Over the coming decade, Japan will get economic tailwinds from a force never before experienced in economic history anywhere on this scale: the country’s gigantic stock of record household savings will become unstuck. Japan’s famous ¥1,800 trillion worth of “Goldfish stuck in Jelly” will finally be freed.
Unfortunately, this is not because of clever new policy initiatives, financial deregulation or a sudden change of heart from the naturally conservative “Mr. and Mrs. Watanabe” beginning to shift hard-earned savings from the safety of cash and deposits — tansu yokin, or mattress money — into riskier financial assets. No, the real catalysts, and economic variables we can predict with virtual certainty, will be national demographic destiny and death. Yes, the upside of the declining population is that the final journey of Japan’s baby boomers is poised to free up inheritance fund flows of as much as ¥550 trillion (about $5 trillion) over the next ten years alone.
In clear speak: the equivalent of just about the nation’s annual GDP will be transferred from one generation to another over the next ten years or so. This is a sizable windfall that can boost household disposable income by approximately 15% per year, every year of the coming decade, which is also equivalent to lifting the national GDP by about 10% per annum. No country in history has ever experienced a shift in assets on that scale; the economic consequences of the first and second world war basically disrupted and destroyed the enormous wealth accumulated since the start of the industrial revolution. We’re entering new territory and Japan is in pole position. Such a generational wealth transfer as a boost to the purchasing power of the younger generation simply does not feature in economists’ models but is poised to become a very real force of positive growth, which should surprise many. In my view, here we have not only Japan’s best-kept secret but, more importantly, the single biggest potential positive force for the nation’s future prosperity.
However, policy makers must work harder to ensure this ¥550 trillion of inheritance flow will indeed be invested for future growth rather than just wasted on paying down public debt (i.e. past investment or consumption); or, even worse, simply ending up back under the mattresses of the next generation.
What is to be done? Established policy priority is, of course, to tax as much as possible of this intergenerational windfall. Interestingly, it is not the Ministry of Finance that is to blame, but the American occupation. When Joseph Dodge and his team designed the postwar Japanese tax system, one of the fundamental goals was to ensure that a situation where an enormous concentration of wealth controlled by a small group of families could never happen again — the big four Zaibatsu families had controlled as much as 70% of the prewar stock market assets and as much as half of GDP. Through the combination of a highly progressive income tax and a high inheritance rate, Dodge tried to ensure that all family wealth was effectively taxed away over three generations. And it has worked as designed: Japan’s wealth distribution is one of the most equitable in the world. Yes, there are a few super rich and a few very poor; but approximately 70% of the wealth is owned by the 70-75% of households that make up the nation’s broad middle class.
In fact, the breadth of Japan’s financial wealth distribution allows for great and effective policy initiatives. It means that changes to inheritance taxes do not just benefit the top 1% or 10%, but have an immediate positive impact on the purchasing power of the general public. Still, the real issue is that today’s priority must not be to tax away accumulated wealth, but to channel the baby boomers’ savings and wealth into productive investments for the future — or, at the very least, into purchasing power for the young. A cut in inheritance taxes would be a simple but blunt tool to achieve this. A much better tool would be to exempt assets from inheritance taxes if they are invested in specific hard- and soft-public infrastructure projects.
To be specific, Japan wants to stimulate regional economic development. So designated regional investment projects — a new hospital, a new care facility for older adults, the upgrading of bridge or road infrastructure, the building of a new logistics facility, the development of a “Smart City” etc. — should all become eligible for people to invest in directly, with the equity, debt or loan asset exempt form inheritance tax.
Prime Minister Yoshihide Suga was one of the key authors of the Furusato Nozei, or hometown tax payment, where effectively Japanese citizens can donate to municipalities and prefectures, allowing them to re-direct their local tax liability into purchases for goods and services from other regions of Japan. Effectively, this system should be upscaled so that current or future inheritance liabilities get channeled into regional investments. Where the Furusato Nozei Hometown tax program turns income tax into targeted consumption, the proposed “heritage” tax plan turns inheritance tax into targeted investments.
Importantly, just as the various regional vendors on the Furusato Nozei platform compete for the favors of Japanese taxpayers in a de facto free market, a new inheritance tax-free investment platform would have the Japanese people self-direct their family savings into projects they like and deem worthwhile. No doubt, local authorities would sharpen up their project proposals and planning proposals because now they would have to compete for investment funds directly from the people rather than relying on old-fashioned lobbying for favors and budget allocations from senior bureaucrats or politicians. And, hey, if Japan wants to become a world leader and create the first-ever hardware and software to build the infrastructure to make flying cars viable for the public, open that project’s finances up to tax free investments from people’s inheritance money. Technocrats and politicians will still get to coordinate, specify, and select projects eligible for the program. However, minimum standards, governance and quality control must be best in class; but the actual funding for the projects would become much more market based rather than top down directed.
And just to remind everyone how scalable and impactful this new policy could be, during the last fiscal year, total public investment spending came to just below ¥30 trillion — the projected annual inheritance capital pool is about ¥50 trillion. Make no mistake, here is a model that would disrupt and re-invent the use of Japan’s biggest national asset: its gigantic savings pool.
Of course, there are many details to be discussed and much opposition to overcome. Nonetheless, the current business-as-usual approach to simply tax the inheritance and use the proceeds to pay down debt is lazy policy that misses a unique opportunity to turn the accumulated wealth of postwar Japan into forward-looking investments for future prosperity. People are naturally fearful of their hard-earned wealth being taxed away. As my tax accountant cheerfully reminds me every year: “Stop thinking of it as your money.” But it is my money, it is your money and the money we inherit is the legacy of our fathers’ and mothers’ lifework. Policy makers now have a golden opportunity to ensure this legacy is not wasted but invested in future prosperity. Japan will lead the way, being forced into the global pole position by its demographic destiny and helped tremendously by the country’s huge accumulated household savings. Turning the inheritance tax liabilities into future heritage investments would be a great way to show the way for other economies to follow.
Jesper Koll is the senior adviser to Wisdomtree Investments and is consistently ranked as a top Japan strategist/economist. He publishes blogs at www.wisdomtree.com/blog.
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