Investing in Japan

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Flag of Japan.svg.png This page deals specifically with investing in Japan
Fig.1. Tokyo Stock Exchange

This page suggests some approaches and funds that enable a Japanese investor to invest by applying the Bogleheads investment philosophy.

Index funds in Japan

Stock index funds

There are 332 index funds and exchange-traded funds (ETFs) in Japan, so there are plenty of options for Boglehead-style investing.[note 1]

Indices available include:

  • TOPIX: capitalization weighted index covering ~90% of the capitalization of the companies traded on the Tokyo Stock Exchange. This is the closest common index to a total domestic stock index.
  • Nikkei 225: Price-weighted (like the Dow 30) index of large companies in Japan.
  • MSCI All-world ex-Japan
  • MSCI Kokusai: Developed world ex-Japan
  • MSCI Emerging Markets

Expense ratios are generally higher for the older funds, especially the traditional mutual funds (投資信託), and are lowest for the newer ETFs (上場投資信託). The lowest expense ratio fund is the MAXIS TOPIX ETF (MAXIS トピックス上場投信), Code 1348 on the Tokyo Stock Exchange, with an expense ratio of 0.08%.

Vanguard ETFs

The following Vanguard ETFs are also available through certain Japanese brokers:

Vanguard ETFs
Fund Ticker Expense Ratio
Vanguard Total World Stock Index VT 0.17%
Vanguard FTSE All-World (ex-US) Small-Cap Index VSS 0.19%
Vanguard MSCI Emerging Markets Index VWO 0.15%
Vanguard Total (US) Stock Market Index VTI 0.05%
Vanguard S&P500 (US) Index VOO 0.05%
Vanguard Small Cap (US) Index VB 0.09%
Vanguard MSCI Pacific Index VPL 0.12%
Vanguard MSCI Europe Index VGK 0.12%
Total (US) Bond Index BND 0.07%

The brokers officially offering the above funds are: Rakuten, SBI, Monex and Nomura.

Bond index funds

The domestic bond fund with the lowest expense ratio is the Mitsubishi-UFJ Domestic Bond Index Fund (三菱UFJ 国内債券インデックスファンド), with an expense ratio of 0.37%.

The cheapest foreign bond index fund is the Markit iBoxx ABF Pan-Asia Index ETF (Code 1349), with an expense ratio of 0.19%. The Citigroup Nonyen World Government Bond Index ETF (Code 1677) has an expense ratio of 0.25%, and the Barclays Emerging Markets Local Currency Government bond index ETF (Code 1566) has an expense ratio of 0.45%. Foreign bond index funds are generally unhedged.

Individual bonds

Japanese savings bonds (個人向け国債) and regular Japanese government bonds (JGBs) can be purchased at banks, brokerages, and the post office. Note that some banks charge a maintenance fee to hold savings bonds and JGBs; there is no fee to hold them at the post office.

There are no inflation-adjusted Japanese government bonds available to the individual investor.

Individual foreign government bonds are also available at many brokerages.

Taxation

Japan taxes residents on their world-wide income. If you are a Japanese citizen or permanent resident living in Japan, you will have to report all your overseas income to the National Tax Agency (NTA). You also have to pay Japanese taxes on world-wide income even if you are neither of the above, but have lived in Japan for 5 years or more.

When investing through a Japanese broker, it is recommended to use a "Tokutei Kouza" (特定口座), which is a type of brokerage account that automatically calculates and pays your Japanese taxes on capital gains on stocks, eliminating the need to file a tax return just to declare your capital gains. (Note: there is no capital gains tax on bonds through 2015.)[note 2]

US person (citizen, green card holder)

If you are a US taxpayer, there are some restrictions on what you will be able to do, and some special issues you should be aware of.

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 Japanese 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[1]. 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):

US-domiciled ETFs trading as JDRs
Japan Ticker Fund name US Ticker Expense Ratio
1581 iShares MSCI Kokusai ETF TOK 0.25%
1582 iShares Core MSCI Emerging Markets ETF IEMG 0.18%
1583 iShares MSCI Frontier 100 ETF FM 0.79%
1587 iShares S&P 100 ETF OEF 0.20%
1588 iShares Russell 2000 ETF IWM 0.24%
1589 iShares High Dividend ETF HDV 0.12%
1590 iShares U.S. Real Estate ETF IYR 0.46%

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.

Nippon Individual Savings Accounts (NISA)

Starting in January 2014, it is possible to invest in a tax-exempt investment account called the Nippon Individual Savings Account (NISA). This account is modelled after the UK ISA account, and in US terms somewhat resembles the Roth IRA. Contributions made in any one year are made after-tax, with all dividends and capital gains being tax-free for the next five years. An individual may invest up to 1,000,000 yen each year. Each year's "slice" comes back out of the NISA after 5 years, so the maximum contribution one can have invested at any one time is 5,000,000 total, 5 years' worth of contributions. The NISA program is currently scheduled to run for 10 years. [note 3] [note 4]

Notes

  1. For some practical details, see forum discussion, ETF / Mutual Fund in Japan
  2. For a general guide on Japanese tax filing issues, refer to the forum discussion, Filing Japanese tax returns (確定申告)
  3. There is short overview of the features of NISA accounts here: To NISA or not to NISA? (Morgan McKinley)
  4. There is some discussion of NISA accounts in the following forum discussion: Living in Japan - Offshore Insurance Wrapper?

External links

ETFs trading on the Tokyo Stock Exchange:


  1. "Welcome US Expats". Interactive Brokers. https://www.interactivebrokers.com/en/index.php?f=13416. Retrieved January 2, 2017.