Recently, as someone who has decided to make Japan my home, I began researching on investing while living in Japan. Financial independence is a recent goal to me, albeit a little late now that I am approaching my mid-30s.
Before you continue reading, I want to make sure you understand that I am not a financial advisor or a professional of any kind. Any decision you make from the information of this article will be your sole responsibility. Please keep this in mind.
With that out of the way, let’s head down this road together. This guide will cover the following topics
Your Road to Financial Independence Starts Here
If you are reading this article, you are likely living in Japan or thinking of moving here. You are also likely either starting out or on the path to planning out your financial future. Like me, you've probably read a bunch of books to learn to ropes of financial adulting. Some of the books I've read and would recommend are
- Rich Dad Poor Dad by Robert T. Kiyosaki
- I Will Teach You To Be Rich by Ramit Sethi
- The Simple Path to Wealth by JL Collins
- Your Money or Your Life by Vicki Robin
Either way, investing while living in Japan is a critical part of achieving financial independence and creating wealth.
But here's the problem. Unless you have good Japanese language skills, the maze of financial products and investment methods unique to Japan is tricky to understand. Hell, it's hard to even for a Japanese native new to the whole thing.
Types of Investment Accounts
Before you move on, you need to understand the different investment accounts you can have in Japan. A warning is that most of these require quite a process to get set up, but that's to be expected when investing while living in Japan.
The first, and probably the most important, one you should learn about is NISA, which stands for Nippon (Japan) Individual Savings Account. NISA is a type of tax-exempted program aimed at mid to long-term investment. Simply put, all capital gains through a NISA account will not incur tax.
To give you an idea of how you will practically use NISA to make investments, it goes something like this:
- Register for a securities platform account
- Register for a NISA account within the platform
- When investing, choose between regular or NISA account.
In other words, your NISA (tax-exempted) account and regular (taxable) account will be separated within your securities platform.
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Tax-free investment sure sounds nice, but please know there are limitations depending on which of the two types of NISA you choose.
|Regular NISA||Tsumitate NISA|
|Limit||¥1,200,000 per year||¥400,000 per year|
|Types of Investment||Stocks, Investment Trusts, ETF, REIT, ETN||Investment Trusts|
|Purchase Method||Regular purchase or tsumitate (automated monthly contribution only)||Tsumitate (automated monthly contribution only)|
|Tax Free Period||5 Years||20 Years|
Other things to note includes:
- You can only have one NISA account even if you have multiple securities account.
- You can sell or cash out those investments anytime.
Which type of NISA should you choose? It depends on your style of investment. Here are a few ways you can look at it.
- The total tax-free amount investable for the regular NISA amounts to ¥6m (1.2m x 5 years), while the amount for tsumitate NISA is ¥8m (0.4m x 20 years). The key point is that you can invest more tax-free with tsumitate NISA but over a longer period.
- You can make fewer types of investments with tsumitate NISA, so if you like to make short or mid-term market investments, you should maybe consider regular NISA.
- Tsumitate NISA lets you make monthly contributions to the investment trust of your choice and is more suitable for a more passive, long-term investment strategy.
So simply put, tsumitate NISA is best for those employing a long-term, dollar-cost averaging strategy, while regular NISA is for those who want to invest more within a shorter period of time.
Most of us would be most suitable for the longer term, tsumitate NISA account, which is what I signed up for. Here are a few things you want to note about how the tsumitate NISA works.
- Tsumitate NISA lets you make a max yearly contribution of ¥400,000, or ¥33,333 a month if you make equal contributions each month. This follows the calendar year, so if you start NISA in the middle of the year, you can prorate the amount. Ie. If your tsumitate NISA was set up in December 2019, you could still make a full contribution of ¥400,000 if you do so within December.
- There are limited investment trusts that tsumitate NISA can be used with. For example, you can't do tsumitate with a US fund like VTI or VO. If you wish to invest in the US index, you'll likely have to invest in a Japanese fund investing in the index. There are even Japanese wrapped versions of Vanguards funds.
It isn't a question if you should sign up for NISA; it's a no-brainer that you should. In fact, maxing out your NISA should be your first goal when investing while living in Japan. If you are unsure of which type of NISA to get, you're likely just starting, and the tsumitate NISA is what you should go for.
Can you invest one lump sum with tsumitate NISA?
The idea of tsumitate NISA is so that you can invest monthly for a cost-dollar average strategy. But, what if you want to invest the entire ¥400,000 in a single month? Can you do it?
The short answer is yes. You want to use a feature called “bonus payment”.
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Just note that I have never personally used this feature in the following manner, so if you have further questions, I would suggest that you enquire with your securities platform.
When setting up your regular payments for tsumitate NISA, you can set a bonus payment that lets you invest more in certain months (up to two months). This setting is for those who receive a bonus salary on certain months of the year and wants to coincide their investment schedule with those months.
