The Top 10 Investment Opportunities in Japan for Foreigners

(This article was last updated on April 20, 2023).

In this article, we will talk about the top 10 investment opportunities in Japan for foreigners to guide you which potential investment options are viable.

Japan is the world’s third-largest country, a competitor, and a partner. It is a vast and important country with a population of more than 125 million people as of the time of update. 

To invest in Japan will appear challenging in the beginning, especially for first-timers. The struggle mainly comes from having majority of the investment information in the local language. Knowing basic Japanese will get you a long way.

If you want to invest as an expat or high-net-worth individual, which is what I specialize in, you can email me (advice@adamfayed.com) or use WhatsApp (+44-7393-450-837).

Often times, it is better to invest “from” Japan internationally as an expat, rather than “in” Japan.

What You Should Know Before Investing in Japan

Taxation

Will I be taxed on my income from investments?

The first step is to determine your residency status. Depending on whether you are a permanent resident, a non-permanent resident, or a resident, your investment income will be taxed differently.

According to PwC, non-residents with one-year visas only pay taxes on Japanese income. If you are a non-permanent resident who has been in Japan for less than five years, you will be taxed on all of your income, except for offshore money not transferred to Japan. Permanent residents must pay taxes on income from Japan and abroad.

Depending on income, the government taxes personal income at 5%, 10%, 20%, 23%, 33%, 40%, or 45%. National income tax surtax is 2.1%.

Rates of Interest

How are Japan’s interest rates?

The Bank of Japan (BOJ) is projected to keep short-term interest rates at -0.1% and 10-year bond yields around zero, according to a recent report from Reuters citing sources familiar with the matter.

This has both positive and negative implications for investors. On the one hand, it should stimulate investing since keeping your money in a savings account becomes more expensive. Negative interest rates also make costs for borrowing money more inexpensive.

On the other hand, Japan’s refusal to hike interest rates could lead to bond yields that are lower. For investors, this means their fixed-income investments could generate lower returns.

Financial System

With big retail deposit bases and stronger liquidity coverage ratios than their American counterparts, Japan’s top banks are in the best financial shape they’ve been in for 40 years.

National Pension System of Nenkin

Do I need to pay into the Japanese pension fund?

Pay into the nenkin national pension fund if you are a registered resident in Japan. Failure to pay on time is not only a legal responsibility as a citizen, but it can also result in the government blocking or emptying your bank accounts (they would send you a lot of reminders first, of course).

If you intend to leave Japan, you should request a lump-sum withdrawal of your contributions to ensure that you receive at least a portion of your investment. Nenkin is also tax deductible, and it provides you with an iDeCo account.

Background Information on Politics

Japan’s officials are concerned about the country’s problem with currency hoarding. As a result, savers have been scrutinized, as their contribution to strengthening investment and Japan’s overall recovery would be crucial. It’s unclear what “contribution” means, as it could indicate some form of financial restriction.

Here are some examples of potential financial repression:

• Negative real interest rates, such as those used to finance government debt and Japanese firms.
• High investment taxes as well as tax incentives to invest in Japan (such as tax-free accounts).

Debt

The country’s debt-to-GDP ratio remains high and is expected to hit 266% by year-end 2023, according to Trading Economics. Such scenario puts the country at risk in the long run if credit analysts assess that it will have difficulty repaying debt.

The Top Ten Methods to Invest in Japan

When you initially start investing, take it slowly. Begin with tiny sums of money and progressively increase them as you gain experience and comfort.

Below are the top 10 investment opportunities in Japan for foreigners:

Japan’s Individual Stocks

Investing in publicly traded Japanese companies is a common method of doing so. These investments have a number of drawbacks, despite the fact that they are incredibly liquid and provide you entire control over the businesses in which you invest.

Individual stock portfolios need in-depth research on each company you invest in, as well as the purchase of numerous individual equities to diversify your investment basket. You may also be compelled to pay a commission each time you buy or sell something.

Investing in Japanese Mutual Funds

One of the best ways to profit from Japan’s future growth prospects is to invest in Japanese stocks and mutual funds. Japan mutual funds (also known as equity funds) are a type of mutual fund that invests in Japanese company stocks and can span a wide range of market capitalizations, sectors, and styles. The funds can be managed passively or actively by teams situated in Japan or remotely.

This option is also a great way to diversify your portfolio.

Real Estate Market in Japan

Property in Japan may be a very steady and secure investment if done right. Expect a lower rate of appreciation and lower rental yields than in Cambodia or the Philippines. Foreigners can own land and residences in Japan, which is one of the few Asian countries that allows it.

Foreigners are allowed to not only buy but also own freehold property in Japan. When you acquire real estate in Japan, whether it’s a house in Tokyo or an apartment in Osaka, you’ll have the same rights as a Japanese local.

Invest in Gold in Japan

Gold is a highly liquid yet limited commodity that no one holds as a liability. It’s bought as both a luxury item and an investment.

According to research, adding 2.5%, 7.5%, or 10% of gold to a typical Japanese pension portfolio during the last decade would have resulted in superior risk-adjusted returns.

