YOUR GOALS,OUR COMMITMENT.

“Bold and fundamental changes” to Japan’s
NISA a positive driver for Japanese equities
By Junichi Takayama, Japan Equity Investment Director
4 October 2023

Key Takeaways— As the Japanese domestic tax-free savings scheme – the Nippon Individual
Savings Account (NISA) – celebrates its tenth anniversary next year, thesystem is being given a bold revamp.
— The changes are expected to deliver an increased flow into mutual funds
both international and domestic, and attract a younger generation of
investors in one of the world’s most liquid markets in terms of household
wealth.

With the Nippon Individual Savings Account (NISA) scheme celebrating its ten-year anniversary in 2024, recently
announced changes to the scheme should help encourage further investment from Japanese investors. Japanesesavings clearly present an enormous opportunity that has yet to be tapped, households hold approximately
Japanese yen (JPY) 2 quadrillion in wealth (approx. EUR 12.9 trillion), with over half of that in savings accounts or
cash. Only 17% of this is invested in equities, bonds or investment trusts (March 2023).1

Growing an equity culture by weaning Japan off its savings habit
The Japanese government has been keen to change Japan’s savings mindset for decades. The slogan “from savings
to investments” was a campaign slogan in Japan as far back as 2001. Why is changing the savings culture into an
equity culture so important? Chart 1 shows the different types of investments held by citizens in Japan, the US andthe Euro area, respectively. As the chart demonstrates, 54.2% of Japanese households’ JPY 2.0 quadrillion yen(approx. EUR 12.9 trillion) in assets is kept as cash and deposits.

1 Bank of JapanFOR SOPHISTICATED INVESTORS ONLYBOLD AND FUNDAMENTAL CHANGES TO JAPAN’S NISA

Chart 1: Japanese households hold approximately JPY 2 quadrillion in wealth

Source: Bank of Japan, 2023

Both in the US and the Eurozone, a strong investment culture encourages personal financial planning, emphasises
retirement savings and driving longer-term wealth generation. It is therefore unsurprising that Japan’s policymakers
have long been keen to wean Japanese citizens off their preference for cash savings and encourage greater
investment into equities and other investment vehicles. The introduction of the NISA is one example of aprogramme designed to encourage domestic investors to create wealth, own a stake in successful companies andparticipate in the longer-term growth of their economy. Foreign investors, such as Warren Buffett, have helped toaccelerate Japan’s recent bull market and greater participation by domestic investors looks to be creating a“virtuous circle” underpinned by a growing equity culture in Japan. Indeed, considering the size of Japan’s
household wealth this transition could help fuel what we believe is a secular bull market in Japanese equities. To
learn more about reforms Japan has made to unlock shareholder value, read Nikko AM’s Japan investment guidehere.

The history of the NISAThe NISA began as a temporary scheme in 2014, and was modelled on the UK’s highly successful Individual Savings
Account (ISA) system. Just as with the ISA, the NISA was designed to encourage people to convert their cash andbank deposits into long-term investments instead, particularly for retirement planning. All residents of Japan 20 orolder, including non-Japanese nationals, are currently eligible to invest via the NISA scheme.

The NISA rules
The General NISA has a tax exemption period of five years and has a yearly investment contribution limit of JPY 1.2
million (approx. EUR 7,600), as well as a lifetime investment limit of JPY 6 million (approx. EUR 38,000).
In principle, dividends and gains from the sale of stocks and investment funds are currently taxed in Japan at a rateof 20%. Therefore, the tax-free status of NISA investments has been a significant incentive for those prepared toinvest their money rather than keep it in a bank account.
With a General NISA, contributions can be invested into investment funds, equities and exchange-traded funds(ETFs) etc. The NISA benefits from tax-free growth for a five-year period which then resets.
Just as with the UK ISA, the NISA has evolved over time to increase contribution limits and to make it more widely
available to Japanese citizens. For example in 2016, the Junior NISA was introduced which can be opened by parents
and guardians for individuals under the age of 20. Junior NISAs have a yearly investment limit of JPY 800,000 (approx.
EUR 5,100).

YOUR GOALS, OUR COMMITMENT.

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BOLD AND FUNDAMENTAL CHANGES TO JAPAN’S NISA

Then in 2018, another NISA investment option was created. The “Tsumitate” NISA is a more long-term, savings-typevehicle, designed for less sophisticated investors who plan on putting aside regular amounts over time. It aims toprotect these investors by excluding investment vehicles that may be considered too volatile, complex or expensive.
Also, to encourage the idea of “investing and forgetting”, the Tsumitate NISA has a much longer (20-year) tax
exemption period, with a yearly investment contribution limit of JPY 400,000 (approx. EUR 2,500) and a lifetime
investment limit of JPY 8 million (approx. EUR 50,700). However, unlike the General NISA contributions can only be
invested in qualified investment funds. A General NISA and a Tsumitate NISA cannot be used at the same time.