For example, if you invest ¥10,000 a month, you'll only be investing ¥120,000 a year, which is ¥280,000 short of the limit. In this case, you can set the month(s) in which you invest more, for example, ¥140,000 in July and December, to make up the full ¥400,000 limit.
So how do you invest a full ¥400,000 in one month? Technically speaking, you can't as you would still have to set a monthly investment amount to use bonus payment.
What you can do is set your monthly investment amount to ¥100, which will amount to ¥1,200 over a year. Then, set your bonus payment as ¥398,800 for the upcoming month. It's not the full ¥400,000, but pretty close.
Just note that some securities platforms do not support “bonus payment” setting, but if you are signed up with one of the big ones, you should be fine.
Once again, buying in a lump sum is not recommended since you lose the dollar-cost average strategy, but if you really want to do so, it is possible.
If you understood NISA, then iDeCo is not much different. It's another tax-exempted account. The core difference is that you can only get the money back after you reach 60. It's sometimes referred to as the J401k.
Unlike the NISA, the maximum amount isn't capped by the year but per month. Since the iDeCo is designed as an add-on to the National Pension we are all enrolled in, the amount you can contribute each month depends on the current contribution you already have. This comes down to which category you fall into.
Maximum iDeCo contribution per month
- Category 1: Self-Employed or Students – ¥68,000
- Category 2: Company Employee – ¥12,000, ¥20,000 or ¥23,000
- Category 3: Full-Time Homemakers – ¥23,000
Most of us would fall into category 2, and when you sign up for iDeCo via your securities account, you'll get a form that has a part that your company needs to fill up.
Unless your company has a defined contribution plan, the maximum you can contribute would likely be ¥23,000 per month. Either way, you'll know once the accounting or HR department helps you fill up your form.
Similar to tsumitate NISA, you can choose the fund to contribute that amount to, although the list is pretty limited.
Maxing out my tsumitate NISA and iDeCo account is the goal I work towards, about ¥56,333 a month, and what I recommend to those starting. You also want to make sure you have your investments with the highest potential returns are using those accounts.
Which Japanese Securities Platform to Choose when Investing While Living in Japan?
I assume you already have a rough strategy of how you want to invest your money, whether it's a passive boglehead style investment or dividend investment using a diversified portfolio of high dividend stocks. Either way, you'll need to understand how to execute it in Japan. There are a few ways you can invest in stocks (or bonds) in Japan, but the very first thing you should do is sign up for a securities account.
To trade stocks, funds, FX, or bonds, you need a securities platform that allows you to execute those trades. There are several securities platforms out there, and I obviously ended up using just one. But I did quite a bit of research, and I hope this can help you decide which securities platform to use.
You should choose the platform based on whether it allows you to execute your preferred strategy. Here are a few popular securities platforms in Japan
- SBI Securities (SBI証券)
- Rakuten Securities (楽天証券)
- au Kabucom Securities (auカブコム証券)
- Matsui Securities (松井証券)
- Monex Securities (マネックス証券)
- Okasan Online Securities (岡三オンライン証券)
- GMO Click Securities (GMOクリック証券)
For example, I wanted to carry out a passive, minimalist three-fund strategy with a US index, total market index, and bond index. I also wanted to execute part of it with my NISA and iDeCo account.
So, it's important for you to consider following when you sign up
- NISA support
- iDeCo support
- Availability of stocks or funds that you wish to invest in
- Usability of tools
Most security platforms are pretty much similar. You won't go wrong if you go for any of the most popular ones: SBI Securities or Rakuten Securities.
Even LINE has a securities service from within the app. However, they don't have NISA or iDeCo support and have a limited selection of stocks and funds. They do not offer a tsumitate option, which lets you automatically purchase stocks each month for a long-term dollar cost average strategy.
While user-friendliness is a plus, in the end, there are quite a number of features, like NISA or iDeCo support, necessary for long-term investors.
What about robo advisors? Robo advisors are basically platforms that help you to invest. Just put in money each month, and they would use their algorithm and expertise to invest your money into a variety of stocks and funds.
While nothing is stopping you from copying exactly the robo advisors' portfolio, what these robo advisors platforms are offering is a hassle-free investment. Robo advisors are usually very user-friendly and are great for people who want to learn nothing about investment.
What is the reason not to use them? Well, the main thing is the cost. Some of the most popular robo advisor, WealthNavi and Theo, charges a whopping 1% fee. Let's compare it to the management fee of a fund like the eMAXISSlim S&P 500 fund, which is less than a tenth of the cost, at 0.0968％. 1% might not sound like much, but compound it over decades, and it adds up.
Depending on your investment period, that difference might seem little now, but it will end up with a substantial loss in potential gains, up to the equivalent tens of thousands of dollars. But, using robo advisors is better than making absolutely no investments. It can be considered if you are an absolute beginner and not willing to invest the time needed to understand it.