Historically, at periods of high risk, gold has benefited from flight-to-quality inflows. During instances of systemic recession, when investors tend to withdraw from equities, gold has proven to be particularly beneficial by providing positive returns and avoiding portfolio losses.

When fewer liquid assets in a portfolio were undervalued or potentially mispriced, investors were able to satisfy liabilities. Gold’s capacity to protect investors from high inflation has also helped investors. In years with inflation of more than 3%, the price of gold has grown by an average of 16% in real terms.

It has been used as a medium- to long-term investment.

Invest In Japan Exchange-Traded Funds (ETFs)

Exchange-traded funds are a low-cost and efficient way to participate in the ups and downs of the Japanese stock market. They provide diversification and ready market-makers with whom you can trade throughout the day, as opposed to mutual funds, which require you to wait until the end of the day to trade. In-kind redemptions are also tax-efficient because they avoid capital gains taxes.

Exposure to Japanese equities provides the type of diversification required to maintain optimal portfolio allocation. Profits would come from large-cap stock funds, while growth would come from small-cap stock funds.

Japanese Government Bonds (JGBs)

Bonds issued by the Japanese government are a good investment. The government pays bond interest until the bond matures. At the maturity date, the bondholder will be repaid the full amount. Japanese government bonds are a major player in the Japanese financial securities market.

Japanese government bonds are similar to Treasury bonds in the United States (US Treasury securities). The Japanese government completely supports them, and their investments among low-risk investors have become a well-known technique for them to manage their risks. They are also a good choice for high-risk investors.

They, like US savings bonds, have a strong credit rating and liquidity, which contributes to their popularity. Furthermore, price and returns are utilized as a benchmark for trading JGBs.

Cryptocurrency Investment

Crypto is a great investment if you are willing to accept the risk. Bitcoin wants to replace gold as a store of value, and Ethereum has the ability to upset the whole financial services industry. While ambitious, cryptocurrencies have a growth potential unlike any other investment.

Japan is among the world leaders in the growth of cryptocurrency markets, backed by a robust legal structure that strengthens investors’ confidence.

Invest in the Japanese Yen

Foreign investors have long seen the Japanese yen as a safe haven, carry trade, and currency hedge. Since the early 2000s, investors have been borrowing the Japanese yen due to the Bank of Japan’s low interest rates. The cash from these borrowings were subsequently given out in other currencies, such as the US dollar, at a higher interest rate.

The most straightforward approach for international investors to obtain exposure to the Japanese yen is through exchange-traded funds. These funds use a variety of derivatives, such as currency swaps, to try to mirror the price of the Japanese yen versus the US dollar or a basket of international currencies.

Put Money into a Taxed Account

It’s simple to open and invest in a taxed account. There are various varieties of these due to Japan’s investor-friendly rules, but tax-reporting tax-withholding accounts is one of the best and easiest options.

If you utilize this type of investment account, your bank or broker can calculate and pay your taxes on your behalf. You won’t have to report your investments on your tax return as a result (in most cases). Online brokers’ costs are typically lower than those imposed by banks or large brick-and-mortar brokerage firms.

Investing in a Foreign Currency (FX)

If you want to enhance your earnings, it’s time to attempt the genuine deal. Because of the hazards, the majority of people shun forex markets. It is preferable to be sensible and well-prepared while trading forex. It will enable you to make a significant wealth-building change in your life.

Debunking all of the myths and avoiding all of the frequent mistakes that ineffective traders make is the best method to do it. If you utilize the appropriate trading tactics, you could become a successful forex trader.

Setting acceptable goals will help you refocus on effective investing tactics that work for you. You must also band together and not be intimidated, as anyone may become a successful forex trader.

Trading forex in Japan is an excellent option to invest in one of the world’s most prestigious stock markets. In order to succeed in the market, you must have the greatest trading tools and tactics. It’s best to visit many websites, such as ForexNihon.com, to obtain a comprehensive understanding of how to become the finest forex trader possible.

Expats may also want to consider buying foreign currency assets as a hedge against the Japanese Yen’s volatility. The most liquid markets in the world are foreign exchange markets, which are influenced by a range of macroeconomic factors.

Forex trading can make you wealthy if you’re a hedge fund with huge pockets or a highly adept currency trader. However, for the average shopkeeper, Forex Trading may be a rough route to enormous losses and potential suffering rather than an easy road.

Foreign currency exposure is a complex financial engineering issue, and you should obtain professional advice before making any decisions. To trade in the FX market, you’ll need a broker. Many overseas forex brokers accept Japanese clients and can quickly process their deposits. Because trading takes place via the internet, you can utilize a broker from anywhere in the world.

What are the Costs of Investing in Japan?

Fees for Property Management

If you hire a property manager, you’ll normally be paid maintenance costs based solely on monthly rental income. Your property manager is in charge of all day-to-day operations at your property, including tenant care, administrative work, rental money collection, and so on.

In most cases, property manager fees are reported without regard for consumption tax. For example, if your total rental income is 100,000 JPY and your property manager charges 5%, you will pay 100,000 JPY x 5% x 1.08 = 5,400 JPY monthly at the current consumption tax rate of 8%.

