New investment opportunity

With the introduction in January of tax-free, individual investment accounts — aimed at enticing more investments by the younger generation — banks and brokerages will need to redouble their efforts to ensure that potential investors fully understand the risks and mechanisms of stocks and other financial products, instead of just campaigning to get more investors on board.

The Nippon Individual Savings Accounts (NISA) will be modeled after the Individual Savings Accounts in Britain, which is believed to have succeeded in helping boost long-term investments by individuals in the country. NISA is being introduced here just as current tax benefits on securities investments expire at yearend.

Anybody living in Japan and who is at least 20 years old may open a special account at a brokerage or bank that deals in stocks and investment trusts. For investments through the account of up to ¥1 million a year, capital gains and dividends will be tax-exempt for five years after the special account is set up.

Today, roughly 60 percent of the ¥1,550 trillion worth of financial assets in Japan’s household sector are owned by people aged 60 or older, while those in the 20-to-40 age bracket account for less than 20 percent. About 55 percent of these assets are in the form of cash deposits; only about 10 percent is in stocks and other investments.

The government hopes that NISA will serve as a catalyst to get the younger generation more interested in investing in stocks and investment trusts, which would channel more funds to companies and potentially contribute to economic growth while helping the young investors build up their own assets.

Calls to get more individuals to shift their money from savings into investments have been made repeatedly over the years, but have had little effect in Japan. Financial institutions’ tendency to encourage clients to buy and sell their portfolios in short cycles — so that institutions can earn commission fees on each transaction — are believed to have alienated potential investors.

Once people sell stocks or investment trusts bought through NISA accounts, they cannot reuse the tax-free status for the portion invested. The special account is, therefore, not suitable for short-term trading, as investors are likely to benefit more if they hold their investments over a longer term. The Financial Services Agency hopes investments through NISA accounts will total ¥25 trillion.

Parallel to this rosy scenario, the financial authorities must make sure that prospective investors fully understand the mechanisms of stock trading and investment trusts, especially the inherent risks. Banks and brokerages must do more than just lure individual investors into NISA accounts; they must redouble their efforts — through seminars and other occasions — to teach novice investors basic knowledge about these investments.

The financial authorities should be ready to mete out punishment, such as ordering banks and brokerages to suspend operations if they fail to give sufficient explanations to prospective investors. They also should make the system more convenient to investors by reviewing the rigid aspects of the NISA system, such as the requirement to keep accounts in the same financial institutions for a certain length of time and the government plan to abolish the system in 2024.