Things I Learnt Along the Way Investing While Living in Japan
I ended up going with Rakuten Securities, and here are some things I found out along the way setting up and starting to invest. Once again, I have to say I'm just starting, and I don't guarantee the accuracy of this information.
If you are way more experienced than I am, please leave a comment if you have more to add or something to correct. I hope this can be a guide for future potential investors can refer to.
NISA is quick to set up while iDeCo takes some time
After getting my securities platform up and running, I got my NISA account up and running within a week or two. iDeCo takes more time as you need to register and wait for them to send you forms that your employer needs to fill up. It can take up to three months. I'm still in the midst of getting it registered and will update this article when it's done.
What are the differences between a US fund and a Japanese wrapped US fund?
This was something that I took some time to wrap my head around when learning about investing while living in Japan. What is the difference between buying a US ETF, like the Vanguard Total Stock Market ETF (VTI), compared to buying a Japanese-wrapped fund, like the Rakuten US Stock Index Fund（楽天・全米株式インデックス・ファンド）which wraps the VTI.
As far as I can tell, there are a few differences. I will be using the above two funds as examples.
Vanguard Total Stock Market ETF (VTI)
- Cheapest fees (0.04%)
- Dividends are automatically paid out and taxed
- Since reinvestment of dividends has to be done manually, you can get a better picture of the market.
- Can buy and sell based on real-time market prices
- Conversion fees are incurred.
- Because fees are incurred upon each purchase, it would not be worth it unless you make a lump sum investment.
- Cannot automatically reinvest and will be troublesome for a passive investor
Rakuten US Stock Index Fund（楽天・全米株式インデックス・ファンド）
- No fees when buying and no conversion fees
- Because there are no fees when purchasing, you can invest even with small amounts, as frequently as you like.
- After setting up tsumitate (automated contributions), you can practically leave it alone. (Read: Automatic Millionaire by David Bach)
- Compared to VTI, it is performing slightly worse.
- If you are thinking of making a large one-time investment, then VTI might be more suitable.
- Higher management fees (0.162%)
- You need much less time commitment since you can pretty much automate it.
For me personally, I hold some US ETFs but have my tsumitate set up with local funds.
Taxes are tricky
First off, if you sell your investments for a profit, the capital gains are liable to be taxed within the year. This why the NISA and iDeCo accounts should be the first thing you look at, as money invested in those accounts will not be taxed.
There are technically two types of profits that will incur taxes. One is the taxes on capital gains, which refers to the profit you make when you sell a stock. And the other is on dividends, which you get when you are a holder of certain stocks or funds.
The tax rate for either one is 20.315% (15.315% income tax and 5% resident tax). It's easy to remember if you think of the taxes as about 20%.
Apart from the above, you must also know that some stocks give out stockholder benefits like vouchers or coupons. If the value of these perks, together with any other extra income you have made exceeds ¥200,000, you have to declare it under “miscellaneous income” (雑所得).
On the other hand, if your capital gains and other extra income is under ¥200,000, you don't have to pay income tax on it. However, you would still have to pay 5% resident tax.
How to pay taxes?
So, how do you pay these taxes? Basically, you need to file a tax return. But this is pretty tricky to do so. So, what if I tell you there's a way you don't have to file the tax return yourself?
When you apply for an account, you want to make sure you select the option for a “specified account – withholding” (特定口座・源泉あり). When you buy stocks, make sure you select the specified account instead of the “general account”.
If you've already opened an account and selected specified account – non-withholding (特定口座・源泉なし) or general account (一般口座) you can change the type via the settings if needed.
By doing this, the securities platform will withhold the tax on your profits automatically, so you don't have to file a return yourself. This is highly recommended for beginners, which you probably are if you are reading this guide.
Why would anyone use specified account – non-withholding (特定口座・源泉なし) or general account (一般口座)?
The reason some might use this is to take advantage of the tax exception for miscellaneous income. If the profits, together with all other non-company income, adds up to be less than ¥200,000 a year, it doesn't have to be declared or be taxed. So you intend to make a short-term investment that will result in less than ¥200,000 profit a year (including all other miscellaneous income), then you might use this.
Once again, this is a complicated way to invest while living in Japan and is not recommended for beginners. Instead, make use of NISA.
Monitoring your investment portfolio isn't streamlined
Of course, this depends on what kind of investments you own. If you own solely Japanese investment trusts or solely US stocks, then you can monitor regularly. But most apps will not support both US and Japanese funds, and you'll need separate apps to monitor both markets.
As a minimalist, I decided that consolidating all my investments into local funds is the easiest way to go about it. I personally use Yahoo Finance as well as a Google Spreadsheet.
While I can't tell you which funds to buy, I can tell you that the first thing you should do is sign up for a securities account and get NISA and iDeCo up and running.
I hope to add to this article so that new investors will have a complete guide to get started on investing while living in Japan. If you have more to contribute to this article, please leave a comment, and I'll add it in.