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 in 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 brokerage
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 google 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.

US-Domiciled ETFs trading on the Tokyo Stock Exchange
There are a few US-domiciled ETFs that trade on the Tokyo Stock Exchange as Japan Depositary Receipts (JDRs):

These JDRs may be attractive for US taxpayers, because they are not PFICs -- they are US-domiciled ETFs. 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 these ETFs (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 the above JDRs. At this writing (Aug. 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.)

In addition to the above funds, the S&P500 index ETF SPY (ER 0.09%) also trades on the Tokyo Stock Exchange as ticker code 1557. This appears to be a direct cross-listing rather than a JDR, though the tax treatment seems likely to be similar to that of the above JDRs.

UPDATE: As of January 22, 2018, the only US-domiciled ETF still trading on the Tokyo Stock Exchange is SPY (1557). The iShares ETFs have all been delisted.