Ichiro Suzuki
The NISA or the Nippon Individual Savings Account is a tax-free investment scheme created by the Japanese government in 2014. They did it for the purpose of promoting investments among the Japanese people who have been known for their extreme risk-aversion. The government borrowed ideas from the IRA in the U.S. and the ISA in the U.K. The scheme’s name is patterned after the ISA, and the NISA’s N stands for Nippon, which is Japan. Facing the country’s rapidly aging population, the Japanese government thinks it imperative to make its people financially sound, and to make them turn away from risk-free assets, notably bank deposits.
Another reason for the government to promote investments is not-so-bright long-term outlook of public pensions. They are not a ‘funded’ scheme, and are based on a pay-as-you go system, in which the working age population supports the retired cohort. The former has been shrinking while the latter is on a steady growing trend for decades. Though it might not go bankrupt, the public pension system in the future would be capable of making only smaller amount of payments, especially adjusted for inflation, to the beneficiaries than today as this trend persists. For fear of a potential of a substantial number of aged people in great financial difficulties, the Japanese government took a step to create a tax-free investment scheme, and launched the NISA in 2014 in a relatively modest fashion. At the outset, the NISA allowed tax-free investments up to ¥1.2 million (approximately $10,000 at the exchange rate at that time) for every individual who is 18 or older.
In 2024, the NISA scheme has received a substantial upgrade, which has created a new type of NISA accounts to replace the original ones. The new NISA has expanded tax-free investment limit to ¥18 million. The overhauling allows investors to have two NISA accounts, the old and the new ones, if they already had an old account by the end of 2023. On top of the investment ceiling, the new NISA accounts stay tax-free indefinitely whereas the original ones were granted a tax-free status only through 2028. The move is a display of seriousness of the government on long-time financial well-being of its people.
Japan’s households have been notoriously risk-averse in their finances. The household sector financial assets amounted to ¥2,121 trillion at the end of September 2023. Of the ¥2 trillion, over 60% was deposited with banks, in a land of zero interest rate. The overwhelming majority of the people makes not losing money, not even a penny, as their highest priority, preferring principal-guaranteed bank deposits up to ¥10 million per person with each bank. This ultra conservative attitude toward money was not entirely irrational. For almost three decades beginning 1990, investing in Japanese stocks was almost a sure way to lose money as the Tokyo Stock Exchange posted the world’s worst performances for a generation. In 2012, the Nikkei index was still trading almost 80% below its peak value that was registered at the end of 1989. Daily headlines of the Japanese yen’s surge made people so scared of potential foreign exchange losses, even though the markets outside Japan, notably the U.S., boomed. Amid mild deflation, defending the principal amount still increased real value of deposits or cash under the mattress. This was not a bad deal after all. Nonetheless, failure to grow their financial assets has presented a serious problem, which they didn’t foresee, in the long run, as the government’s PAYG pension system has its limits and private sector employers are terminating defined benefit pension plans. Above all, the government and the Bank of Japan have been making every effort to get the Japanese economy out of deflation, to the detriment of bank deposits.
In recent years, buoyant stock market performances around the world, though with a notable exception of China, have reawakened some parts of the Japanese household sector to investments in risk assets. It showed that 37% of those who were surveyed expressed their interest in investing through the NISA while 33% had no interest in it with the remaining 30% belonging to the ‘don’t know’ category. People in the 37% bracket who gave a positive reply to the scheme are considered as risk-takers and would not use their NISA account for fixed income securities investments. Most likely, their asset allocation is heavily skewed toward foreign (non-Japan) equities due to their newly found love in U.S. equity investments, based on performances from The Magnificent Seven and other tech-related companies.
While rising popularity of the NISA should be definitely taken positively, here’s a catch. People’s love for American stocks drives the yen down. One estimate shows that the new NISA scheme can potentially create additional $2 billion of outflows into the U.S. dollar. This compares to current account surplus of ¥9.23 trillion for the year through March 2023 (FY2022). Until about a decade ago, the Japanese household sector’s home bias, as a showcase of their risk aversion, was contributing to overvaluation of the yen since their money was trapped in Japanese assets whose returns were minuscule. In the 2020s, reawakened retail investors’ risk-seeking is adding persistent downward pressure on the yen at a time when the Japanese economy has found negative effects of a weak currency through higher inflation.
On top of downward pressure on the yen, the NISA poses a more serious long-term question on financial assets from a broader perspective. Who is going to buy the Japanese government bonds? The household sector prefers bank deposits overwhelmingly. Banks in turn recycle deposits into JGBs since bonds in a stagnant economy have been a better choice than most other alternatives. The household sector’s immense risk-aversion keeps funding ever-greater supply of government bonds, of course along with the Bank of Japan that has expanded their balance sheet exponentially as the largest buyer of JGBs. Along with risk-takers in the household sector, pension funds as institutional investors are generally moving toward greater risk-taking. It is true that the household sector and pension funds still remain a great deal more conservative than the counterparts in other countries, even after their recent move toward risk assets. Nonetheless, subtle changes in their behavior can cause disruptions in asset prices through shifting expectations. Lower bond prices, or higher yields, would be sure to bring a different landscape to the Japanese economy.
About the author: Mr. Suzuki is a retired banking executive based in Tokyo, Japan.
