Japan's NISA investments seen adding downward pressure on yen
Program could spur estimated $26bn in yearly yen-selling on foreign-asset demand
Japan's revamped Nippon Individual Savings Account program is fueling retail demand for foreign assets. (Photo by Ryutaro Yokoyama)
AKIRA INUJIMA and TOSHIHIRO SATO, Nikkei staff writers
February 3, 2024 05:48 JST
TOKYO -- Japanese retail investors are snapping up foreign assets through the revamped Nippon Individual Savings Accounts, stoking speculation that the tax-exempt investing program could contribute to further weakness in the yen.
"Every investor overseas knows about the revamped NISA," said a source at a brokerage. "Many are especially interested in the scale of yen-selling and dollar-buying tied to the program, and comparing it to Japan's trade deficit."
The NISA program has two components: "growth" accounts that can be used to invest in individual stocks, and tsumitate accounts intended for monthly investments in mutual funds. Up to 3.9 trillion yen ($26.3 billion) could be invested in overseas assets yearly across the two components, the Japan Research Institute said.
That yearly figure works out to 325 billion yen in potential yen-selling demand monthly. For comparison, Japan's trade deficit in December totaled 412.7 billion yen after seasonal adjustments.
"People tend to hold on to their monthly investments, particularly in foreign equities, over the long term, so we're unlikely to see profit-taking or other moves that drive demand for buying yen," said Soichiro Tateishi at JRI.
The Japanese government wants cumulative investments through NISA to reach 56 trillion yen by 2027. Assuming the figure grows around 5.2 trillion yen each year, JRI sees the program weakening the yen by up to 6 against the dollar by 2027.
The yen is expected to see greater depreciation pressure early in each month, based on investment trends tracked by Nikkei affiliate QUICK's Asset Management Research Center. Five major mutual funds that focus on foreign equities drew 339.1 billion yen in inflows in the first half of January, outpacing the 236.6 billion yen in the second half.
Investments made by the 15th of each month also accounted for 68% of the total before NISA's overhaul last month.
"Many people set up automatic investments for the 1st of the month, or otherwise on the 5th or the 10th," said Tomoichiro Kubota, senior market analyst at Matsui Securities.
The yen has been trading around 146 to 147 to the dollar, about 5 to 6 weaker than at the end of 2023, despite the spread in long-term interest rates between Japan and the U.S. remaining largely unchanged.
The marked depreciation in the yen since 2022 was largely driven by two factors: interest rate differentials between Japan and overseas, and the widening trade deficit.
But the yen has continued to weaken even as the interest rate spread settles and Japan's trade deficit declines, leading to views that the new NISA is a third factor putting downward pressure on the yen.
Unlike stock prices, which are connected to corporate performance, there are few indicators in the foreign exchange market to gauge whether prices are high or low. Currencies also often keep moving in a single direction.
"As more people become aware of the fact that households are selling yen, more people will sell yen based on that," said Daisuke Karakama, chief market economist at Mizuho Bank. "That's how the currency market works."
The U.S. Federal Reserve is expected to begin lowering interest rates by midyear, and the Bank of Japan is also expected to end its negative interest rate policy by April.
Market participants had predicted that the yen would appreciate in 2024, possibly to the 120 level against the dollar, as interest rate differentials narrow, but enthusiasm for overseas investment brought on by the new NISA may spur a rethink.
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