Time Limit Ruins Japan’s NISA Program, Sawakami Says

Japan’s tax-free investing program is failing to draw new stock buyers as the benefits expire too soon, said the founder of the Sawakami Fund.

The Nippon Individual Savings Account program is being overlooked because its exemption on capital-gains and dividend taxes only holds for five years, according to Atsuto Sawakami, whose eponymous fund has 295 billion yen ($2.9 billion) in assets. The rule means NISA won’t foster a culture of long-term equity investment and will be used primarily by investors close to or in retirement, who already buy stocks anyway, he said.

Japan introduced the tax breaks from Jan. 1 to encourage individuals, especially younger workers, to shift some of their $8.5 trillion cash mountain into higher-yielding assets. After people under 40 years old put less than $1 billion in NISA accounts in the first quarter, the government is considering doubling the amount of funds exempted and lowering the age limit to 18 years old from 20.

“NISA is meaningless as it’s only good for five years,” Sawakami, 67, who travels throughout Japan to host 200 seminars a year on stock investment, said in an interview in Tokyo on July 8. “Young people have to work for 30 or 40 more years. Tax cuts on long-term investment are key.”

A little more than 1 trillion yen flowed into Japanese equities via NISA from January through March, according to a June report from the Financial Services Agency. The benchmark Topix index slumped 7.6 percent during the period, the steepest decline among 24 developed markets tracked by Bloomberg. The Topix fell 0.3 percent to 1,255.19 at the close in Tokyo today.

Generation Gap

People aged 60 or over made up 65 percent of the investment, or about 650 billion yen, the FSA said. That compared with 8.5 percent by those in their 20s and 30s, according to the report, which was based on a survey of banks, brokerages and financial planners.

Taxes on share gains and dividends held outside NISA accounts doubled to 20 percent on Jan. 1. The program allows investors to buy stocks, exchange-traded funds, investment trusts and real estate investment trusts through 2023, while bonds and currencies are not included. After the five-year tax exemption period, investors can roll over holdings, subject to a total investment cap of 5 million yen.

While the program was originally meant to have a longer tax-break period, it was shortened at the last minute due to concern about a drop in tax revenue, according to Haruhiro Nakano, president of Saison Asset Management Co. in Tokyo, which sells investment trusts directly to clients.

Tax Pressure

“You have to think hidden pressure compromised the program,” Nakano said. “Nobody will tell the truth on this, but the most plausible explanation is tax bureaucrats said no.”

Brokerages also benefit from a shorter time limit as they make commissions on transactions, Sawakami said.

The government is considering raising the annual NISA investment ceiling to 2.4 million yen from the current 1 million, Finance Minister Taro Aso said on July 1. Increasing the amount to 2 million yen would attract individuals to Japanese stocks, Economy Minister Akira Amari said on June 28, according to NHK. Planners are also looking at cutting the minimum age to 18, the Yomiuri newspaper reported on July 1.

A higher ceiling “only benefits seniors already investing in securities and would be meaningless for regular folks, let alone young people,” Sawakami said. “Encouraging people to switch from savings to stocks is meant to help them build assets over the long term and to send money into the stock market.”

Household Savings

Japanese households held 1,630 trillion yen in financial assets as of the end of March, according to data from the Bank of Japan. Fifty-three percent of that, or 865 trillion yen, was in cash and bank deposits, while 9.1 percent was in stocks and 4.8 percent in investment trusts.

“Japanese savings are the world’s biggest sleeping resource,” Sawakami said.

He suggests permanent tax breaks if individuals hold stocks for seven years or longer. Over time, such buyers could replace foreign investors as the main players in the Japanese share market, he said.

Individual investors accounted for 23 percent of stock transactions by value in June, according to data from the Tokyo exchange, compared with 67 percent for overseas investors.

Fund Return

Ninety-seven percent of the Sawakami Fund’s assets were in Japanese stocks as of June 30, according to the fund’s website. The biggest holdings were Toyota Motor Corp. and Bridgestone Corp. The fund posted a 44 percent return in the three years through June 30, according to the website. That compares with a 59 percent total return for the Topix during the period.

Young people aren’t using NISA because they lack money to invest and knowledge about the program, according to the FSA survey. They must be taught more about investment and NISA, and wealth must also be shifted from older to younger generations, survey respondents said.

“Young people don’t know much about NISA,” Sawakami said. “They think it has nothing to do with them because they don’t have money. They think NISA is for the rich.”