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Investment for Expats in Japan

Submitted: March 2014

Finding a broker might be a little tricky, as you will need to speak Japanese for this, even though brokers may have English-speaking staff. Although Japan has modern financial markets, its supply of securities is quite low, which is bad for the yields available to investors on Yen-denominated securities.

As in any country, expats should be concerned with beating inflation and taxes to preserve the value of their savings.

Tax is a matter of law, no matter the country you come from. A tax adviser may help you take the right decisions and mitigate your overall tax liability. Regarding inflation, this is a personal matter, as you must determine for yourself which inflation you want to beat. If you are a long-term immigrant, you are likely to be concerned by Japanese inflation. If you plan to return to your home country, you might prefer beating the inflation rate of that country.

Remember that you invest for a purpose, and that this purpose is specific to you. If the purpose of your savings and investments is 100% outside Japan but you invest in any Japanese dollar assets, you are effectively taking a currency bet.

 

Political background

Japanese policymakers have become concerned with Japan’s cash hoarding issue. Therefore, savers have come under the spotlight, as their contribution will be needed to spur investment and Japan’s recovery generally. What is meant by “contribution” remains to be seen, as this can largely amount to some form of financial repression. Likely forms of financial repression include:

  • negative real interest rates, e.g. to finance Government debt or Japanese businesses
  • high investment taxes (Japan’s capital gains tax doubled from 10% to 20% in 2013), coupled with tax incentives to invest in Japan (such as tax-free accounts).

 

Inflation in Japan

Inflation in Japan is subject to central bank monitoring, with an inflation target of 2%. Over the past two decades, inflation has been close to zero, which is an unacceptable level for the central bank (BoJ) as a policy matter.

Given that the BoJ is now happy with taking radical measures, one could reasonably expect inflation to stay close to the 2% target in the future. That being said, this should not be taken for granted. Japan’s inflation rate may well soar above 4% or fall back to zero in three years from now. As of January 2014, the inflation rate was 1.4%.

For more information on monetary policy, see Foreign Exchange for Expats in Japan.

 

Savings accounts

As far as savings accounts are concerned, interest rates are close to nil, and they have been so for over 20 years. An easy-access savings account would get you 0.10% (gross) while a 1-year term deposit would land you with a return of 0.20%.

As the times of no-inflation seem to be behind, Japanese savers are likely to be hit unless they invest their Japanese Yens in riskier assets.

 

Nippon Individual Savings Accounts (NISAs)

In 2014, the Government launched Nippon Individual Savings Accounts (NISAs), wherein you can invest in most listed securities, covering shares, bonds and exchange traded funds (ETFs), but not just cash. It is inspired from UK Individual Savings Accounts (ISAs).

To open an NISA, you must:

  • be an individual
  • be resident in Japan or have a permanent establishment in Japan
  • be at least 20 years old
  • not already have an NISA opened for the year in question
  • open your NISA by 2023

The maximum amount you can invest in an NISA is ¥1m per year. If you use your NISA allowance every year, the maximum tax-free investment you can make is ¥5m. Investments are tax-free until the end of the fourth year following that in which the investment is made.

Example

Ann invests in Japanese shares through an NISA on 1 February 2014.

The tax-free period for this investment will expire on 31 December 2018.

You are free to sell your investments at any time, but the proceeds cannot be reinvested in the tax-free allowance. Capital losses within an NISA are not deductible.

 

Japanese securities (costs)

Do consider carefully the applicable transaction costs if you wish to trade Japanese securities. Japan is not necessarily an expensive country in that respect.

Here are the main costs you should be aware of:

  • Broker’s commission fees (from 0.08% to 0.15%)
  • Minimum commission fees (these can be as high as ¥1,500)
  • Any other applicable fees that may be charged by your broker.

There is no Financial Transactions Tax (FTT) in Japan since 1999.

 

Japanese securities (overview)

The main stock index in Japan is the Nikkei 225. It soared to ultra-high levels in the run-up to its 1990 peak. Since then, it kept going down while Japan’s inflation was broadly nil. In real terms, however, share prices fell to very low levels between 2009 and 2012, as the index was anchored at around 9000.

