With the Japanese government’s plans to expand personal defined contribution (DC) pension plans studded with three tax benefits and with 26 million people eligible, the expanded DC plan could witness more than JPY3.1 trillion per annum, report analysts at Deutsche Bank. Mikihiro Matsuoka and Kentaro Koyama said in their August 5 research piece titled “Inconsistency of policy to promote ‘savings into investment’” that they believe the Japanese government’s campaign to encourage a shift “from savings into investment” contains misleading elements.

Personal DC could get twice the inflows via NISA

Matsuoka and Koyama highlight that Japanese households have been said to be persistently highly risk-averse, and inflows of funds by households into financial assets with principal guarantees are overwhelmingly greater than those into financial assets without principal guarantees in Japan. The flow into non-guaranteed products did increase between 2006 and 2008, but since then, new funds in almost every period have headed into principal-guaranteed financial assets.

Preference for principal guaranteed

Highlighting the Nippon Individual Savings Account (NISA) that was launched in January 2014, the analysts note that the value of financial asset purchases through NISA has touched JPY4 trillion. However, the DB analysts note it is hard to claim that the government has sufficiently achieved its objective of channeling investment into risk assets by introducing NISA.

The DB analysts point out that starting in April 2017, the Japanese government plans to expand the eligibility for the personal defined contribution pension system (personal DC) to housewives, employees in the government sector, and those in the private sector whose employers are equipped with corporate pensions. As against the approximately 2.9 million active accounts under NISA, the analysts anticipate that about half the eligible 26 million people will enroll in personal DC and that with about JPY20,000 in monthly contributions from each of the eligible people, the DC could garner about JPY3.12 trillion per annum, which is more than twice the annual financial assets purchased by NISA.

Japan NISA vs DC Pension Plans

Personal DC could push up household saving rate in Japan

Noting the effect of personal DCs on the household saving rate, Matsuoka and Koyama point out that when households are target savers and think that reaching a financial asset target will become easier by using a new investment method that avoids taxes, the household saving rate will decline because they will cease conventional accumulation methods and accumulate a smaller amount in NISA or personal DCs.

The DB analysts note that NISA and an expansion of personal DCs were designed by the Abe administration in order to encourage households to shift their financial assets from safe bank deposits to risk assets. However, the analysts point out that with strong headwind factors facing target-saver households, such as the strong Japanese preference for principal-guaranteed financial products, prolonged low or zero interest rates, QQE lasting for more than three years, and the January introduction of negative interest rates, the majority of households probably see the expansion of personal DCs as a great opportunity to alleviate these headwinds. They believe the rise in the household saving rate, which started in 2015, could well continue through 2017, thus forming a visible near-term downside risk for the economy.