The new tax exemption program implemented by the Japanese government could shift billions of yen from savings to equities and help more and more Japanese investors discover the uncharted territory of stock investing, writes MoneyShow's Jim Jubak, also of Jubak's Picks.
For the next two weeks, the battle over shutting down the US government and raising the debt ceiling is likely to keep downward pressure on the US dollar. And that's likely to mean a stronger yen, since the Japanese currency once again looks like a favorite safe haven.
A stronger yen is bad news for Tokyo stock prices, by and large, since Prime Minister Shinzo Abe's program for stimulating growth (and inflation) in Japan hinges on a cheaper yen to boost Japanese exports. Yesterday, September 30, for example, the Nikkei 225 stock index dropped 2.06% with such exporters as Hitachi (down 2.71%), Kubota (down 3.28%), and Toyota Motor (down 2.64%) leading the retreat.
But before you throw in the towel on your Japanese positions—assuming that you've gotten over the habit of ignoring Japan's equity market ingrained during the country's lost decades—I'd note that the Japanese government is riding to the rescue of Japanese stocks beginning today. That effort makes the current weakness a potential buying opportunity, rather than a moment to run for the hills.
Today, October 1, the government began the Nippon Individual Savings Accounts, which will allow individuals to invest up to $10,100 a year for five years with total exemption from taxes on capital gains and dividends. Japanese households held $8.5 trillion in deposits as of March, the most ever, the Bank of Japan reported. Stocks made up just 8% of the total (in the US it's 34%) with bank accounts paying as little as 0.02%.
The program has two goals. First, if Japan's rapidly aging (and shrinking) population is to have any hope of paying its way in retirement, retirement savings have to earn more than 0.02%. Second, the government is scheduled to raise the capital gains tax rate to 20% from 10% in January and it hopes the new tax break will minimize the damage to Japanese equities in 2014.
Nomura Securities estimates that the new program, set to run through 2023, could shift as much as $660 billion from savings accounts into equities.
Stock investing is such unexplored territory for most domestic Japanese investors, that it's hard for me to say where this money might flow. (It can't flow into bonds, which aren't eligible for this tax break.) Considering the conservative nature of Japanese savers, I think it's reasonable to conclude that a good percentage will flow into shares of brand name Japanese exporters such as Toyota Motor (TM) and I'd certainly think about picking up shares of companies like that on weakness—especially if they've shown good returns in the rally in Japanese stocks that began in November 2012. Toyota Motor is up 65.1% in the last 12 months. (Toyota Motor is a member of my Jubak's Picks portfolio.)
Full disclosure: I don't own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund, I liquidated all my individual stock holdings and put the money into the fund. The fund may or may not now own positions in any stock mentioned in this post. The fund did own shares of Toyota Motor as of the end of June. For a full list of the stocks in the fund as of the end of June see the fund's portfolio here.
