Lessons from Japan’s investing drive for fellow cash-loving Britons

Good morning. Stephen here. The United Kingdom has the worst of both worlds when it comes to saving: much of our saving is in cash, compared to higher-return ways of saving, and we have weaker pension pots. Georgina has written about the UK’s investing culture and how it compares with Japan’s in today’s note.

Capital at risk

With a potential cut to the cash Isa allowance coming in next week’s Budget — as Rachel Reeves tries to divert more savers into the stock market — lobby groups have amped up calls to overhaul the Isa regime and make better use of the British public’s £610bn of investable cash (savings above their emergency buffer). In 2023-24, two-thirds of all Isa contributions were to cash Isas that have generous limits compared with UK peers. The cash Isa total is now £360bn, per the Treasury.

Savers choose cash because of reasons that, while grounded in people’s unique realities, may actually be at odds with their goals. The most common reason why comparatively few Britons pay into a stocks-and-shares Isa — less than 6 per cent of adults — is a fear of losing money, according to the 2024 FCA Financial Lives survey:

The Social Market Foundation finds the UK retail landscape’s notices about risk amplify fears in the minds of people already predisposed to a methodical line over the zip up, zip down of the stock market:

Risk disclosures are applied unevenly, with savers constantly warned about the risks to investing without hearing about the risks of holding cash [where returns are usually outpaced by inflation].

People struggle to map various “risk appetites” on to their real-life financial scenarios, or may glaze over them if they have been burned in the past, it adds.

Leaving the debate about cash Isas to one side, I want to focus on how we cultivate a culture — and not only through policy — that encourages people to invest their non-emergency savings. That’s why I wanted to bring up Japan, an ageing economy that is also reckoning with a cash pile and a wariness to equities that has endured since the collapse of the 1980s stock bubble. Yes, Japan still holds proportionally more in cash than the UK. So you understandably might think this an odd example! But I think there’s something in the way it reframed investing, not as risk-free, but as a risk that fits into people’s efforts towards financial resilience.

For much of the past 25 years, Japan’s flat or falling prices meant savers faced little penalty for sitting on cash. Now the return of inflation has created incentives to invest. Emerging cultural shifts pair well with a generous Isa policy. In January 2024, the Japanese government boosted those incentives by dramatically expanding its Nippon Isa (Nisa) — a tax-free wrapper for stock investment that was introduced in 2014 and is modelled after the UK’s Isa.

The revamped Nisa simplified procedures, raising contribution limits and extending tax benefits. The two types — the “growth quota” and a more restrictive “Tsumitate quota” — were advertised in trains and shops. It came with a strong government narrative that explains the Nisa as part of “stable asset building” for an ageing population. A nationwide financial literacy initiative was launched the same year, through which certified neutral advisers went into schools and workplaces to educate people on compounding interest and advantages of the new Nisa. (Unlike Britain, Japan has imposed a lifetime cap on its Nisa of ¥18mn, or about £95,000.)

This remarkable overhaul has started to work, as the chart illustrates. Many account holders had never invested in stocks before. Japanese households’ allocation of assets to stocks and investment funds has risen to the highest level since the end of the early-1990s economic boom, according to the Bank of Japan.

What I find really interesting about this whole transition is how the advantage of investing has been framed. When I read about how Japanese individuals are enacting small changes, passing on advice to relatives and friends, I sense that the national message around “asset building” — and investing’s upside — has helped drive behaviour, on top of Nisa’s tax perks. It is a matter of financial security. “People are realising it is wasteful to leave money sitting in savings,” Ponchiyo, a Japanese financial influencer, tells the Economist. See also from that piece:

“Investing used to be seen as something for people chasing big returns,” says Suzuki Mariko, who runs Kinyu Joshi (“Finance Girls”), a group for young women. “Now many people feel they have no choice but to consider it, even just to protect what they already have”. 

Some older Japanese, too, recognising that their cash will erode, are seeking other routes to preserve their financial health, with the Nisa being one way. Ahead of the Nisa overhaul, retiree Chieko Takenaka tells the FT:

“I can tell from talking to my friends on the chat group that we are all thinking about the same sort of things when it comes to rising prices and how to deal with that. I’m definitely scared of losing money in stocks, but I think our biggest worry is having enough money if we live another 20 years.”

For years, young Japanese led the uptake of Nisa. But from January to June 2024, growth in the number of investment accounts among people in their fifties and sixties accelerated, and the growth rate of the cohort in their fifties even overtook younger generations, according to Mitsubishi UFJ Financial Group. 

There are differences to consider between the two economies (Japanese households also invest less than the UK in pension schemes — see chart). Still, I think the Nisa offers interesting lessons for the UK’s challenge in reframing risk. With defined benefit pensions increasingly closing, people have already had to become more active and imaginative in ensuring their savings and investments add up to a sufficient retirement pot.

So how do we bridge the gap from “I worry about losing money by investing” to “I worry I am underinvesting for my long-term financial health goals”? It starts from school: without concepts such as compounding and percentages nailed down, savers are unlikely to clock the benefits of retail investment. Tech helps: in South Korea, people in their 50s show the highest predominance for investing because of simple low-touch apps, helped by open banking. In addition, we need a retail environment where investing risks are transparent and explained, but not a deterrent. Cash is still king in Japan, but its Nisa experience shows behaviour can shift when the story around risk makes sense to them. Britain needs to convey its own version if it is to strengthen household wealth — and its economy. (Georgina)

Now try this

Here’s a fun browser game: here’s a dish . . . guess the country it is from.

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