As we continue to monitor the potential for the impact of Abenomics, we note the potential intersection of two crucial ideas—ideas that may be central to the ultimate efficacy of these programs.
• Bank of Japan’s (BOJ) 2% inflation target, reversing the overall, entrenched deflationary expectations
• Investors beginning to shift their assets from cash and savings accounts into equities
In a deflationary environment, there is no incentive to spend, since the purchasing power of the money increases with the passage of time. As a result, Japan’s households are flush with cash in the bank. However, as consumers start to expect higher inflation, they may increase purchases and also invest their assets to receive some type of hedge against inflation—in things that can increase in value as prices increase. Equities are one such option, as companies can often increase their prices as their costs increase. And because part of the inflation is coming from imports as a result of a weak yen, the Japanese also may look for assets in other currencies to protect themselves from a drop in the value of the yen. Both equities and foreign assets are thus two potential sources of inflation protection.
Starting January 1, 2014, Japanese citizens will be able to buy equities in new incentive accounts motivated to encourage risk taking—specifically the movement of money from savings accounts and cash into things such as equities, where there is no guarantee that its value will be maintained. Each citizen will be able to invest up to 1 million yen per year for at least five years. The capital gains and dividend payments from these equities will be tax free. These accounts were designed to encourage risk taking. Importantly, Japanese government bonds (JGBs) are not eligible to be purchased in these accounts.
While we believe that taxation (or the lack thereof) is usually an effective motivator for people to change their behavior, we believe that receding deflationary expectations—in concert with the implementation of these accounts—can create a more widespread and far-reaching motivation for Japanese investors to buy equities.