Monthly Archives: June 2010

Is Consumption Tax in Japan on the Rise?

Talk here in Japan has heated up about a possible increase to the 5% consumption tax (sales tax) that is currently levied. It began, as I mentioned before, in the inaugural address by the current Prime Minister, and has since moved into more public forums.

In a recent “round-table” talk with all the party leaders, each and every one said they were adamantly against doubling the consumption tax to 10%. I suspect party leaders understand the need to raise taxes, and even silently support such a rise, yet want to distance themselves from such a controversial decision.

But is it so controversial?

A recent poll suggested that 48% of eligible voters were in favour of doubling the consumption tax, and this is after only a couple of weeks of debate. 48% in support of increasing taxes doesn’t seem too radical to me.

As for public awareness, more and more TV programs are devoting time to this issue. Only last night was I watching a show subtitled “Japan in Danger!” that compared  the possible future of Japanese debt to the current struggles of Greece, and continued on why a rise in the consumption tax could be good. As the public becomes more informed, I suspect the support number will edge upward from that 48%.

As far as my two cents go, while I think raising taxes is necessary, I think the government is taking the wrong bull by the horns. Personally, I think they should raise personal income tax (which is only about 10% or so for the majority of earners) and lower corporate tax (which currently sits at about 40%).

40 percent!!??? No wonder Japan, Inc. can’t turn a profit.

Raising income taxes will bring in more money, which can be used to pay down debt and help out social services. And the way I see it, lowering corporate taxes would increase investment and expansion, which would in turn increase hiring. Increased profits mean increased share prices which would mean investors feel better about their holdings, and better about spending cash.

And that is the point we can talk about raising the consumption tax… when people are actually consuming.

Perception and Human Capital

When we were in high school, my buddy and I used to go to a relatively empty pool hall in a blue-collar part of town and play snooker for an hour or two. We’d then go to a heavily populated trendy pool hall and play King of the Table for another hour or two, usually only ever paying the dollar for the first game.

The “trick” was that after playing on a very large snooker table, with small balls and pockets, where the margin of error on a shot was very slim, it made playing on a standard pool table seem like child’s play. Just hitting the cue ball in the general direction seemed to produce spectacular results.

What does this have to do with anything?

I view my own human capital as my most prized asset. The return on my investment of time in relation to salary is leagues beyond any stock, bond or bank account. As such, I use it to near full capacity. Living below our means translates into retained earnings that will continue to work for us until they are needed.

Being young, healthy and motivated means that I can devote large amounts of time to producing wages. From Monday to Saturday, an average of 11 hours of my day is work/business related (my longest day being about 13.5 hours, and Saturday weighing in at a mere 8 hours).

Aside from cash, how does this 6-day, 66 hour work week benefit me?  The way I see it, I’m playing snooker now. I have been for the past 4 years, and plan to keep playing snooker for the next two. At that point we plan to move to Canada where, as I see it, a five-day, 40 hour work week will seem like child’s play.

Want to feel less busy? Fill your schedule for a few weeks. When you return to a normal schedule, you will feel as if just smacking the ball will produce spectacular results. 

Weekend Reading

Remarkably, I have been able to pull myself away from the World Cup  for a moment or two to keep up with the world of finance and economics… though only a moment or two. Here are some interesting or important articles I came across this past week.

  1. Though Canada’s athletes didn’t quite make the grade, at least our grass was able to make it to South Africa… and be featured in every match.
  2. Canadian Capitalist talks about how some Canadians misunderstood the TFSA contribution rules, over contributed, and were nailed with massive tax bills.
  3. He then wrote anther post on how you could apply for tax relief if the mistake was an honest one, and if the request is made in a reasonable amount of time.
  4. The author of “Where Does All My Money Go” has started a podcast that will recap his posts from the week.
  5. Michael James on Money talks about the problems with trying to tax the rich… ie, they are rich because they are crafty, and crafty people avoid tax.
  6. BankNerd takes a look at the new cash-back Visa card offered at RBC.
  7. Million Dollar Journey looks at how to value a REIT… because of how depreciation is treated in the books, they may be better off than they appear.
  8. Canadian Mortgage Trends looks at the issue of mortgage lenders, Canada’s Privacy Commissioner, and Social Insurance Numbers.
  9. An investment firm is offering victims of Bernard Madoff to sell their claims for 20 cents on the dollar.
  10. Speaking of investment schemes, anyone who thinks the mob just sells cigarettes and DVD players that “fell off a truck” should think again. A $12 million dollar scheme was uncovered this month.

