[Tokyo, 10fed]- In view of a weak yen that has continued for more than two years, the number of inquiries asking if there are any countermeasures is constantly increasing. Putting aside discretionary macroeconomic policies such as foreign exchange intervention and interest rate increases, measures to prevent yen depreciation tend to attract attention to promoting inward direct investment and encouraging inbound tourism, both of which can be said to be the correct response.
But there are other strategies too. For example, the so-called “repatriation tax break,” which “reduces or exempts corporate taxes when Japanese companies circulate domestically held foreign currency,” is attracting attention in the foreign exchange market, and reports from Reuters and other sources suggest that the government and the ruling party will finalize the plan in June.
As for the repatriation tax cut, I discussed it in detail in my September 2022 contribution, “Prescription for the “repatriation tax cut” to curb the continued depreciation of the Yen.”
Intuitively, since 95% of dividends received from foreign subsidiaries are already treated as tax-exempt income, there is a strong impression that the remaining 5% cannot be expected to be exempt. before tax have a lot of impact, and in fact, many voices say this.
On the other hand, considering that there are not many cards left in Japan, some think that we should stick to the remaining “5% friction” even if we cannot expect a significant impact. Certainly, the government’s initiative to take the lead in creating a flow of Yen buying could send a message against speculative yen selling. In countries known as international financial centers such as the United States, the United Kingdom, and Singapore, it is 100% tax-free. When I was asked about countermeasures, I would like to mention this in the sense that there are still things that can be done.
However, the repatriation tax cut is literally a symptomatic treatment, and its effects are likely to be one-shot. Of course, we should respect the idea that “even a single shot is necessary to buy time,” but it is disappointing that this is the only countermeasure.
As a more sustainable measure to curb yen depreciation, the author focuses on the idea of establishing a new domestic investment quota under the NISA Small Investment Tax Exemption System.
As is well known, the depreciation of the Yen since the beginning of this year is said to be mainly due to the purchase of foreign stocks linked to the new NISA, so-called “yen selling by households.” According to data from the Ministry of Finance, foreign securities investments through investment trusts reached about 3.5 trillion yen in the January-March period this year alone, equivalent to an entire year’s worth in a normal year.
Regardless of whether this is the main reason, it almost certainly contributes to the yen’s depreciation. In past columns, I have expressed concern that “selling the yen at home is the real risk of a weaker yen,” and it appears that those concerns are partially borne out.
Assuming foreign securities investment through investment trusts continues at this pace, household budgets will sell well over 10 trillion yen in yen each year. There seems to be a large number of people who haven’t started managing their assets yet, so there is a lot of potential for expansion. This is not an issue that can be ignored.
So, what kind of effects can be expected if a “domestic investment limit” is established in addition to the current “construction investment limit” and “growth investment limit”? Given the difference in growth rates between Japan and abroad, there is a possibility that the desire to invest in foreign stocks will remain strong. However, given the depreciation of the Yen up to this point, there is a possibility that more people will become reluctant to take foreign currency risk. Domestic investment quotas can be a source of support for such groups.
Of course, if new investment funds were to increase as a result of the new domestic investment quota, the domestic “selling the yen” momentum would not change, but that is unlikely to happen.
This is because the majority of individual investors do not use the current annual limit of 3.6 million yen (1.2 million yen for accumulation investment and 2.4 million yen for growth investment). According to the Financial Services Agency’s “NISA Account Usage Survey” at the end of September 2023, the number of NISA accounts was 20,347,312, and the purchase amount was 34,028,145,970,000 yen. A simple calculation shows that it is 1.67 million yen per account. Even if the annual limit of 3.6 million yen is expanded, it won’t affect many people because they haven’t used it all in the first place.
If a new domestic investment quota is established, it is anticipated that some of the funds that used to go to foreign investment will be replaced by domestic investment. In other words, the increase in domestic investment quotas is just an expansion of options.
If investment in foreign assets (selling the yen) falls by the amount allocated to domestic investment, that would be an excellent measure to prevent the Yen from depreciating. Although capital controls are difficult in Japan, which is part of the G7, it is possible to design incentives to reduce outflows.
The UK has already started to consider this step. In April this year, the British government will raise the tax-free limit for UK stock investment from the current 20,000 pounds a year to 25,000 a year for ISAs (Individual Savings Accounts), an original form NISAs, in the budget policy published in the spring expressed his intention.
However, given that the country is holding a general election this fall and there is a possibility of a change of government, we have to wait and see how the proposal will turn out. However, once this policy is finalized, I think there is a possibility that there will be increased momentum to demand the same policy in Japan.
If household sector funds are allocated domestically rather than overseas, Japanese stocks will rise and yen sales will be suppressed, killing two birds with one stone. It will also help that the new NISA is in its first year of operation, a good time to introduce new options.
At the very least, as a means of countering “domestic yen selling”, which is attracting attention as a cause of yen depreciation, the establishment of a new domestic NISA limit is not only a matter of interest rate hikes and foreign exchange. intervention, but also compared to the return tax reduction proposal that was presented at the beginning It seems that it has the potential to be sustainable, and is consistent with the government’s policy of becoming a nation that built on asset management.
On the other hand, if the “selling of domestic yen” is not stopped early, there is a risk that some of it will end up as “foreign currency that will never return,” so it is better take action early I can think of it too.
However, neither the repatriation tax cut nor the establishment of NISA’s new domestic investment quota can be said to be a drastic policy that will reverse the weak yen market. In the first place, there is no policy that can absorb all the selling of yen that exists in the market. To put it bluntly, only the US can fundamentally change the flow of the foreign exchange market in a floating exchange rate.
With this in mind, what Japan needs for now is a “sustainable method of buying time,” and I believe that the cut in the repatriation tax and the NISA domestic investment quota are part of this. If the exchange market can be smoothed out, even if only for a short time, it will be possible to ensure a favorable market environment for business corporations. There is meaning in that too.
Although we buy time by combining various symptomatic treatments, we discuss things like accumulating direct inward investment, adjusting the power source mix, and securing a workforce (and the pros and cons of immigration policy). to improve supply and demand in the Yen exchange rate over the medium to long term.
Editing: Erika Mune, Kazuhiko Tamaki
(This column was posted on the Reuters Foreign Exchange Forum. It is written based on the author’s personal opinion)
* Daisuke Karakama is Mizuho Bank’s chief market economist. After graduating from Keio University’s Faculty of Economics in 2004, he joined the Japan External Trade Organization (JETRO). From 2006, he was seconded to the Economic Research Center of Japan, and from 2007 to the Directorate-General for Economic and Financial Affairs of the European Commission (Belgium). Mizuho Corporate Bank (currently Mizuho Bank) since October 2008. When he was seconded to the European Commission, he was the only Japanese economist involved in the preparation of the EU’s economic outlook. His books include “European Risks: Japaneseization, Yenization, and Bank of Japan” (Toyo Keizai Inc., July 2014) and “European Central Bank ECB: From Organization and Strategy to Banking Supervision” (Toyo Keizai Inc., November 2017 ). Month). Has appeared in many media such as newspapers and television.
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