If you’ve got a little voice in the back of your head telling you “I should probably start investing,” you’re not alone. We’re constantly told we should start investing for our futures, but for those of us who aren’t finance bros, it can be tough to know how to start. It is especially challenging for foreign people living in Japan, who have likely been exposed to some information about investing in their home country but very little about investing opportunities in Japan. To help you get started, here is some basic information about investing in Japan.
Why Invest in Japan?
Don’t be fooled by the weak yen—Japan is a good place to invest. As the fourth largest economy in the world, Japan is home to strong global companies like Toyota, Sony and Nintendo. The economy is also stable with low interest rates, and has better growth potential than other developed countries. Several unique investment opportunities are available to those investing in Japan, and some options have government incentives for long-term investment.
Investment Options in Japan
To start your investments in Japan, you have plenty of options to choose from. Here is a brief overview of Japan’s best investing opportunities.
Account Types
NISA (Nippon Individual Savings Account)
Modeled on the British Individual Savings Account, NISA allows tax-free investing to anyone residing in Japan. These accounts are great options for those who want to invest in Japan long-term but do not intend to stay until retirement. They offer no taxes on capital gains and dividends and are available at most banks and online financial institutions in Japan.
The NISA system was completely updated in January 2024. Called 新NISA (New NISA), the new system is flexible for stocks, ETFs (exchange-traded funds) and mutual funds, and the lifetime investment limit has been raised to 18 million yen. There are two sections to each new NISA account:
- つみたて (Tsumitate section): This section is for passive investing in mutual funds and must be filled with a regular monthly payment. It has an annual contribution limit of 1.2 million yen and a lifetime contribution limit of 6 million yen.
- Growth section: You can buy stocks, mutual funds and ETFs and contribute with either monthly or one-off payments. It has an annual contribution limit of 2.4 million yen and a lifetime contribution limit of 12 million yen.
iDeCo (Individual-type Defined Contribution Pension Plan)
If you plan on staying in Japan permanently, iDeCo is the best retirement savings option. These private retirement accounts come with income and local inhabitant tax deductions, which is the Japanese government’s way of encouraging people to open one. Contributions to these accounts are limited to select mutual funds, bonds, and ETFs.
Since withdrawals are locked until you are at least 60 years old, you should only consider this option if you intend to retire in Japan. However, it is possible to withdraw your account early if you meet the following three criteria: you are not a Japanese citizen and are leaving Japan; you opened your iDeCO account less than five years previously; and you have less than 250,000 yen in the account
Investment Types
Index Funds & ETFs
If you’d prefer passive, long-term investing instead of watching the market and choosing stocks, index funds and ETFs are your best bets. Some great options in Japan are ETFs that track the Nikkei 225 and TOPIX, stock market indexes for the Tokyo Stock Exchange. Global ETFs are also great options for expanding your portfolio. Some examples are the S&P 500, MSCI World and emerging markets. Some popular low-fee options are Vanguard and eMAXIS Slim funds.
REITs (Real Estate Investment Trusts)
Investing in REITs gives you exposure to the Japanese real estate market without actually buying any property. There are plenty of Japan REIT Index ETFs to choose from if you’d like to invest in Japanese real estate.
Stocks & Dividend Investing
For those interested in active investing, there are plenty of options for stocks and dividends. Some Japanese companies with strong dividends include Mitsubishi UFJ, SoftBank and Japan Tobacco. A unique aspect of stock trading in Japan is that there is no capital gains tax for small amounts if you are using a NISA account.
Bonds & Fixed Income Investments
Japan’s bond yields are historically low. However, government bonds, or JGBs, are still a good option and have several available maturity rates. Alternatively, you can invest in foreign bonds through Japanese brokerages instead of investing in Japanese bonds.
Investing in Japan as an American
Unfortunately, we must include this specific section for Americans who plan to live and invest in Japan, as the situation for supposedly “free” Americans tends to be very complicated.
U.S. citizens must report all foreign investments to the IRS. Furthermore, according to the Foreign Account Tax Compliance Act (FATCA), foreign financial institutions must report on all foreign assets held by US citizens. This means that NISA and iDeCo are not tax-free for Americans under U.S. law.
Additionally, because of FATCA rules, some Japanese brokers like Rakuten and SBI may not accept American investors. Even without these hurdles, investing in assets based on the yen means dealing with exchange rate fluctuations.
Due to these regulations and inconveniences, Americans in Japan should consider tax-efficient options like US-listed ETFs, currency-hedged ETFs or forex trading (foreign exchange trading). However, instead of investing in Japan, the best option for Americans is to use Interactive Brokers or U.S.-based brokerage accounts for exposure to Japan and the international market.
An alternative solution is that if you’re married to a Japanese national, you can also help fund their investments up to the maximum limit. Just keep in mind—this approach carries more risk since your retirement savings could end up tied to both your spouse’s financial decisions and the future of your marriage.
How to Start Investing in Japan
Step 1: To start investing, you’ll first have to choose a brokerage. Some popular brokerages in Japan are:
Step 2: If you can, open a NISA or iDeCo based on how long you intend to stay in Japan. For passive investing, choose index funds or ETFs. If you prefer the individual route, research Japanese stocks to invest in.
Step 3: Fund your account(s) by setting up monthly payments or adding a certain amount to your savings.
Throughout this whole process, don’t forget to keep tax considerations in mind.
Final Tips
Whether you plan on staying in Japan permanently, long-term investing is encouraged due to the low fees and tax benefits available to investors in Japan.
Government-incentivized opportunities like NISA and iDeCo are excellent options for foreign residents of Japan, except for Americans. Japan is a great place to invest, but don’t keep all of your assets in one place. Even if you intend to stay in Japan permanently, you should consider diversifying your portfolio with investments in your home country or elsewhere alongside your Japanese investments.
Do you have experience investing in Japan? Got any tips for our readers? Let us know in the comments!
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