Japanese Retail Investors' Appetite for Overseas Equities Weakens the Yen

Japanese retail investors' insatiable demand for international stocks is putting additional pressure on the yen, exacerbating the downward risks posed by Donald Trump's tariffs and the significant interest rate disparity with the US.

NISA's Influence on Yen Sales

Following the government's expansion of the Nippon Individual Savings Account (NISA) scheme, Japanese individuals through investment trusts purchased a net of ¥10.4 trillion ($66 billion) of foreign equities and funds in 2024. This represents the highest level since 2015, the year after Japan introduced NISA to encourage retirement savings. Preliminary indicators suggest substantial flows persisting in 2025.

"NISA-driven selling pressure on the yen is likely to intensify in the near term," stated Shota Ryu and Daisaku Ueno, currency strategists at Mitsubishi UFJ Morgan Stanley Securities Co. "NISA's impact will continue to grow as the number of accounts increases."

NISA's Growing Popularity

NISA, akin to the UK's Individual Savings Accounts and the US's Roth IRA, has seen account enrollment surge to 25 million as of September 2024, a 60% increase from late 2020. The Financial Services Agency of Japan has introduced Tsumitate Wanisa, a mascot designed to promote personal investment from the massive savings of over one quadrillion yen held by Japanese individuals.

The government's 2024 NISA revamp contributed to this increase in accounts, eliminating tax-free holding period limitations and raising annual contributions to stimulate Japanese investment.

Interest Rate Gap and Yield Differential

Despite the Bank of Japan's anticipated interest rate hike on Friday and the Federal Reserve's indication of a moderating pace of rate increases, the US-Japan yield differential remains wide. Nomura Securities Co. estimates that approximately half of the 2024 dollar gain against the yen can be attributed to increased investment trust flows into international securities.

The allure of domestic assets held in NISA accounts has been diminished due to the weak yen and relatively low domestic yields. Since NISA's inception in 2014, US equities have significantly outperformed Japanese stocks.

NISA's Impact on Investment Flows

Increased volatility in foreign markets could impact NISA-funded outflows in 2025. The yen-weakening pressure from tax-free accounts may also subside if inflows to Japanese assets rise in response to higher yields or strong stock market performance.

NISA-related investment flows contributed to the yen's plunge to its lowest level since July earlier this month. Inflows into Mitsubishi UFJ Asset Management Co.'s eMAXIS Slim US and All-Country Equity Funds have already reached ¥641 billion during the first ten business days of 2025. According to Bloomberg-compiled data, this represents a 66% increase from the same period a year earlier and the highest level since at least 2019.

"NISA kicked off 2025 with a bang," wrote JPMorgan strategists Meera Chandan and Arindam Sandilya. "Given that more than half of household assets are still held in yen cash, we continue to believe that Japanese household outflows are a structural reason for yen weakness."