Salient to Investors:

The Nippon Individual Savings Account program opens for applications tomorrow and will allow individuals to buy $10,143 a year of risk assets – stocks, ETFs and investment trusts – that are exempt from taxes on dividends and capital gains for 5 years. Nomura Research Institute estimates the plan will draw as much as 68 trillion yen through 2018, with 65 percent coming out of bank deposits.

Equities were just 7.9 percent of Japanese household assets in March versus 34 percent in the US and 15 percent in the euro zone. Domestic individual investors accounted for 28 percent of Japanese share trading in August, versus 21 percent a year earlier, and foreign buyers made up 63 percent.

Naoki Kamiyama at Bank of America Merrill Lynch said the tax break could be a catalyst for a change in attitude toward investment – more necessary than ever given the aging society and expected inflation.

Japan has the world’s oldest population with 26 percent aged 65 or older and will shrink 17 percent by 2055, the fastest decline among developed economies. The IMF estimates Japan’s debt will reach 245 percent of GDP in 2013 and the government projected in 2009 that the 140 trillion yen set aside for 34 million workers will run out by 2031.

The equivalent UK plan began in 1999 and allows as much as $17,400 in tax-free investment each year – there were 2.9 million active accounts as of September 2012.

Japanese individual investors were net sellers of local equities for 8 of 10 years through 2012. More than 90 percent of Japan’s sovereign bonds are owned locally and the 10-yr yield of 0.68 percent is the world’s lowest.

Isao Kubo at Nissay Asset Mgmt said individual investors have not bought Japanese stocks simply because the markets have fallen in the past 2 decades, and elderly people have more funds to invest but tend to avoid risk.

Satoshi Nojiri at Fidelity Investments Japan says the tax breaks will trigger a steady stream of money to risk assets as seminars for NISA are always full.

Yasuhiro Yonezawa at Waseda University said other government policies tried and failed to promote the shift of funds, and NISA is set to join them as it will have limited impact on the investment attitude of Japanese people who won’t behave rationally when it comes to asset management as they’ve been unresponsive to incentives offered by the government in the past.

In the 5 years after stock trading fees were deregulated in 1999, the proportion of equities as household financial assets fell to 9 percent from 9.9 percent.

Ichiro Takamatsu at Bayview Asset Mgmt said the expiration of another incentive plan for investors at the end of 2013 will limit NISA’s impact as levies on dividends and capital gains will return to 20 percent after being cut by half for the past 10 years. He said individual investors will sell shares toward the end of 2013 before the tax rate is raised back up, while many hold unrealized gains due to the Abenomics rally and that will spur profit-taking.

Nomura Research Institute said 65 percent said in July they will transfer funds from bank deposits into NISA, while 23 percent said they would sell equities held in normal accounts and replace them with NISA assets – suggesting 28 trillion yen to 68 trillion yen will flow into the accounts in the first 5 years of the program.

Atsuto Sawakami at Sawakami Fund said people will shift money to stocks if markets remain steady because the Japanese, especially those of working age, cannot rely on public pensions. He said the NISA will boost Japanese stocks in due course, especially if the program becomes permanent.

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