Given that Japanese people, especially those of working age, can’t rely on public pensions, there’s no doubt that they’ll shift money to stocks if markets remain steady,” said Atsuto Sawakami, whose namesake fund has 297 billion yen under management. “The funds through the NISA will boost Japan’s stock markets in due course, especially if the program becomes permanent.”

To contact the reporters on this story: Masaaki Iwamoto in Tokyo at miwamoto4@bloomberg.net; Satoshi Kawano in Tokyo at skawano1@bloomberg.net

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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