Japan's NISA Intensifies Currency Depreciation Pressure

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The increasing demand for overseas stocks by retail investors in Japan has put additional pressure on the depreciating yenThis growing trend, driven by various factors, reflects a shift in the traditional investment landscape in Japan.

Last year, the Japanese government expanded the scope of its NISA (Nippon Individual Savings Account) system, encouraging individuals to invest more funds into long-term opportunitiesThis initiative not only increased participation among personal investors but also prompted investment trusts to significantly purchase foreign stocks and funds, with investments reaching ¥10.4 trillion (approximately $66 billion), the highest level since 2015. Since the inception of NISA, a noticeable trend of capital flowing towards overseas markets has emerged, with indications suggesting that this trend could intensify by 2025.

Shota Ryu and Daisaku Ueno, currency strategists at Mitsubishi UFJ Morgan Stanley Securities, noted, “In the short term, the selling pressure on the yen driven by NISA may escalate

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As the number of accounts increases, NISA’s influence on the yen exchange rate will further expand.” As of September 2024, the number of NISA accounts had grown to 25 million, reflecting a significant increase of about 60% since the end of 2020.

To promote this investment initiative, the Japanese Financial Services Agency launched a mascot named “Tsumitate Wanisa.” This character symbolizes the vision of investors withdrawing funds from over ¥1 trillion in savings to investInterestingly, the term "Wani" means crocodile in Japanese, and its tail symbolizes the growth of asset value, which has resonated well with the public and encouraged further participation in NISA.

Early in 2024, the Japanese government reformed NISA by eliminating restrictions on tax-free holding periods and raising the annual contribution limit, aiming to encourage more Japanese citizens to engage in capital markets

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With these reforms ongoing, the number of NISA account holders continues to rise, likely applying more pressure on the yen in the short term amid the backdrop of capital movement.

In today’s interconnected global financial markets, Japanese investors utilizing NISA accounts tend to direct funds toward markets facing dynamic central bank policy adjustmentsThere is considerable speculation and attention regarding the trajectory of global monetary policy in 2025, with particular focus on the actions of the Bank of JapanThe prevailing market expectation is that the Bank of Japan will implement interest rate hikes by 2025. This expectation stems primarily from signs of economic recovery in Japan and changes in inflation data; the central bank aims to adjust the pace of economic growth through rate hikes to avoid overheating the economy or runaway inflation, while also trying to stabilize the yen's position in international currency markets.

Meanwhile, on the other side of the Pacific, the Federal Reserve has been sending out different signals

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It has clearly indicated a slowing in its rate hike paceThe recent hikes by the Fed have had profound effects on global financial markets, significantly altering international capital flow directions due to the strong position of the dollar and fluctuating interest ratesThe recent shift to a slower rate increase reflects a complex consideration of the U.Seconomic growth, employment market, and the global economic situationWhile the U.Seconomy is exhibiting moderate growth, it faces looming risks such as debt concerns and trade tensions; slowing down on rate hikes helps stabilize the domestic economic environment and avoid an economic recession that might arise from overly tightening monetary policy.

Despite the anticipation for interest rate hikes by the Bank of Japan and the Fed’s slowing pace, the interest rate disparity between Japan and the U.S

continues to remain significantHistorically, the U.Shas maintained a higher interest rate policy compared to Japan, which opens opportunities for Japanese investors to earn higher returns on dollar-denominated assetsThis substantial interest rate gap manifests significantly on the yen's exchange rate in various waysOn one hand, high rate differentials entice Japanese investors to sell their yen to invest in U.Sassets, thereby increasing the market supply of yen and driving down its valueOn the other hand, on the international forex market, the pursuit of higher returns drives investors to prefer dollar assets, thereby reducing demand for the yen and compoundedly accelerating its depreciationAs long as the interest rate disparity remains high, it will continue to play a pivotal role in influencing the yen’s value.

Moreover, Nomura Securities has pointed out that a significant portion of the rise in the USD/JPY exchange rate last year is attributable to Japanese investors increasing their overseas securities investments through NISA

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While NISA accounts also permit investments in domestic assets, the combination of a weak yen and relatively low returns from Japanese assets has limited their attractiveness for Japanese investorsSince NISA’s launch in 2014, returns in the U.Sequity market have more than doubled those of Japan, further contributing to capital flight from Japan and heightening the depreciation pressure on the yen.

However, volatility in overseas markets could impact the scale of capital flows through NISA in 2025. Significant market fluctuations might influence investors’ decision-making processes, potentially alleviating some pressure on the yenConversely, should the Japanese market attract capital inflows due to better yields or strong stock performance, this could offer some support for the yen.

At present, investment flows linked to NISA have prompted the yen's depreciation, driving it down to its lowest point since July 2024. At the beginning of 2025, the eMAXIS Slim U.S

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