Revamping the NISA system in 2024
Back in 2022, Japanese Prime Minister Fumio Kishida made the following pronouncement: “I will promote a bold
and fundamental shift from savings to investment, in order to double people’s incomes from asset investments”.
He made this statement in the City of London, echoing the NISA’s UK-inspired roots.
As part of these reforms, the Japanese government is revamping the NISA system and making the scheme
permanent. From January 2024, the General NISA and Tsumitate NISA will be consolidated into a new Tsumitate
framework for investing in funds, while the General NISA will be replaced by a “growth investment” framework thatwill be available for investment alongside the Tsumitate NISA. Here are some of the other key changes:•••

The annual investment limit will be doubled from JPY 1.2 million to JPY 2.4 million (approx. EUR 15,200) for
the Growth Investment NISA and tripled from JPY 0.4 million to JPY 1.2 million (approx. EUR 7,600) for the
Tsumitate NISA.
The tax-exempt lifetime investment limit will be raised to JPY 18 million (approx. EUR 114,000), of which
the Growth Investment element can comprise up to JPY 12 million (approx. EUR 76,000).
The tax-exemption period has been abolished, meaning under the new framework NISAs will be exempt
from tax for the lifetime of the investor.

Table 1: Key information about NISA

Eligible investments

Existing NISA system

NISA system fromJanuary 2024

Investment (mutual) funds suitable forlong-term investment (for Tsumitate
NISA)

Investment (mutual) funds suitable for long-term
investment (for Tsumitate framework NISA)

Stocks and investment funds (for General
NISA)

Eligible persons

Individuals 20 or older

Stocks and investment funds (for Growth
Investment NISA)

Individuals 18 or older (Junior NISA abolished)

Junior NISA for individuals under 20 years
old

Tax exemption period

20 years (for Tsumitate NISA)

Unlimited

5 years (for General NISA)

Annual investment limit

Total investment limit

JPY 400,000 (for Tsumitate NISA)

JPY 1.2 million (for Tsumitate framework NISA)

JPY 1.2 million (for General NISA)

JPY 2.4 million (for Growth Investment NISA)

JPY 8 million (for Tsumitate NISA)

JPY 18 million (of which up to JPY 12 million for
Growth)

JPY 6 million (for General NISA)YOUR GOALS, OUR COMMITMENT.

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BOLD AND FUNDAMENTAL CHANGES TO JAPAN’S NISA

Limitations on the investments available within the new NISAs
While the Japanese government is committed to encouraging its citizens to move beyond savings and into
investment, the different types of funds available via the Growth Investment NISA will be limited.
At present, the General NISA allows for the purchase of all publicly offered investment trusts, of which there areabout 6,000 in Japan. However, it is expected that only 2,000 of these will eventually become NISA-qualified funds.
Investment trusts that are highly leveraged, distribute monthly dividends, and with investment periods of less than
20 years will be excluded from the new Growth Investment NISA. On 21 June 2023, the Investment Trusts
Association of Japan announced about 1,000 investment trusts, which invest in domestic and foreign stocks andbonds, that can be bought by investors from January 2024 and the list has expanded to 1,491 as of 1 August 2023.

What is the likely impact on Japanese equities?
Given the expansion of existing NISA investment limits, the flow from individual investors into mutual funds is
expected to be significant. Inflows into Japan’s investment trust universe have centred on US and global equity
index funds in the past fiscal year. However, that is likely to change, partly due to the success of Japanese equities
this year, and also partly due to the new NISA rules. For example, of the top 30 funds in terms of inflows last year, 10monthly-distributable funds will be excluded from the Growth Investment NISA. Capital inflows into NISA-targeted
products are mainly into foreign equities. But it will be interesting to see whether net inflows into Japanese equities
will also increase in the future.
For individual investors, the new rules should make the Growth Investment NISA easier to understand and invest in.
Also, the fact that individuals can only invest in investment trusts that meet specific requirements should help giveinvestors of all ages a greater sense of security. The new rules could also help to skew the demographic of NISA
investors towards younger generations.
At the end of March 2023, investors in their 20s and 30s accounted for 5.19 million NISA accounts or fewer than 30%
of all NISA accounts. It is worth noting that young people in their 20s and 30s have no memory of past investment
bubbles (and no experience of watching those bubbles burst). We are already seeing strong signs that the decline
in the ratio of individual shareholders in Japan has halted and reversed. The new NISA rules could embed a newgeneration of investors with greater confidence in the Japanese economy and motivate them to participate inJapan’s longer-term success.
Chart 2: The changing dynamic of share ownership in Japan
35.0%
30.0%
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%

Investment Trusts

Corporations

Foreigners

Individuals

Source: JPX

YOUR GOALS, OUR COMMITMENT.

4BOLD AND FUNDAMENTAL CHANGES TO JAPAN’S NISA

Unlocking value in Japan
Japanese equity markets are enjoying a resurgence and looking more compelling thanks to a raft of corporate
reforms starting to bear fruit, but Japanese citizens are at risk of missing out on this economic and corporate growthpotential. Greater investment into growing companies, those located in Japan and overseas, would help to boost
disposable incomes and drive stock valuations higher. In other words, greater domestic investment could help
create a “virtuous circle” that sees equity markets move higher in 2024 and beyond.

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BOLD AND FUNDAMENTAL CHANGES TO JAPAN’S NISA

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