Japan may introduce tax incentives for purchasing government bonds
The Japanese government is considering introducing tax incentives to encourage private investors to buy more government bonds. The initiative is being discussed amid the Bank of Japan’s reduction in purchases of debt securities and rising yields, The Japan Times reports.
Finance Minister Satsuki Katayama said on Tuesday that government bonds need to become a more attractive asset for retail investors to ensure their stable issuance and redemption. Possible measures under discussion include reducing the inheritance tax for holders of Japanese government bonds or fully exempting such assets from the tax.
Proposals for NISA
The Democratic Party for the People proposes including government bonds in the NISA program, Japan’s tax-advantaged investment accounts. Last month, the party submitted a corresponding bill to the upper house of parliament. Currently, NISA allows investments in stocks, real estate investment trusts and exchange-traded funds, but not directly in government bonds.
Tsuyoshi Ueno, executive research fellow at NLI Research Institute, noted that depending on the specific measures, household assets could shift significantly from bank deposits to government bonds. At the same time, he said, one of NISA’s main goals is to channel household savings into the stock market so that companies receive capital for growth, rather than to support public finances.
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Sales and yields
As of March, Japanese households held government bonds worth about 20 trillion yen, or $125 billion, while bank savings amounted to around 1 quadrillion yen, according to Bank of Japan data. Higher interest rates have made bonds more competitive: five-year securities planned for issuance in September will have a 2.06% coupon, compared with about 1% on five-year time deposits at major banks.
From April to August, government bonds worth about 4 trillion yen were sold to individuals, 66% more than in the same period of the previous year. Ueno called the one-year lock-up period a drawback of retail government bonds.
Noriatsu Tanji, chief bond strategist at Mizuho Securities, suggested that inheritance tax benefits could significantly affect capital allocation. However, he warned that if funds for purchasing bonds come from bank deposits, banks will have fewer opportunities to buy government debt themselves. Keiji Kanda, chief economist at Daiwa Institute of Research, added that large-scale tax incentives would ultimately require budget spending.
