Investor Alert

Feb. 21, 2003, 7:00 p.m. EST

Tax cut leads Japanese into stocks

Investors target dividend yields in place of bank accounts

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By Mariko Ando, CBS.MarketWatch.com

TOKYO (CBS.MW) -- Ai Takeuchi knows nothing about stocks. But with her savings earning practically nothing in the bank, the 28-year-old office worker figured it was probably time to learn.

"What's the point of keeping money with banks when their interest rates are zero?" asked Takeuchi, who recently attended a stock seminar aimed at teaching investment novices how to make money at a time when interest rates are virtually nonexistent in Japan.

Besides learning basic investor jargon, Takeuchi discovered the appeal of investing in stocks with high dividends, especially now that Prime Minister Junichiro Koizumi is bent on cutting tax rates to spur the sluggish economy and the stock market.

Tokyo's benchmark Nikkei Average is hovering near 20-year lows, hurt by growing uncertainty over the global economy and the structural reform measures taken by the Koizumi government.

In December, the Japanese government took a page out of the Bush administration's economic playbook and said it would cut the tax rate on corporate dividends to encourage people to move their money into the securities markets.

For the next 5 years, the maximum tax rate on corporate dividends will be capped at 10 percent, down from the current 50 percent.

The move is considered quite bold given the usual glacier-like speed of economic policy change in Japan.

"A change in the dividend tax system made (equity investing) even more attractive because it used to be incomprehensible. As banks' rates are so low, I now think I need to use my own knowledge and initiatives to make money," said Takeuchi.

She isn't alone in that way of thinking.

Stocks beat bonds

With a pending cut in dividend taxes, stock investing is becoming more tempting to people in Japan, where the average expected annual dividend yield of shares listed on the Tokyo Stock Exchange's first section -- at 1.39 percent -- topped the 0.84 percent yield on 10-year government bonds for the first time in more than three decades.

The government estimates that of a total 1,400 trillion yen ($11.5 trillion) in national personal savings, more than 50 percent are in basic deposit and savings accounts and only 7.5 percent is invested in the stock market.

Analysts attribute some of the investor disinterest to Japan's prolonged deflation, sluggish economic conditions and a loss of faith in the ability of the nation's equity to deliver capital growth.

The fact that dividends and capital gains are taxed at a higher rate than ordinary deposits and savings doesn't help, they say.

Ueki Yasuo, an independent analyst, said individual investors are starting to show interest in stocks because of falling stock prices, the simplification of the taxation system and low interest rates.

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