Why a Japanese savings account may prove a boon for Indian stock market

A move by the Japanese government may provide a boon to the Indian stock market.

Prime Minister Fumio Kishida has touted the Nippon Individual Savings Account (NISA) as part of his ’new capitalism’ to boost household wealth and asset holdings by helping households invest in riskier assets such as stocks.

But what is it? And how could it help the Indian stock market?

Let’s take a closer look:

What is it?

NISA is essentially a tax-free stock investment scheme from the Japanese government.

Targetted at individuals, it looks to convert the trillions of yen held in cash by households into investment in stock markets.

Japan launched NISA in 2014.

It was modeled after the UK’s Individual Savings Account (ISA) system.

There are two types of NISA accounts: a general NISA and a tsumitate (savings) NISA

The general account includes domestic and foreign equities as well as exchange traded funds (ETFs), real estate investment trusts (REITs) and mutual funds.

Tsumitate NISA is intended for mutual funds for long-term investment.

Currently, individuals can invest up to 1.2 million yen ($8,020) per year in general NISA accounts, or up to 400,000 yen in tsumitate accounts, and income from those investments is eligible for an exemption from Japan’s 20 per cent capital gains tax.

The investment quantum and tax exemption is valid for five years for general NISA and 20 years for tsumitate NISA.

From January, general and tsumitate NISA were changed to a growth and tsumitate framework. The amount that individuals can invest annually will be 3.6 million yen, within which the general NISA limit will be doubled to 2.4 million yen.

Each individual will be allowed to hold a combined total balance of 18 million yen in NISA, which will be tax-exempt permanently.

Why has Kishida pushed NISA?

Kishida has made NISA the pillar of his vision for a “new form of capitalism,” which emphasises concepts such as better wealth distribution and a virtuous cycle of growth.

In an aging society where more than half of household financial assets are held in cash, Kishida aims to double household income from investments and help individuals rely less on public pension funds.

Japanese households held a record 2,115 trillion yen in financial assets as of June, up 4.6 per cent from a year earlier, according to the Bank of Japan. More than half was held in cash.

The number of NISA accounts stood at 19.4 million as of June this year, according to the FSA, up from 7.27 million in June 2014.

Of the total accounts, people in their 40s accounted for 18.9 per cent, the biggest portion this year, with those in their 50s accounting for 18 per cent.

Those in their 80s took up 6.7 per cent of the total.

NISA account holders have spent 32.8 trillion yen since 2014 and until June buying stocks and other financial products, according to the FSA. This year alone, they spent 2.7 trillion yen.

The most popular products are investment trusts, with people buying 19 trillion yen of them so far, or 58.8 per cent of the total, followed by individual stocks worth 12.4 trillion yen, or 38 per cent.

They have bought 793 billion yen worth of ETFs and 239 billion yen worth of REITs.

Most analyst estimates show the money has gone primarily into US equity funds and US single stocks.

How will it help India’s stock market?

Nikkei Asia quoted Shusuke Yamada, chief Japan FX Strategist at Bank of America Securities, as saying Japanese investors have been increasing investment in India since the middle of 2023.

Yamada said Japan invested 157 billion yen in India-related investment vehicles in January.

That comprises 43 per cent of equity and debt securities inflows from foreign investors.

Yamada said this “hints outward Toshin (investment trust) investment may be accelerating in Feb and inflow to India-focused Toshins are clearly rising."

Yasutomo Mentani, head of sales and marketing at Eastspring Investments, told the outlet many people for the first time have begun investing in Indian equities.

Mentani added that India has become an investment destination due to its good stock market performance and the global supply chain tilting away from China.

With inputs from agencies