Other than that, a Happy Father’s Day to any of you dads out there. Hope you had a relaxing day off.

Dollar Cost Averaging

With the “New Normal” looking like it means that it is commonplace for the markets to move plus or minus 2% in a single day of trading, it can be understood if an investor asks him or herself about when money should be put to work.

I would advocate for almost always.

Dollar Cost Averaging is a simple average. If you continuously buy a certain security over a period of time at different prices, the average cost is what you base your profit or loss upon. It is basically putting your portfolio on auto-pilot, which can remove some of the emotions of investing, and letting your investment build over time, which removes the stress of trying to decide when to buy.

To illustrate the point I created two simple portfolios. I randomly selected a low-cost Canadian index fund, and selected January 2007 as the starting date of the portfolio, which gives us three and a half years of data.

The assumption is that two investors had $5000 to invest at that time. Investor A put all $5000 in the Canadian Index fund; Investor B put $900 in to start, put the remaining $4100 in a high interest savings account, and set up an automatic withdrawal to invest $100 per month from that account.

After 3 and a half years where are our investors?

Investor A is currently just above par with a gain of 0.9%, which is only because of re-invested distributions, which were paid annually.

This investor probably would have encountered a good amount of stress as he watched his holding drop 50%, from a high of over $6000 to just above $3000.

And Investor B?

By investing $900 to start, and $100 every month, this investor would also have invested a total of $5000, but she would be over 5% ahead because of dollar cost averaging, reinvested distributions, and interest.

This is because she would have been buying small amounts of the fund through good times and bad, smoothing out the average purchase price.

She would also have been receiving interest on the cash she had in the high interest savings account, which was slowly being depleted over the three and a half years.

I suspect Investor A would also have had less stress to deal with through the recession, as her portfolio would have been down about 20% at the trough (the invested capital would have been down 30% – from $3000 to $2000 – but she would have had about $2000 sitting in cash).

I’ve written before about the investing lessons learned from Aesop. He brings us wisdom again today in the form of slow and steady wins the race.

There will be times when it may seem like indexing and dollar cost averaging is a losers game (at one point, Investor A had over $6000 to Investor B’s $5500, for example), but I am confident that over the long-term it is the way to smoothing fluctuations, lowering stress, and increasing your net worth.

Free Credit Reports: A Walkthrough

About this time every year I try to remind myself to send away for a free credit report from both TransUnion and Equifax. Taking a look at your own report allows you to see how lenders view you, and also lets you check to make sure there are no mistakes.

In case some of you are unsure of how to get this information, I thought I would walk you through it.

First we’re going to download the report request forms from the two companies: Transunion and Equifax and fill them out. While providing your Social Insurance Number is optional, I have heard that it speeds up the process.

You will also have to photocopy both sides of two pieces of major ID, such as your driver’s license and passport, and submit that with your request form. Combined, the two pieces of ID should have your address, name, signature, and date of birth.

And that’s it. Mail them to the respective agencies (addresses on each form) and wait to get your free credit report.

I should point out that this is just your credit report. It has all the information about your credit history, but not your credit score.

Once you get it in the mail you want to check for mistakes and correct any if they exist. Mistakes may be as small as a mis-spelled street name, so take a good look. A good document to look through while you wait, and alongside the credit reports once you get them, is called “Understanding Your Credit Report,” which I have linked under “Resources” in the side-bar to the right.