Starting yesterday, Japanese investors can open new tax free accounts that will go live at the start of January. The new scheme, Nippon Individual Savings Accounts (NISA) is modeled on the UK’s ISAS program. It will allow individuals to invest as much as JPY1 million a year for five years with no tax on capital gains or dividends.
The main rule is that the investment has to be made in stocks, equity investment trusts, ETFs or REITS. Government bonds, bond funds and the like would not qualify for the new program. Also the new accounts are not transferable; where the account is opened, it must stay.
Reports suggests a few million accounts have been opened. A survey by Nomura Asset Management suggests the overall total in the NISA accounts could be more than double the government’s JPY25 trillion target 2020 target. To prepare, an estimated 127 new investment trust were launched last month, the most in a single month since 1998.
Although the scheme has not yet fully been implemented, there is some concern that JPY1 million a year is to low of a cap. There is also some discussion of extending it for ten years rather than just five year periods.
While much attention has been given to the growing disparity of wealth (and income) in the United States, the divergence in Japan is a significant obstacle for NISA, besides the cap on contribution and duration. The average financial asset per Japanese household is a little more than JPY11 mln. However, the average is a bit deceiving in the sense that the financial assets are concentrated in the hands of the elderly. The median household has JPY4.5 mln in financial assets and a full quarter have no financial assets whatsoever.
Another significant obstacle is the investment culture itself. Japanese households have about JPY1,590 trillion in savings (~$16 trillion). According to BOJ data, a little more than half is in bank deposits (earning practically nothing). Only around 8% of the savings is invested in equities. And here again, the disparity of wealth shows up. According to survey data by Mizuho, some 90% have never invested in a mutual fund and 80% have never owned a single stock.
On the other hand, the strong appreciation of Japanese shares (year-to-date, Nikkei is up 36.3% and the JASDAQ is up 71.4%) may induce investors. In addition, with deflation being beaten back, real interest rates have turned negative in Japan and this may also provide some incentive to shift from conservative deposits to riskier investments. To square the circle, some Japanese brokers suspect investors will prefer equities with high dividend yields.
Lastly, NISA may offer a vehicle for Japanese households that have financial asset to shift funds from existing accounts to avoid the increase in capital gains tax. The capital gains tax is scheduled to double to 20% starting in January.. Some fear that the capital gains tax hike will produce selling of Japanese shares at the end of 2013.
This piece is cross-posted from Marc to Market with permission.