Posts Tagged ‘Ministry of Finance’

New tax-free investment scheme not likely to increase investment

Thursday, August 8th, 2013

The acronym NISA has a checkered image in Japan. To most people it stands for Nuclear and Industrial Safety Agency, the now discredited government organ that did such an ineffectual job of policing nuclear power plants prior to the Fukushima accident of March 2011. On Jan. 1, 2014, the acronym will take on a different meaning as the Japan (Nippon) equivalent of the U.K.’s Individual Savings Account system, under which individual investors in stocks or mutual funds will not have to pay taxes on dividends and capital gains. It sounds simple and irresistible, but according to Tokyo Shimbun it may prove to be as resistible as that other more toxic NISA.

NISA application

NISA application

At present, dividends and capital gains are taxed at a flat rate of 10 percent on personal income as part of a government incentive program to boost stock investment that will end this year. Originally, the taxation rate was going to return to 20 percent, the rate levied on regular savings accounts, which is what the finace ministry wants. However, the Financial Services Agency (FSA) thinks that more average people should be encouraged to invest in stocks and helped pass the NISA law, which was modeled after Britain’s.

On the surface, the system seems easy. Anyone 20 years of age or older can open a NISA account with a financial institution, but is limited to only one, and for four years the individual cannot switch his or her account to another institution. The account holder can put up to ¥1 million a year into the account for five years, which means the maximum amount of non-taxable investment at any given time is ¥5 million. The tax-free system itself is limited to ten years, meaning no investments in NISA can be made after 2023.

Unfortunately, there are other conditions that experts are saying may scare average people away. During a given year, the individual can redeem any dividends or capital gains that are earned but he cannot reinvest that money back into the account during that year. He can, however, reinvest it the next year as part of the ¥1 million maximum input allowed during a single year. Also, at the end of five years he can roll over the ¥1 million he invested the first year, and the next year roll over the ¥1 million he invested the second year, thus maintaining a ¥5 million maximum account over time. However, once ¥5 million is reached, he cannot make any “new” investments.

Banks and securities companies will start accepting applications for NISA on October 1, and competition for customers is already heated. The Japan Securities Dealers Association is airing commercials for NISA featuring idol Ayame Goriki, and most companies are offering ¥2,000 cash premiums as an incentive to sign up. The stated target of the FSA is first-time investors and young people, but Tokyo Shimbun doesn’t think the message will get through. Financial journalist Minako Takekawa told the newspaper that she believes the new system will only appeal to people who are already investing, and that it needs to be simplified greatly if it’s to appeal to a wider consumer base. She says Britain’s system is easy and popular, with 40 percent of the population signed up. Like Japan’s, the U.K.’s ISA system was originally only meant to last 10 years, but it has since been made permanent, with financial services companies devising lots of products that take advantage of ISA, including regular savings accounts. Takekawa went to London earlier this year to study the system and found that “even people who don’t have a lot of money find it easy to use.”

Popular economist and TV personality Takuro Morinaga told Tokyo Shimbun that the reason NISA is so convoluted is that the finance ministry made it so. He says the ministry is “greedy” for more taxes and so have sabotaged NISA by making it too difficult for the average person to understand. The ministry was counting on a return to the 20 percent rate at the end of this year, and suddenly they’re getting nothing.

Of course, one aspect of NISA that most experts overlook is that it’s risky. Unlike regular savings accounts, an investor’s principal is not guaranteed or insured. Consequently, even if the system is simplified, older people will be reluctant to join. And as for young people, they don’t have any money to invest in the first place, at least not until their wages are increased.

New government bonds attempt to play it safe

Friday, June 25th, 2010

Investing can be a beach

Investing is a beach

For the first time in four years, the Ministry of Finance is issuing a new government bond product. Starting this month you can buy fixed-rate, 3-year bonds starting at denominations of ¥10,000. The product is specifically aimed at average consumers, so they are “easy to buy” at banks and brokerage houses. The annual interest rate is 0.19 percent, compounded semiannually, which, after the 20 percent tax, comes to 0.152 percent. New bonds are issued monthly, and can be canceled without penalty after one year.

Compared to bank time deposits, it may not seem like much of a deal to the average saver. A three-year savings plan, albeit for a minimum deposit of ¥1 million, is running about 0.43 percent right now, but the MOF seems to think the new bond will be a popular product. (The MOF also offers its usual 5-year, fixed rate bond at 0.42 percent, and its 10-year, variable rate bond at 0.48 percent. These are issued four times a year.) After the so-called Lehman Brothers shock, securities companies surprisingly sold a lot of government bonds at about the same interest rate, apparently because consumers thought it was a safe investment in the midst of all that financial uncertainty. The MOF hopes this feeling is still at large, because it needs a more stable investment base.

As of the end of 2009, the Bank of Japan estimates that ¥830 trillion of Japan’s national debt is in government bonds, of which ¥340 trillion is held by financial institutions; ¥170 trillion by insurance companies and pension funds; ¥90 trillion by various government entities, central and local; and ¥35 trillion by individuals, accounting for only 4 percent of the total, which is even less than the percentage held by foreign investors (about ¥50 trillion). The MOF wants to increase the amount of bonds held by individuals because bonds for individuals are non-marketable securities. Their value is fixed, since they cannot be traded on the bond market.

According to experts, the MOF is trying to avoid a Greece-like meltdown. If interest rates go up, the value of government bonds drops and everybody rushes to sell theirs, as foreign investors did in Greece. It’s thought that Japan is sort of safe since more than 90 percent of its government bonds are held domestically. Not so, says outspoken economist Noriko Hama in the Asahi Shimbun, since the vast majority of these bondholders answer to stockholders, so they are just as likely to sell if interest rates go up. Also, banks right now buy a lot of bonds because they don’t have any loan business, but if the economy recovers, lending will increase and their purchase of bonds will drop.

The idea is that the more non-marketable bonds the government sells, the more stable the debt situation becomes, but that’s assuming the economy will remain in the doldrums. The money that financial institutions, including Japan Post, are using to buy bonds and not giving out as loans are taken from people’s savings and other investments, so it’s all the same cash circulating in one enormous self-perpetuating loop that doesn’t really get the economy moving.

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