Long-term steps best cure for stock market

Junichi Ujiie, Chairman Nomura Holdings, Inc., The Asahi Shimbun, Tokyo

In order to secure a sustained recovery of stock prices, it is necessary to change investors' expectations of the long-term relationship between supply and demand in the stock market.

As the stock market is struggling to shake itself out of the lengthy doldrums, calls are growing for new policy measures to give the market vim and vigor. But measures to lift stock prices must not end up impairing the proper functioning of the market, thereby curing the cold but killing the patient. What kind of measures should be taken now to give a boost to the wobbly stock market?

The prices of stocks, like the prices of any goods and services, are determined by supply and demand. But stocks are different from other commodities; demand for specific stocks is often affected more by what investors believe will happen in the future than what is actually happening in the present.

So, in order to secure a sustained recovery of stock prices, it is necessary to change investors' expectations of the long- term relationship between supply and demand in the stock market. The measures adopted by the government to rev up the stock market, however, tend to be focused on the short-term effects on supply and demand, such as the rule change to allow employee pension funds to return the assets they manage on behalf of the government without cashing them and the suspension of sales of government-held shares. These steps will only affect short-term forecasts.

General improvement in corporate earnings is essential for sustained growth of demand in the stock market. Moreover, the government should take measures to make the stock market more accessible to investors. There are three potentially effective steps.

First of all, the government can implement tax reforms to accelerate the shift of private financial assets from cash and deposits into the securities markets. One possible big stimulant would be a cut in the tax on dividends. Even the United States, where the stock-buying culture has penetrated so deeply, has decided to lower the dividend tax rate. In April this year, Japan also lowered the rate in principle to 10 percent. But this is a temporary measure as it will be raised back in five years. We believe it is worthwhile to consider slashing the rate further and making the reduction permanent.

It would also be effective to introduce measures that value shareholdings at half their market price when inheritance tax is calculated.

Another good idea would be to raise the maximum amount of corporate contributions, which are eligible for tax incentives, to defined-contribution pension programs to around 1 million yen, roughly the same level as in the United States. (The current amount in Japan is 216,000 yen per year per employee for companies that have their own pension plans).

In debate over securities taxation reform, emphasis is often placed on cuts in capital gains tax. But lower capital gains tax is effective only when investors expect capital gains on stock investments. The government needs to provide incentives that are effective regardless of stock market conditions.

Secondly, more energy should be poured into popular education to increase people's knowledge about securities investment. In this respect, private businesses like ours can make a great contribution. In the last fiscal year, the Nomura Group sponsored courses on securities investment and securities business at 112 universities nationwide and dispatched a total of 400 lecturers.

A survey by the Cabinet Office shows that the most common reason for public reluctance to invest in securities is poor knowledge about the subject. Disseminating knowledge about securities investment will help increase the total number of investors and generate sustained demand for stocks.

Thirdly, the government should do more to make investment trusts popular instruments among investors because they offer greater diversification and professional management services. Theoretically, they are an appropriate investment vehicle to help broaden the investor base. Unfortunately, however, investment trusts available in Japan have not been performing well. But intensifying competition in the investment trust market will contribute to improving performances.

Another problem is that investment trusts are sold only at branches of brokerages, banks and life insurance firms, limiting their availability to many investors in rural areas. Proposals are on the table to allow Japan Post, which has more than 20,000 offices nationwide, to sell investment trusts. If the step causes part of the 230 trillion yen of money dormant in the postal savings system to flow into investment trusts, that would be a big boon to the stock market.

As corporate earnings are picking up, a combination of the measures discussed above is likely to improve the long-term prospect of supply and demand in the stock market, leading to the economy's revival and a sustained upward climb of stock prices.