Inflation is pushing Japan into a new era that could boost equities by encouraging more households to draw savings from low-interest bank deposits, the head of the country’s stock exchange operator said.
Hiromi Yamaji, president of the JPX group that controls the Tokyo and Osaka stock exchanges, said he expected many Japanese to stop sitting on so much money — the country’s households have amassed ¥1 trillion ($7 trillion) in bank savings – and looking to the stock markets for better returns in response to rising housing costs.
“They sense inflation coming on. . . cash was king when there was deflation. But if inflation comes, they have to be prepared,” Yamaji said in an interview.
Exchange-traded funds would likely be a first entry into stocks for many, said Yamaji, who became head of JPX this year and is trying to make the stock market more attractive to individual investors who have long viewed it as too risky.
Since the burst of the country’s economic bubble more than three decades ago, many Japanese have been very skeptical about holding equities, while years of stagnant prices led households to overlook the fact that bank deposits yielded almost no returns.
“They didn’t care even if it didn’t bring any returns,” said Yamaji. “But once inflation kicks in . . . they have to be willing to hedge against inflation and it’s very clear that deposits don’t give you enough returns to hedge against.’
Japan’s core measure of consumer inflation, which excludes fresh food and energy, rose more than 4 percent in April for the first time in nearly 42 years.
With prices rising more broadly, market expectations are building that Kazuo Ueda, the new governor of the Bank of Japan, will gradually shift to winding down decades of ultra-loose monetary policy.
At the same time, Japanese stock markets have returned to levels not seen in 33 years. The broad Topix index is up 14.5 percent this year, which investors say is due in part to JPX’s efforts under Yamaji to push companies harder to improve capital efficiency and increase business value.
However, the increase is mainly due to foreign funds, while domestic Japanese investors – especially the retail sector – have been much more cautious.
Yamaji suggested that Japan’s attitude to investing in the stock market would also change as the generation that lost money in the bubble of the 1980s reached old age.
“There was a generation that had the very bad experience of the bubble bursting, but it was 35 years ago, but the number of people who had that bad experience is decreasing,” he said, while a younger generation of investors are less cautious. about diverting more savings into risky assets.
Since 2014, about 17 million Japanese have opened a tax-sheltered investment product known as Nisa. The stock market has since risen about 50 percent, leaving a younger generation of investors with significant unrealized gains, Yamaji said.
Starting next year, the government will significantly broaden the investment scheme, allowing investors to purchase shares of up to ¥3.6 million annually using the Nisa account and raising the expectation that the shift from cash savings to equity investments will accelerate.