WisdomTree Minds on the Markets
Minds on the Markets
Minds on the Markets
Japan’s “401(k)” Contribution Boost Is Weeks Away
December 4, 2023
Maybe it’s because the U.S. economy is just so large, or maybe it’s simply been so long since foreign developed markets witnessed a sustained bout of outperformance. Whatever it is, we seem to be in this bizarre world where overseas bullish developments get short shrift when they surface.
Consider Japan’s little-known—at least on this side of the Pacific—“Doubling Asset-based Income Plan.” One of Prime Minister Fumio Kishida’s key planks in a roadmap to snap Japanese households out of their reflexive grasp for cash, it calls for expanding the limits of the country’s defined contribution retirement program in 2024.
With 54% of household savings in cash, compared to Americans’ 15%, risk aversion has become as quintessentially Japanese as cherry blossoms and vending machines.
Whether Kishida can pull off the Asset Income Doubling Plan, whose name implies that he wants people to double up their equity holdings in the coming years, is going to rely on what happens if and when middle-class Japanese embrace the 401(k)-style NISA program to a greater extent than they have in recent years. Maximum contributions are set to ramp up in January. The 2023 maximum was ¥400,000 ($2,702) per year; it will triple to ¥1,200,000 ($8,108).
The forthcoming statistic still gets us every time we think about it. First place in the MSCI All Country World Index’s weights is the U.S., at 62%, as of October. The runner-up is Japan, at just 5.5%, a couple of percentage points above Britain’s sub-4% proportion.
Part of the United States’ dominance of the global equity basket can be chalked up to intense outperformance since the Japanese stock market’s 1989 comeuppance. But part of the market cap mismatch is also because a steady stream of firms have chosen to list in the U.S. over the years. You can’t blame them: the New York Stock Exchange and the NASDAQ are where hot IPOs come to splash.
By pushing retail investors into the stock market, maybe Kishida can juice valuations and change those valuation perceptions.
The Tokyo Stock Exchange is also in on the act, prodding Japanese companies to boost buybacks, boost profitability, boost price-earnings ratios, boost everything. Companies that do not get the memo and explicitly publish how they are going to pull their profitability metrics out of the basement will be put on the infamous “Name and Shame” list. It will be posted in 2024, we believe.
Increased retirement contributions, a society-wide push for an equity ownership culture and high pressure on corporations to boost their profitability: these are three drivers of a bull case for Japan. But from our experience, non-Japanese investors are not fully aware that these initiatives are even happening. Maybe that will change in 2024.
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