Since then, prices bounced back, and appreciated by 50%, but a large part of it is due to the radically loose monetary policy pursued by the central bank, which mechanically made the Yen depreciate. In foreign currency terms, the Japanese share price rises have thus been more moderate.

Overall, Japanese shares do not seem under-priced for their yields are poor, especially in light of the risk that share investors take. Typically, Nikkei 225 shares get you a dividend yield between 1% and 2%. Meanwhile, the Profit-to-Earnings Ratio frequently exceeds 20, which means the company’s profits per share are below 5% of the share price you would pay on the market.

Be wary of volatility when you invest in securities. Although Japanese stock markets have their own price movement patterns based on technical analysis, volatility is also highly dependent on fundamentals, especially the underlying risk. However, higher risk normally means higher reward, and some securities may be low-risk. Additionally, stock market variations are very dependent on central bank interest rate variations or expectations. If interest rates are going down, stock prices should go up.

You are responsible for deciding how much risk you want to take on. There is no set answer to this question, as this largely depends on your personal circumstances. A qualified wealth manager may assist you regarding this matter.

On the stock market, your emotions are your enemy. You must control them rather than let them control you. Do not, under any circumstances, let (natural) psychological factors make you take irrational decisions.

 

Overseas investments generally

If you wish to invest in overseas assets, there are a few points you need to check:

  • Financial transactions taxes
  • Inheritance tax considerations
  • Asset liquidity
  • Broker’s fees (pricing structures may vary greatly from one jurisdiction to another)
  • Foreign withholding or income taxes
  • Yields available on foreign investments
  • Your residence status for income tax purposes
  • Any foreign financial restrictions or barriers (including fees for international money transfers), and
  • Foreign currency exposure.

As a result of Japan’s financial regulations, you may be unable to invest through an overseas stockbroker whilst you are a resident of Japan.

 

Foreign currency investments

Expatriates may also consider buying foreign currency (FX) assets as a hedge against any Japanese Yen fluctuations. FX markets are the most liquid markets in the world, and they are influenced by many macroeconomic variables. Foreign currency exposure is complex financial engineering, and you might wish to seek professional advice to help you take the right decisions.

 

Carry Trade

Carry trade is an investment strategy which consists in borrowing in a low interest rate currency in order to invest in a high interest currency.

Japan is by excellence the country that offers carry trade opportunities, as it has had near-zero interest rates over the past 20 years. Therefore, there are times international investors are eager to borrow Japanese Yens, convert them into, say Australian dollars or South African Rands, and purchase investments in these high-yield currencies. The point is, doing so exposes to foreign exchange risks.

Carry trade hasn’t been fashionable over the past two to three years, as such strategies are typically pursued when everybody invests into the emerging markets, not when foreign investors pull back their funds from there.

Another reason for today’s lack of interest in carry trade is that most other developed countries, such as the UK, the Euro-zone or the US, have recently seen their interest rates edging closer to Japan’s. In the future, carry trade is likely to be a matter of dichotomy between developed and developing countries, subject to a few exceptions (e.g. Norway or Australia).

Carry trade is much more complex that it seems, but it may have some financial relevance for many expats in Japan, especially high net worth individuals. Here is a non-exhaustive list of its core issues:

  • Because of the leverage, carry trade is a high risk/high reward investment
  • Carry trade strategies involve both borrowing and investing, and on a cross-border basis. There are fees for this, but having a long-standing relationship with a Japanese banker will surely help.
  • You are to make FX losses if the Japanese Yen appreciates, which is likely if Japan’s inflation is lower than that of the other country. Check the Yen exchange rate in real terms
  • There are various reasons why a foreign central bank would set its interest rates high, but high inflation in the country in question is probably the main reason – so check the real interest rate in that country and compare it with Japan’s

 

Taxation

The first thing to do is to check your residence status, as investment income will likely be taxed differently depending on whether you are resident, non-resident, or a non-permanent resident. For more information on this matter, see Investment Taxation for Expats in Japan.

 

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