TOKYO -- 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 Tuesday for applications, 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 engineer Toshiya Enomoto, 42, 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 index surged 39 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.
The Topix soared 65 percent since elections were announced in November that brought Abe to power. The gauge fell 1.9 percent to 1,194.10 Monday in Tokyo amid concern the U.S. government is set for a partial shutdown.
Japanese shares have risen more than any other developed market as record stimulus from the Bank of Japan improves the outlook for growth. Investments in the nation's 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."
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 housewife Reiko Takagi, 66, 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."
The NISA system, based on Britain'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 British 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.
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 59 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. "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 on Sept. 27 was the world's lowest. Outstanding government debt exceeded one quadrillion yen in June, according to the Ministry of Finance.
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., which will also defer trading charges, jumped 39 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."
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.
"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.