Tax-exempt investment schemes set to be introduced in Japan early next year will further boost flows into riskier assets that were originally sparked by Abenomics, argues Nikko Asset Management.
Japanese investors are sitting on mountains of cash; $8.5 trillion by Bank of Japan estimates. That’s fine in a deflationary environment, which has been the case in Japan for 20 years. But with the country potentially entering an inflationary environment, simply holding cash is no longer an option, argues Hiroki Tsujimura, chief investment officer at Nikko AM.
Local retail investors have indeed been shifting into riskier assets for most of this year, driven by strong stock-market performance as a result of Abenomics, the policy of aggressive monetary easing, fiscal stimulus and other support measures aimed at boosting economic growth. The Nikkei 225 is up 44% year-to-date, and Nikko AM estimates that retail investors allocated $25 billion into Japan equity mutual funds from April to end-September.
And Tsujimura expects the trend will continue as a new tax-exempt scheme is due to be introduced early next year. The Nisa programme – modelled on the UK’s individual savings accounts (Isas) – offers mutual fund investors tax exemptions on capital gains and dividend income of up to ¥1 million ($10,000) every year for five years.
Several firms are said to be considering launching products under the scheme, including BlackRock, with funds distributed by Mizuho Bank and Nomura Securities, according to media reports. And as the government implements more tax hikes, these tax-exempt schemes will, in Nikko AM’s view, help encourage younger Japanese to invest.
Nikko AM will be providing a range of these low risk strategies to attract younger investors, many of whom may be using the Nisa scheme to invest in mutual funds for the first time, Tsujimura says.
As for concerns that inflation will rise too quickly in Japan, Tsujimura is sanguine. “There is a very low risk of this happening. After 15 years of deflation, we do not believe inflation will be able to accelerate that quickly.”
He also anticipates the monetary easing will further encourage the rotation out of bonds and into equities.
“We believe signs of the great rotation out of bonds and into equities are just beginning, especially on the retail investor front,” Tsujimura says. “Institutional investors such as pension funds and insurance companies still hold a great deal of JGBs [Japanese government bonds], but we expect this to change and for portfolios to be rebalanced in favour of risk assets in order to prepare for the 2% inflation target.”
Investors may be receiving tax relief on one hand, consumers are set to be taxed more heavily. Although Abenomics has brought in higher tax revenues – tax receipts for financial year 2012 (which ended in March 2013) were $12 billion higher than forecast –the government is taking further measures to tackle its debt-to-GDP ratio of 230%.
Prime Minister Shinzo Abe in October announced plans to implement a rise in sales tax from 5% to 8% in April 2014, and Tsujimura, expects it to rise even further.
“It is difficult to predict how much further the sales tax will rise, or the time frame of these hikes, as it is a controversial issue and ultimately is against popular opinion,” he says. “However, we believe this will not be the final hike.”
Nikko AM also expects the Bank of Japan to start its next phase of monetary easing next spring, but notes it’s too early to predict whether the next phase of easing will on a bigger scale.
Ultimately, the success of Abenomics depends on implementation of wage increases, says Tsujimura, arguing that if wages stay the same, the programme won’t work. “Inflation makes people’s lives [extremely] difficult without wage increases,” he says. “If we do not [see wage increases], Abenomics will face a difficult political situation.”
Tsujimura notes that the Abe administration has asked large business groups to increase wages on many occasions. Judging from recent comments from these companies, he is fairly confident that base salaries will soon increase by 1-2% per year, potentially in the first half of 2014.