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NISA a hit with old investors, not new

NISA, short for Nippon Individual Savings Account, in which individual investors will be eligible for tax exemptions of up to five years on their financial gains, has begun this month. Banks and securities houses are rushing to promote sales campaigns to encourage individual investors to open NISA investment accounts. In contrast to the excitement in the financial industry, however, the scheme is struggling to bring in new clients.

Under NISA, capital gains from investment of up to ¥1 million a year on stocks and investment trusts are tax free. To receive the tax break, an investor needs to open a separate NISA account. According to the National Tax Agency’s statistics, about 3.6 million applications for NISA investment were filed on the first day alone last October.

But most of the applications were filed by existing investors. An example is Daiwa Securities Group Inc., which has had more than 400,000 applications. At the company’s management strategy conference held in mid-November, President Takashi Hibino said most of the applications were from existing customers. At Nomura Securities Co., which attracted 1.06 million applications as of Nov. 30, many of them were from existing clients as well.

Many financial institutions give clients who open NISA accounts cash as a gift, or discount transaction fees. As a result, some in the industry say they know managing NISA accounts alone doesn’t generate profits, considering administration costs.

Through the NISA service, the government is targeting financial assets totaling ¥1.6 quadrillion, and hopes to encourage individuals to invest in riskier assets, rather than keeping their money in savings. But few are investing for the first time as a result of the NISA service.

For many neophyte investors, there is a psychological barrier to investing in securities. In addition, the NISA mechanism is difficult to understand and the service itself is inconvenient, which discourages first-time investors.

For example, the tax-free period for capital gains from investment is limited to five years. And once an investor buys a financial product, that product is not allowed to be sold to buy another one, although selling the product alone is allowed.

NISA is modeled on Britain’s Investment Savings Account (ISA), which puts no limit on the tax-free period. And an investor is allowed to sell one financial product to buy another. NISA may need convenient features to attract more investors.

NISA’s shortcomings are due in part to a series of haphazard revisions to Japan’s tax system. Under the existing regulations, taxes on dividends or capital gains from sales of stocks are halved to 10 percent from the original 20 percent. Since this measure ended at the end of 2013, NISA was introduced this year. That tax break was introduced in 2003 to boost share prices in Japan that had remained low back then. Since it was criticized as a policy favoring wealthy investors, the 10 percent tax break was introduced as a temporary move, and has been postponed repeatedly as a band-aid measure. Against such a background, NISA, too, has been introduced as a temporary measure. And the reason that an investor is not allowed to change a financial product once bought is to avert securities houses’ often-criticized practice of nudging investors to repeat selling and buying and thus racking up transaction fees.

Under the NISA scheme at present, fresh investments of up to ¥1 million are tax free, and the service itself will be available only for 10 years, until 2023. Stock investment performance depends largely on timing. If the government really wants to attract entry-level investors and to encourage a shift from saving to investing, the NISA service’s time limit should be eliminated.

NISA accounts can only be opened by investors who are at least 20 years old, whereas in Britain, even children can open an ISA account. In Japan, most of the personal financial assets belong to senior citizens. As long as money stagnates among the elderly, the flow of money into the securities market will not grow. If grandparents open NISA accounts in the name of their grandchildren, a shift of funds from older generations to younger ones would start, and investments by individual investors would be expected to become more active.

This section, which will appear every second and fourth Monday, features translated stories on hot national topics from the monthly magazine Wedge. The original article was published in the January issue.