Japan’s tax exemption system for individual small investors, NISA (Nippon Individual Savings Account), is set to expand in December when the Government enacts its tax reform package. The new tax plan combines regular and installment NISA accounts in 2024 to create a permanent tax-exempt investment program. Japan Securities Dealers Association (JSDA), a securities industry group that has advocated for reform, sees NISA now moving to the forefront of employment-based asset building.
The following, translated from an article originally published in Ma-Do, vol. 69, February 2023, explores the benefits and shortcomings of NISA reform via interviews with key JSDA executives.
What Will Change?
As part of Japan’s decades-old effort to shift household assets from savings to investments, NISA expansion is a pillar of the Doubling Asset-based Income Plan launched by Prime Minister Kishida in London in a speech from May 2022. Following Kishida’s recommendation of “fundamental expansion”, JSDA Chairman Toshio Morita immediately called for making NISA permanent and raising its contribution limits. JSDA solicited opinions from securities firms on the Kishida's plan and compiled a proposal in July. To JSDA’s delight, the newly adopted NISA scheme went farther than its recommendations on contribution limits based on the UK’s ISA (Individual Saving Account), the model for NISA.
|The government’s Doubling Asset-based Income Plan includes a policy to promote "simplification of NISA procedures” such as employing digital technology to reduce the burden on financial institutions and creating synergies with My Number Card (Japan's chip-embedded ID card) to make opening a NISA account easier. JSDA recommends additional reform, including to financial institutions for operating and other costs incurred in facilitating NISA. Toshin funds purchased under Tsumitate NISA carry zero sales commissions (no-load) and low custodial/trustee fees. In addition, financial institutions will incur costs to upgrade their systems to accommodate the new NISA scheme. Tomonori Ishizu, Chief of Planning at JSDA’s Policy Making Bureau, said “This new NISA scheme has a much simpler system design. We hope that the government will create an environment that makes it easier for financial institutions to enter the market by also simplifying the operational infrastructure that supports the system and lowering costs.”||
Senior General Manager
Following the UK's ISA Example
Senior General Manager
Japan’s government aims to increase the total number of NISA accounts to 34 million and the total investment amount to 56 trillion yen -- double the current levels for both -- over the next 5 years. In order to expand NISA’s reach to that extent, sales to individuals (B to C) alone will not suffice. “NISA has been made permanent, which is a step toward popularizing Workplace Tsumitate NISA”, stressed Kenji Konishi, Chief of Securities Taxation at JSDA. The Financial Services Agency has played a central role in promoting the Workplace Tsumitate NISA, but the number of companies offering it has slowed in recent years. The current NISA was only a temporary measure based on a time-limited legislation. Konishi pointed out that “For companies, it was difficult to incorporate into their benefit programs a system that would end in time. Now that the system has been made permanent starting in 2024, such concerns on the part of companies will be dispelled, providing an impetus for its introduction.”
The process of ISA development in the UK is instructive for exploring the potential of workplace schemes. UK’s ISA was introduced in 1999, made permanent in 2008, and widely adopted by employers between 2010 and 2011 when Standard Life (now Abrdn), Fidelity, and others entered the Workplace ISA (WISA) market. Japan’s NISA, based on ISA and introduced in 2014, will become permanent in 2024 and is expected to be prevalent in workplaces a few years thereafter.
Why Promote Workplace Tsumitate NISA?
The JSDA 's focus on employment is not only motivated by the immediate goal of realizing the Doubling Asset-based Income Plan, but also by serious concerns regarding the health of financial institutions.
One concern is financial institution sustainability, given their aging customer base. Ishizu noted, "In recent years, we have seen new shoots begin to grow, especially among younger people who have started asset building through NISA. We will do our utmost to cooperate with efforts to improve financial literacy, and encourage those with no investment experience, estimated to be as many as 80 million people, to take the first step toward asset building”. Even though the Tsumitate NISA itself may not be highly profitable, in the long run, the rejuvenation of customers will accelerate the "shift from savings to investments", which will ultimately lead to strengthening financial institutions' management capabilities.
Another concern is that as financial inequality among Japanese worsens, the securities industry may be seen as existing mostly to enrich those who are already wealthy. JSDA’s July proposal references a theoretical discussion among prominent economists, such as Thomas Piketty and Branko Milanovic, on the issue of inequality. If Piketty's inequality formula "r (rate of return on capital) > g (rate of economic growth)" is true, then middle- and lower-income groups should also diversify their capital income by holding stocks and bonds to reduce the disparity. Milanovic, in his book "Capitalism, Alone", outlines a policy of decentralizing capital ownership via (1) tax incentives for small investors, (2) a system to encourage employees to own shares, and (3) an inheritance tax. Japan is pursuing tax incentives for small investors through the expansion of NISA and encouraging employee investment via the enhancement of employee stock ownership plans (e.g., Japanese ESOPs) and stock-based compensation. By promoting Workplace Tsumitate NISA and employee stock ownership plans, JSDA seeks to build the middle class as a stable customer base on which to expand asset building and investment management.
Improving Financial Education
Another policy of the Doubling Asset-based Income Plan is to create a system to encourage availability of neutral and reliable financial advice to consumers. The "Financial and Economic Education Promotion Organization” (tentative name), a public organization to be established in 2024, is designed to give "endorsement” of "certified advisors”. While registration as an investment advisory business is required to recommend individual stocks, a proposal is being made to relax registration requirements for investment advisory businesses focused on Tsumitate NISA and iDeCo (individual Defined Contribution pension plan) accounts. Ishizu commented, however, “If the new advisory system targets the middle class and below, rather than the wealthy, it will be difficult to establish as a sustainable business, given that the culture of paying for advice has not taken root in Japan. In the initial stage, it is important that advisors supplement the public's knowledge and experience in asset building and asset management by providing information about general financial literacy, such as life planning and asset allocation, rather than advising about individual products.”
According to a survey conducted by the JSDA, only 6.4% of respondents answered "Yes" to the question, "Have you received education on securities investment?” The gap in financial knowledge can directly lead to disparities in income and assets. Both the public and private sectors are urgently required to improve financial education.
< Takuya Mizorogi >
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