Japan Income is set to surge under new government plans to unlock 2,000trn yen (£12.4trn) worth of personal financial assets, half of which is held in currency and deposits.
Japan’s government wants to super-charge long-term savings and catalyse a rapid increase in nationwide investing – a rate that’s the lowest of any major developed country.
The knock-on effect is that income from these assets has barely increased at all throughout recent history due to ultra-low rates.
We believe that the government’s Asset Income Doubling Plan, announced back in August 2022, should be celebrated by Japan Income investors.
Opportunity Knocks for Income
Right now, equities yield well in excess of bonds (helped, in no small part, by the impacts of yield-curve control policy on the country’s bond market). This means they are likely to be favoured by investors and their advisers as they search for an alternative to cash for their holdings.
Digging deeper, we believe that the stocks likely to receive the most attention as this develops are those that have worked to improve their corporate governance standards over the past decades. The ones that have focused the most on putting shareholders first by recognising their demands, increasing dividends and share buybacks, and unwinding cross-holdings.
This could be promising for income investors for two reasons. Firstly, it means dividend-paying stocks stand to be exposed to an upsurge of new funding they can put towards accelerating growth in a post-Covid world (as well as continuing to reward investors through dividend pay outs).
Secondly, it gives firms that have been slower to develop their corporate governance standards a powerful motivation to do so. Especially when put alongside other key drivers of corporate governance change such as the restructuring of the Japanese stock market, which places greater emphasis on “putting shareholders first”.
This stands to accelerate the growth rate at which the pool of attractive Japanese income stocks moving forward.
The Japanese government is currently preparing to roll out the Asset Income Doubling plan in its Basic Policy on Economic and Fiscal Management. While details are sparse right now, we do know that Prime Minister Kishida is planning a vast expansion of Japan’s NISA scheme, exempting small investments from tax; a redesign of iDeCo defined contribution individual pension plans; a drive to improve financial literacy so households can better build stable asset portfolios; and a strategy to enhance the asset management environment so more households are encouraged to select suitable financial assets.
We should have further details soon. However, the fundamental point is that the Japanese government appears committed to getting its citizens to put more of their savings to work. That can only be good for income investors.
While we believe that this benefits the Japan Income sector, as we have outlined, it should be heralded as a positive and, perhaps long-overdue, catalyst for domestic economic growth.
Without it, the nation’s rapidly ageing population could be at risk of running out of cash due to insufficient long-term asset building. After all, there’s a reason so much emphasis is placed on retirement planning in countries like the US and the UK.
The good news is that plans are moving ahead to rectify this situation.
The net effect, of course, is that the Asset Income Doubling Plan could not only stand to benefit the Japanese economy, but also the nation’s standing as a global investment destination.
Richard Aston is portfolio manager of CC Japan Income & Growth Trust plc. The views expressed above should not be taken as investment advice.