Various introductory books on asset building have emphasized for years that what is known as dollar cost averaging investment in the United States — utilizing such tools as investment trusts linked to stock price indexes with low fees — realize higher returns in the long run. In Japan, however, such an asset building method has yet to take root. Why?

In 2018, the Tsumitate (accumulation) NISA (Nippon individual savings account) was introduced at the initiative of the Financial Services Agency. It is a fixed amount investment plan with the tax on investment earnings exempted for 20 years. Investment trust products used in the plan are mainly low-fee instruments linked to domestic or foreign stock price indexes. Fortunately, a growing number of young and middle-aged people have begun to open the accounts. As of the end of June, the number of Tsumitate NISA accounts reached 1.47 million. This is a promising development.

Let us make a trial calculation of the performance of fixed amount investment over the past 20 years (December 1999 to November 2019), assuming that at the end of each month, the investor buys a ¥10,000 investment trust linked to the Tokyo Stock Exchange’s broad-based Topix gauge and that the person reinvests each year’s dividends in the same investment scheme. To simplify the calculation, the tax and the trust fee are set at zero.

The cumulative invested amount for the 20 years would reach ¥2.4 million and the aggregate market value at the end of November is ¥4.26 million, or 1.78 times the total invested amount. The annual return on this investment, or the internal rate of return, comes to 5.7 percent. Since the inflation rate over that 20 years was close to zero, the nominal annual return rate of 5.7 percent is unchanged in real terms.

Suppose a person invests ¥20,000 at the end of each month for this fixed amount investment, starting at the age of 30 and continuing until retirement at 65. The aggregate market value with compound interest of 5.7 percent would come to ¥26.53 million, or 3.16 times the invested amount. Last summer, a report by the FSA fueled popular concern when it noted that an average household of retirees depending on public pension benefits for income will be ¥20 million short of covering their retirement expenses. But the calculation shows that investing just ¥20,000 each month would result in building assets easily topping ¥20 million.

Nonetheless, such rational and efficient methods for asset building have so far not taken root in Japan. There are several likely reasons.

First, financial institutions like securities firms generally recommended to customers active-style investment trust products that bring high commission fees and are inclined to earn more fees by having customers frequently change their investment tools.

Second is insufficient education about financial and investment matters. Behavioral finance experiments show that the sense of discomfort that people feel over a financial loss is far stronger than the satisfaction they get from a gain — even when the amounts of the loss and the gain are equal. This asymmetry in people’s feelings results in a bias toward avoiding losses and makes people hesitate to invest in stocks, which causes price fluctuation risks.

Such risks are dispersed to a certain extent in investment trusts linked to stock price indexes. But they cannot be free from overall ups and downs in share prices. In fact, an appraisal loss of up to 33 percent occurred in the above calculation when stock prices plunged in the serious financial crisis in 2008.

The discomfort and fear over such short- or medium-term investment losses prevent people from seeking long-term gains. Conversely, only people who have managed to correct their bias toward risk-averting behaviors through education and learning can obtain long-term gains. Japan is lacking in such education.

The third reason is peculiar to Japan. Since the deflationary trend became strong in the economy following the burst of the bubble in the early 1990s, the collapse of the long-term upward trend in the stock market continued through the 2000s. That ruined investors’ belief that they would be rewarded with positive returns if they hold on to stocks in risk-dispersed portfolios over the long term — which in turn gave way to the widespread perception that stocks are the object of short-term trade.

Even now, many people may think that if the economy plunges into recession, stock prices as measured by the Nikkei 225 average would not only fall below the 20,000 mark but even sink below 10,000 — as happened when the IT bubble collapsed at the outset of the 2000s and in the 2008 financial crisis. But if the performance of Japanese businesses as a whole is measured by their operating and pretax profits, they have indeed regained a long-term upward trend. The next recession will naturally push down share prices. But it is unlikely that the Nikkei will drop below 10,000.

The asset gaps between people who realize these circumstances and start long-term investments in share price index-linked products such as Tsumitate NISA and individually defined contribution pension plans — and those who don’t — will likely become very wide in the next 20 to 30 years.

Masaharu Takenaka is a professor of economics at Ryukoku University in Kyoto.

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