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Proposed Fundamental Reform to ‘Comprehensive NISA’, Testing the Seriousness of the Kishida Administration

THE NIKKEI via scoutAsia

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September 12, 2022 6 min read
Proposed Fundamental Reform to ‘Comprehensive NISA’, Testing the Seriousness of the Kishida Administration

In response to the Kishida administration's "Asset Income Doubling Plan," the Financial Services Agency (FSA) released a request for tax reform for NISA (Nippon Individual Savings Account) at the end of August. The goal is to unify the three current NISAs and then expand and make permanent the investment limits. New innovations were also incorporated to allow for the flexible increase or decrease of investment balances in accordance with life plans. Although only at the request stage, this is an ambitious overhaul proposal that is expected to provide a tailwind for people's asset formation, and will test the seriousness of the Kishida administration in its efforts to realize it.

It consolidates the current three types of NISA

Under NISA, the usual 20% tax burden on investment income is reduced to zero. Currently, there are three types of NISA: (1) the General NISA with a tax exemption period of five years and an annual investment limit of 1.2 million yen, (2) the accumulation NISA with a tax exemption period of 20 years and an annual investment limit of up to 400,000 yen, limited to investment trusts suitable for long-term asset building, and (3) the Junior NISA――for minors.
In order to simplify the system, the FSA's plan is to integrate the three NISAs into a "comprehensive NISA" based on the accumulation NISA. The function of Junior NISA will also be incorporated by allowing minors to invest here.

A portion of the Comprehensive NISA will be a "growth investment line" that will take over the functions of the current General NISA. As with the General NISA, it can invest in listed stocks and most equity investment trusts.
It calls for both the tax exemption period and the new investment period to be made permanent. The annual investment limit and the respective tax exemption limits will also be decided by the end of the year, with the aim of significantly expanding the annual investment limit and the respective tax exemption limits.

After 2024, more straightforward and flexible

Currently, General NISA and accumulation NISA are optional in the same year. However, the Comprehensive NISA allows double use of the two annual investment limits. If the request is fulfilled, the annual investment limit will be considerably expanded.

The General NISA was to be replaced by a two-story "New NISA" after 2024, with the second floor available in principle only to those who have invested accumulatively in the first floor. In addition to the difficulty of the mechanism, many pointed out that the transfer (rollover) of assets from the current general NISA is extremely complicated. If the FSA's plan is approved, the new NISA will be withdrawn in favor of a comprehensive NISA starting in 2024.

A distinctive innovation in the integrated proposal is the establishment of a new system in which the tax exemption limit is managed by balance. Under the current NISA, once sold, the tax exemption limit cannot be used again, and the tax exemption limit for the period of time during which the investment wasn't made will disappear as is. However, under the unified proposal, it would be possible to increase or decrease the amount within the balance of the tax exemption limit.
For example, if there is a period of time when it couldn't afford to invest due to educational or housing expenses, but then the balance is within the limit, it can take advantage of the increased annual investment limit and play rapid catch-up. It will be possible to use it flexibly according to life plans.

Permanent tax exemption period and new investment period requested

Strict coordination with the Tax Commission and tax authorities is expected in the future. It will be interesting to see how much the annual investment limit and tax exemption limit can be expanded, and whether the tax exemption period and new investment period will be made permanent.

The most important thing is still to make the tax exemption and new investment period permanent. It calculated how many times its assets would have increased by the cumulative amount accumulated if it invested in world stocks for 5 or 30 years, using the World Equity Index (MSCI WORLD, yen basis, including dividends). Since the results varied from period to period, it shifted the end of the investment period by one month after January 2000 and examined the multiples up to each point in time.

Assets in the five-year accumulation averaged only 1.2 times the cumulative accumulation, and in the worst five-year period, from March 2004 to February 2009, assets were 40% less than the cumulative accumulation. It is clear that the current 5-year tax exemption period of the general NISA is too short.
However, the 30-year accumulation averaged 3.5 times, and even in the 30 years through September 2011, when it was at its weakest, it increased 1.7 times. If the tax exemption and new investment period are made permanent, such longterm investments will become possible.

A stepping stone to "100 million total shareholding"

When discussing tax incentives for investment, one criticism that always comes up is that they are "preferential to the rich." However, according to a survey by the Japan Securities Dealers Association and other organizations, 70% of NISA users have annual incomes of less than 5 million yen and 60% have financial assets of less than 10 million yen. In other words, NISA is being used to build assets for the middle class, not just the "rich."

The Kishida administration's goal of doubling asset income is also important for revitalizing the Japanese economy. For example, even through the end of June, when stock prices have fallen globally since 2010, the global equity index (including dividends, in yen terms), including Japan, has quadrupled. If you owned investment trusts linked to the index, you could benefit from this.

If 10% of the 1,000 trillion yen in cash and deposits, which account for 50% of household financial assets, or 100 trillion yen, were to move into investments, and if the same rise in global stocks as in the past were to continue, assets would increase to 400 trillion yen. It will provide a significant stimulus to consumption and capital spending. As real wages lose upward momentum, attempts to increase asset income through long-term diversified investments are becoming more important. If the proposed overhaul of the NISA system is realized, it will be an important call to "100 million total shareholders."

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The English translations provided through this service are the result of automatic and mechanical translation of contents written in Japanese and created by Nikkei or licensed by a third party, by an automatic translation system provided by a third party after certain processing of the contents by Nikkei. Nikkei disclaims all warranties, express or implied, related to the English translations, including any warranty of accuracy, reliability, validity and fitness for a particular purpose. Users shall use this service with the full understanding that it employs an automatic translation system that automatically and mechanically recognizes and analyzes information and outputs the results.