Recently I find I’m seeing the topic, “asset-income doubling plan” every now and again. Originally, Japanese Prime Minister Kishida launched this notion in a speech he gave in London in May of last year, and the government has since established the “Council of New Form of Capitalism Realization” in the Cabinet Secretariat to deliberate the issue. The plan is not designed to double both assets and income; rather, to boost income generated from assets—to double it. While we could debate the naming of the plan in terms of appeal, one wonders how many Japanese people would recognize the phrase when they hear it in the first place. This is because the Japanese have not traditionally viewed assets as income-generating elements, instead earning exclusively through labor. They are a people who have gone through their lives without being aware of their personal balance sheets.

Students in Europe and the United States learn financial literacy from a young age, whereas it is just beginning here in Japan. Salaried workers, who comprise the majority of the working population, have their taxes deducted from their paychecks and even have companies perform year-end tax adjustments—which relieves them of the burden of submitting a tax return—so even if they have a basic grasp of the flow, they have no opportunity to learn about what stock-type income actually is. As their chief concern is their take-home pay, they are not aware of how much is being deducted for taxes, pensions, medical care, and other social security expenses (as an aside, they do not become more aware of politics). Looking at the ratio of risky assets to financial assets, it is 13.0% in Japan, compared with 44.8% in the U.S. and 25.9% in Europe, only a half or a third of these major countries and regions—quite a disparity.

The profit and loss statement and the balance sheet are vital financial statements that represent a company’s business performance and financial position, so the vast majority of people are familiar with them. The profit and loss statement is a flow-type concept, and it indicates the increase or decrease in sales, expenses, profits, and other items over a certain period of time. The balance sheet, on the other hand, is based on a stock-type concept and shows the amount of assets and liabilities at a fixed point in time. Of course, we can apply the concept of flow and stock to individuals as well. Flow means that you had income and expenses during a certain period and stowed the rest away, while stock represents your assets and liabilities as a result of the accumulation of flow over the years. When we look at means of generating money, “earning a salary” is something that everyone who works does. Sometimes though, for instance, the share price of a company we have invested in has doubled, and we sell the shares and earn a profit. The former is the return resulting from the input of human capital into the labor market, while the latter is the return from the input of financial capital into the capital market.

It is not uncommon for a company to sell idle real estate holdings and realize a gain on the sale. This profit is recorded as a non-operating gain. Prime Minister Kishida’s proposal is to double non-operating gains for individuals as well. But that is easier said than done, because the plan encourages investment in risky assets, and the asset-income doubling plan is also actually an asset-price halving plan. Naturally, it is impossible to double the value of assets with savings in Japan—where interest rates continue to hover around zero. And, to double the value of assets, it is necessary to accept a commensurate amount of risk. At its essence, it is a way of telling a public that is not experienced in this area, “Please proceed at your own risk.”

Of course, if a person or entity has both flow- and stock-type income, they will be more active in terms of consumption. Vigorous consumption leads to moderate inflation and improved corporate performance, which in turn drives wage increases. This then leads to a virtuous cycle of increasingly active consumption, and so on. Over the past three decades, Japan has lagged behind the West in creating a system of flow- and stock-type income. When the bubble economy collapsed and flow-type income growth stopped among a population not considering stock-type income, consumption contracted and inflation slowed. Then, since there was no improvement in corporate performance, wages remained stagnant… and so we were mired in a vicious cycle. Despite the dramatic monetary easing implemented 10 years prior, the dearth of financial literacy among the general public meant limited funds available for investment, and there was little growth in stock-type income. It would, in fact, have been better had interest rates been charged, since this would have resulted in the generation of interest income.

The direction of the asset-income doubling plan so boldly proposed by Prime Minister Kishida is certainly the correct one. However, the goal is economic and societal revitalization by raising people’s risk tolerance toward creating a prosperous country, and the expansion of the Nippon Individual Savings Account (NISA) is merely a means to that end. Meetings, therefore, instead of focusing on the means, conversely should begin with a clear communication of purpose. To achieve a doubling of asset income, there are many measures that the government needs to take—including deregulation to encourage private-sector economic activity—which should also be discussed. And yet, in spite of the current inflation being of a relatively low scale, the government is subsidizing expenses such as gasoline and electricity and providing benefits to low-income households. Can the Japanese government and Prime Minister Kishida really promote the asset-income doubling plan, which aims to shift people from safe assets such as savings to investments, in which risk is inherent?

Hirotaka Shimizu
Chairman and CEO
Kamakura Shinsho, Ltd.