Of Japan’s approximately 2,000 trillion yen in personal financial assets cash and deposits account for about 54%—more than half. Meanwhile, stocks and investment funds account for about 19%, which is considerably lower than the U.S. and U.K., where they account for about 55% and 42%, respectively (figures from the end of 2021). The government has set forth the Doubling Asset-based Incomes Plan, which aims to significantly increase income from investments, or so-called asset income, by spurring individuals to shift their financial assets from savings to investments. Specific measures are expected to be formulated by the end of the year. The government’s goal is to realize a virtuous cycle in which companies grow by utilizing the investment funds of individuals, and individuals reap the benefits of this growth in the form of investment income, which will in turn boost the growth of companies through increased consumption.

Drastic expansion of NISA (First Pillar)

From the perspective of promoting the government’s “from savings to investments” policy and the Doubling Asset-based Incomes Plan, the FY 2023 request for tax revisions released by the Financial Services Agency (FSA) on August 31 proposes a drastic expansion of the NISA (small amount investment tax exemption program), aiming to encourage individuals to increase their investments from a tax perspective.
Currently, there are three types of NISA. The “General NISA” allows investors to invest up to 1.2 million yen per year in listed stocks for five years, the “Reserve NISA” allows investors to invest up to 400,000 yen per year for 20 years in mutual funds that meet the FSA’s criteria, and the “Junior NISA” is for minors. The Junior NISA is scheduled to end in 2023, while the General NISA is scheduled to transition a new system starting in 2024.
As of the end of March 2022, the number of accounts for the General NISA and the Reserve NISA had increased to approximately 17 million and the purchase amount to approximately 27.1 trillion yen. However, to encourage the shift from savings to investment, it is necessary to promote the further adoption of the NISA. To this end, the FSA has indicated that it will turn the NISA program into a “simple, easy-to-understand, and user-friendly system” based on the opinions of ordinary investors.
The FSA has also requested specific tax reforms, including making the NISA program, making the tax-free holding period indefinite, and increasing the amount that can be invested annually.

Financial education as a national strategy (Second Pillar)

To encourage individuals to invest, it will not be enough to simply create an environment that facilitates investment, such as through the expansion of the NISA program. At the same time, it is necessary for individuals to equip themselves with enough financial literacy. This will enable individuals to select appropriate financial products and services that meet their needs and life plans, and to achieve stable asset formation through diversified investments and the like.
If investments are expanded while people lack financial literacy and are unable to make the right investment choices for themselves, unexpected investment losses could undermine livelihoods and lead to serious social problems.
To improve financial literacy, it is necessary to provide financial education to a wide range of age demographics. In this respect, however, Japan has lagged other countries. Opportunities to receive financial education, including about asset formation, at schools and workplaces have been limited.
With the revision of the curriculum guidelines for high schools, financial education in high school classes finally became a mandatory subject starting in April 2022. To support classes that comply with these new curriculum guidelines, the FSA plans to provide on-site classes and training for teachers using instructional materials and class videos.
On the other hand, financial education for university students and above, especially for working adults who actually make the most investments, has been limited to voluntary initiatives by private financial institutions and industry associations. The FSA is considering promoting the provision of financial education opportunities relating to asset formation from a neutral standpoint in cooperation with such private-sector initiatives. The FSA plans to propose the creation of a system to promote financial education as a national strategy at the Council of New Form of Capitalism Realization, which will be held in September.

Acquiring the ability to choose the right investments for oneself

There is a risk that the government’s Doubling Asset-based Incomes Plan and its policy of shifting from savings to investments will spread the mistaken belief that the government has endorsed risky investments. If investment losses were to spread under such circumstances, it could lead to criticism of the government.
The first thing that individuals need to understand through financial education is the simple and obvious fact that there is always a risk of loss in investing, and that simply because money is invested does not necessarily mean that an individual’s assets will grow. There is price arbitrage at work between all financial assets, and given their different risks, etc., expected rates of return are basically commensurate with the risk. Financial literacy does not mean that people will be able to find investments that produce higher returns with the same risk.
It is important to become financially literate so that people are aware of the style of investment that is appropriate for them. By objectively reevaluating their investment objectives, expected investment timelines, and individual preferences for a combination of risk and return, they will be able to make more efficient investments.

Strengthening customer-oriented business operations through financial institution education (Third Pillar)

In promoting the Doubling Asset-based Incomes Plan, financial institutions are required to place the highest priority on increasing their clients’ profits and to provide appropriate solicitation, advice, and information, thereby helping individuals to make appropriate investments that meet their own needs and life plans. If stable asset formation can be achieved under such a plan, it will lead to revenue growth for financial institutions over the medium- to long-term.
Therefore, the FSA intends not only to strengthen financial education for individuals, but also to promote financial institution education, so to speak, and reexamine the rules for solicitation of sales of financial products. This is the third pillar of the plan: strengthening customer-oriented business operations.
The FSA says that some regional financial institutions still have issues with how they sell financial products. For example, it says that there are cases where a regional financial institution refers a customer to a group securities company, the bank does not fully understand the details of the customer’s transactions after the referral, and the securities company then sells themed funds and structured bonds, among other problematic financial products.
Structured bonds, which are high-risk, high-return instruments and a type of derivative, tend to generate many complaints from investors when losses are realized. The FSA also points out the problem with structured bonds: “In order to make a profit in a short period of time, sales companies are likely to entice customers to engage in rotational trading, which is incompatible with medium- to long-term asset building.”
The FSA also notes that, despite advocating an emphasis on increasing stock (balance) earnings and deposited assets in employee performance evaluations from the perspective of encouraging individuals’ long-term asset formation, in reality there are some cases where balance items are relatively underweighted, which is not consistent with the business model stated in the initiatives policy and management strategy.
Thus, many issues still remain in the customer-oriented business operations of financial institutions, which are indispensable for individuals’ stable asset formation.

Promote together with the growth strategy

To increase personal asset income and achieve stable asset formation, it will be effective to shift the composition of personal financial assets from savings to investments. To this end, the three pillars indicated by the FSA (drastic expansion of the NISA program, dissemination of financial education, and strengthening of customer-oriented business operations) must be strongly promoted in an integrated manner. However, this alone will not be enough to easily realize the shift from savings to investment and the Doubling Asset-based Incomes Plan.
One should not simply conclude that the fact that individuals continue to place the majority of their financial assets in extremely low interest bank deposits even in this low interest rate environment reflects a lack of financial literacy. Rather, this could be said to be the result of rational decision-making by individuals. With the Japanese economy remaining sluggish for a long time and companies’ growth potential low, expectations for returns from stock investments should not be high. Under such circumstances, it is natural for individuals to be cautious about investing in stocks, which are relatively risky. For individuals to increase their investment in stocks, the Japanese economy and companies will need to increase their growth potential and the expected rate of return on investing in their stocks.
In this regard, the “from savings to investment” policy and the Doubling Asset-based Incomes Plan must be strongly promoted together with the government’s broad growth strategies, including investing in people, DX (Digital Transformation) strategy, and GX (Green Transformation) to address climate change risk, in addition to the three pillars led by the FSA.
Under such policies, if both firms and individuals have higher expectations for growth, a virtuous cycle will begin between firms and individuals in which investment and investment returns increase synergistically.