Brokerage Commission

When a real estate company assists a client in purchasing second-hand property, the buyer is required to pay the company a brokerage fee. If a real estate business sells a newly constructed property as a seller, the brokerage fee is not paid.

A Financial Institution’s Fee

Many of the buyers have mortgages from banks and other financial entities. When a mortgage is handled, the financial institution’s handling fee is usually charged. Because the handling charge varies based on the financial institution and the size of the mortgage, it’s a good idea to double-check it ahead of time.

Fees for Judicial Scriveners

Due to the lack of a single standard, these fees are established at the discretion of the judicial scrivener. The amount varies greatly depending on what is set by the judicial scrivener.

Why Should You Look for Investment Opportunities in Japan?

Valuations That are Compelling

Japanese stocks are selling at enticing value levels relative to their own historical averages in comparison to other developed equity markets throughout the world, providing even another reason to consider buying Japanese mutual capital.

Japan’s Policy of Stability Stimulates Investment

The government plays a crucial role in the success of startups in its jurisdiction. Japan’s economy has gotten a huge boost during the time of late Prime Minister Shinzo Abe.

Japan has been resurrected as a global economic center, thanks in part to financial policies designed by major policymakers and government leaders to support the economy.

It’s a good opportunity to visit Japan and meet up with local Fintech communities, or to finally host an event. Thanks to continuing reforms in the investment climate and robust government backing, the economy is progressing and drawing private sector investments.

Japanese Stocks are Available for Purchase at a Discount

The general public can now purchase Japanese pension funds, which serves as a new stimulus for the Japanese economy. The privatization of Japan’s stock market is a great step that more investors should take advantage of, especially considering Japanese stock funds are among the best in the world.

Japan’s economy is seeing an increase in investment as a result of its improved economy and the decoupling of the yen from the stock market. As it deals with inflation-related concerns, Japan has begun to re-establish itself as a hub of financial and business development.

Corporate Governance Has Improved

Abenomics’ structural changes, which included the development of Japan’s “Stewardship Code” and a stronger focus on shareholder returns, included corporate governance as a significant priority.

It has resulted in higher shareholder dividend payouts, increased shareholder activism, improved corporate profit margins, and greater returns on equity for some Japanese companies.

Adaptive Innovation

Japan’s strong research and development (R&D) capabilities and regulatory reforms pave the way for future progress in growing high-value-added sectors of the global economy. Japan, which is known for its world-class R&D skills and high-quality intellectual property assets, is providing international enterprises with new value-creation prospects.

What are the drawbacks of investing in Japan?

Due to its slow development, economic setbacks, and political concerns, investors remain wary of Japan, according to Forbes.

The political stability that the country has enjoyed seemed to be under threat after Abe.

Japanese businesses, in contrast to their more enterprising Asian neighbors, are more risk-averse, especially when it comes to taking on debt to fund growth. The business culture in Japan likewise hasn’t solved its problems yet. The lack of diversity and impartiality on boards is still a source of concern.

Though it should be noted that the corporate culture and governance are transforming overall, albeit slowly. In fact, the Tokyo Stock Exchange announced intentions to put more pressure on listed businesses to fulfill its higher criteria or risk de-listing. The move helps promote corporate governance changes and remove inefficiencies.

Japan Investing Outlook

Is it wise to invest in Japan in the future?

Because of a combination of structural reforms and inexpensive equities, Japan is poised for rapid development in the foreseeable future. Now it’s up to the investors to seize this chance.

Now is a wonderful time to invest in Japan’s stock market because of low valuations. Despite possessing the world’s third-largest economy in terms of GDP, investors tend to neglect Japan.

Investors who are not exposed to Japanese equities, on the other hand, are missing out on a market with strong dividend yields and relative stability.

The Nikkei 225 is predicted to rise 6 percent in 2023 compared to 5 percent for the S&P 500. According to John Vail, the leading global strategist at Nikko Asset Management, this predicted outperformance is attributable to a mix of low momentum and valuations.

As per Forbes, Japanese stocks’ prospects remain unclear given the significant cyclicality of consumer goods demand from Japanese blue-chips.

Japan’s economy is recovering momentum, but its main trading partners in the US and Europe are suffering high inflation and looming recessions. China’s zero Covid-19 policy continues to hinder trade as well.

The Bank of Japan’s monetary policy and low interest rates differ from those of the US and UK. This has caused the yen to tumble to its lowest level versus the dollar in 30 years.

Since it hasn’t been priced in yet, the gradual but steady shift in company culture could boost growth.

Behind the top economic figures, global opinions about investment possibilities and long-term constraints are changing, according to The Economist.

By 2040, roughly a third of Japanese will be 65 or older. Businesses and authorities in Japan increasingly perceive demographic shift as an investment opportunity, though. 

They intend to address social issues including a dwindling workforce, rising healthcare costs, and decreased mobility using advanced technologies like big data, the Internet of Things (IoT) and artificial intelligence (AI).

These advancements are also drawing increased international investment from global corporations hoping to capitalize on Japan’s prosperity.

Pained by financial indecision?

Adam is an internationally recognised author on financial matters with over 830million answer views on Quora, a widely sold book on Amazon, and a contributor on Forbes.