Combine NISA & BoJ ETFs to magnetise the appeal of domestic investment!
Japan’s government has unveiled an ambitious “big-boned” plan that brings together private and public spheres and requires huge amounts of investment in defence, semiconductors, robotics, shipbuilding and several other industries judged vital to national security. Altogether, Prime Minister Sanae Takaichi’s government expects total spending to reach around 370 trillion yen across seventeen strategic sectors by 2040.
Thanks to a ruthless and increasingly powerful China, David Ricardo’s theory of comparative advantage is off the menu in the US and elsewhere. Japan was never fully comfortable with neoliberalism, and now “Japan Inc.” is clearly back in business. In such a world, it would be no surprise if finance were co-opted as well.
A few ideas have been floated already. Minister of Finance Satsuki Katayama has suggested that the Government Pension Investment Fund — known as “the Whale” because of its enormous size — should tilt its long-established asset allocation in favour of domestic stocks and bonds. Such a disruptive move is unlikely right now, but the GPIF may widen the deviation limits to allow a slightly greater domestic weight than the standard 50/50 split.
A better idea from Katayama was to offer individuals tax breaks on purchases of Japanese government bonds via the “NISA” savings scheme, based on the UK’s ISA. Yields on Japanese 30-year bonds have touched 4% this year, and the 10-year could be somewhere similar when the Bank of Japan finally normalises. Nonetheless, that is not enough to change the direction of travel.
NISA investment has been wildly successful from the expansion in 2024, with the cumulative total at 71 trillion yen and yearly inflows of about 20 trillion yen. However, the scheme’s architects missed a trick. They could have incentivised domestic investment by offering better tax breaks exclusively for Japanese stocks and bonds. We believe that currently the mountain of NISA money is invested 60% overseas, mostly in the United States. That is a significant sum.
A far more powerful way to turn the tide in the favour of domestic investment would be to use the NISA programme in combination with the BoJ’s vast treasury of ETFs that it accumulated between 2014 and 2023. The idea back then was to inject some confidence into Japan’s still unloved stock market. The plan worked only too well. Japanese financial bureaucrats like to pretend that the country is out of cash, but the BoJ itself is swimming in excess funds to an embarrassing degree.
The ETFs, a combination of Nikkei Index and Topix Index funds, have a book value of 23 trillion yen. Thanks to the multiyear bull market that subsequently took off, in our estimation the real value of the ETFs is about 100 trillion yen. No wonder that the BoJ has been dubbed Japan’s greatest ever hedge fund.
Recently it has started to sell ETFs into the market, but at a pace that would require 100 years to finish the job. A sensible approach that would also light a fire under the Tokyo stock market, as the NTT listing did in the 1980s, would be to sell ETF packages at a discount every year through the NISA system.
There would have to be safeguards. Investors would receive the discounts retrospectively on a sliding scale that deepens with length of holding. Thus, an investor who cashes out after one year might have a discount of 3%, while onewho stays for six years might have a discount of 15% and so on. Most importantly, only those who maintain at least 75% of their investments in domestic instruments will be eligible for this scheme.
Is there any precedent for such a manoeuvre? Yes, there is. During the Asian Financial Crisis of 1997-98, the Hong Kong dollar and stock market came under heavy speculative attack. In response, the Hong Kong Monetary Authority made massive purchases of the major stocks in the benchmark Hang Seng Index. As with the BoJ today, the investment turned out to be highly profitable in the end, generating a capital gain of 70%.
Proud of its reputation as a free market bastion, Hong Kong was keen to return the stocks to the private sector as soon as possible. For individual investors, incentives such as “loyalty bonuses” (effectively discounts that became valid after a certain amount of time had elapsed) were offered to encourage them not to sell. There was also some showbusiness razzmatazz, with a song by Canto-pop legend Danny Chan being chosen by the taskforce to brand the campaign.
Japan’s situation is different, but the necessity of returning shares to the investing public is very similar. The sooner the BoJ divests itself of its hidden hoard of riches, the better. And as for a campaign song, given the Prime Minister’s tastes, some heavy metal should fit the bill.
Takaichi drumming with President Lee of South Korea