Investing from Japan for US citizens and US permanent residents

If you live in Japan and you are a US citizen or US permanent resident (green card holder), there are some restrictions on what you will be able to do, and some special issues you should be aware of.

If you are a Japanese investor and not a US citizen or US permanent resident, see Investing from Japan instead.

Passive foreign investment companies (PFICs)
All Japan-domiciled mutual funds, ETFs and Real Estate Investment Trusts (J-REITs) are considered by the US to be a passive foreign investment company. The taxation on these by the US is extremely unfavorable. To avoid having to deal with PFIC issues, a US taxpayer would need to stick with US-registered funds and ETFs, and/or individual stocks and bonds.

Account access
The US taxpayer living in Japan has somewhat limited options for opening brokerage accounts (see below).

US-based brokerages
While most US based brokerages shut access to US persons living abroad due to FATCA compliance workload, Interactive Brokers (IB) welcomed this client base. IB is also licensed in Japan and therefore can provide access to local and worldwide market for Japanese and non-Japanese persons.

Japan-based brokerages
Many brokerages and investment houses place restrictions on what kinds of accounts they allow US persons to open, or refuse to deal with US persons entirely. Fidelity Japan and Citibank Japan both refuse to allow US persons to open investment accounts entirely. Rakuten, SBI and Monex allow US persons to trade in Japanese stocks, but not in US-based ETFs. Nomura, SMBC Nikko and Daiwa allow US persons to open accounts, and also to trade in US-based ETFs.

In general, to determine whether a brokerage is willing to open an account for a US person, and if so, what kinds of restrictions it may place on a US person's activity, do a web search on the term "米国籍 site:????", where "米国籍" means "US citizenship" and "????" should be replaced with the brokerage's home page URL.

Nippon Individual Savings Accounts (NISA)
A NISA is a Japanese tax-exempt investment account. However, the US does not recognise it as US tax-exempt, and so will tax gains in it annually as if an unwrapped brokerage account. Along with the PFIC tax rules, this significantly limits the usefulness of NISA accounts for US citizens, and may render a Reserve NISA account entirely useless.

US-Domiciled ETFs trading on the Tokyo Stock Exchange
As of January 22, 2018, the only US-domiciled ETF trading on the Tokyo Stock Exchange is SPY (1557). This appears to be a direct cross-listing rather than a Japan Depositary Receipts (JDR).

SPY is a US-domiciled ETF. If a US-based investor has a W-9 on file with their brokerage, then no US withholding taxes should be withheld from dividends from this ETF (instead, dividends will be reported on that taxpayer's Schedule B). For a non-US taxpayer, the above funds will have 10% tax withheld from the dividends to be paid to the US, unless that taxpayer refuses to allow account details (account number and year of opening) to be reported by the JDR sponsor, in which case 30% tax will be withheld. (Japanese withholding tax, if held outside of a NISA, will be the same in all cases.)

Note that most discount brokers will not allow US persons to purchase JDRs. As of August 2015, it is known that SMBC Nikko will permit it, and it is presumed that Nomura, and perhaps Daiwa, will permit it. (Best to check to make sure.)