Reboot of Japan’s Tax-Savings Scheme Could Spur Mutual Fund Growth

September 1, 2023 — Singapore

New Nippon Individual Savings Account (NISA) will have higher investment limits and indefinite use of tax reliefs

The revamp of Japan’s NISA scheme is expected to provide a solid long-term boost to mutual fund assets in Japan, by allowing indefinite use of tax exemptions and increasing the ceiling on investments eligible for tax reliefs.

NISA accounts have been increasing every year, from an estimated 5.6 million in January 2014 when it was first introduced to 12.5 million in December 2018, reaching 18.7 million as of March 2023. As part of changes that will take effect in January 2024, there will be two types of NISA schemes—Accumulated Investment targeted at new investors, and Growth Investment targeted at those who are more experienced. The lifetime tax exemption limit on investments has been raised to ¥18 million, up from ¥8 million currently, which could attract affluent investors who were not interested in opening NISA accounts previously.

Accumulated Investment funds are the same as those allowed in the accumulated type of NISA under the existing scheme, wherein there were 245 funds as of July 2023. Most of these products are index funds, representing close to 90% of accumulated NISA funds.

Compared with Accumulated Investment funds, Growth Investment funds may include more diverse mutual funds and exchange-traded funds (ETFs), such as those investing in emerging market equities, high-yield bonds, real estate investment trusts, and commodities, which are considered more risky. However, funds that are not seen as contributing to long-term asset formation are excluded from the list. These include funds paying monthly dividends, funds with less than 20 years’ history in the Japan market, and those using derivatives for non-hedging purposes. It is estimated that funds on the Growth Investment list will reach 2,000 by the end of the year, up from around 940 currently.

For asset managers interested in taking part in the New NISA, providing funds under the Growth Investments framework—especially strategies where domestic managers are lagging behind—would be the way to go, given that most funds under the Accumulated Investment framework would be low-risk index funds.

While the revamp of the NISA is a long-term positive for mutual funds growth in Japan, both managers and distributors should note that regulators continue to take steps to ensure that fiduciary obligations to investors are met. The agency remains concerned about misselling cases and has said it will monitor distributors closely, especially those providing funds for Growth Investments, which allows sales commissions to be charged. Thus, managers should be aware that funds charging high fees without basis will come under the agency’s scrutiny.

“The New NISA should boost mutual fund assets in Japan, because tax exemptions are now available for a longer time period, and larger investments are now possible,” said Ken Yap, Managing Director, Asia, with Cerulli. “There will be opportunities for foreign managers to offer their funds under the New NISA framework. As for distributors, client relationships built under the new NISA could lead to an increase in other fee-based businesses, such as those targeted at affluent investors or business owners.”

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Note to editors

These findings and more are from The Cerulli Edge—Asian Monthly Product Trends Edition, August 2023 Issue.

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