Investing in Japan: Opportunities Await

We have always been fascinated by Japan. Its culture, history, and its innovation. We wanted to learn more about this fantastic country and find new ways to diversify our portfolio. So, we decided to embark on a quest to explore the world of investing in Japan. In this article, you will learn about the attractiveness of Japan’s market, the best strategies for investing in Japanese stocks, the pathways for foreign investors, and whether 2023 is the right time to make this financial move.

What is Investing?

Investing is putting your money into something that can generate more money in the future. For example, you can invest your money in stocks, bonds, mutual funds, exchange-traded funds (ETFs), real estate, or businesses. The purpose is to make your money work for you instead of just sitting in a bank account or under your mattress. Honestly, investing has many benefits, such as:

• Increasing your income and wealth over time. Firstly, investing your money can earn interest, dividends, capital gains, or profits from your investments. Also, these can help you supplement your income or build your wealth over time.
• Protecting your money from inflation and taxes. Secondly, it can preserve or increase its purchasing power over time. Inflation is the rate at which the purchasing power of money decreases over time. Taxes are the fees that you pay to the government from your income or assets. By investing your money in certain types of investments that offer tax advantages or higher returns than inflation, you can protect your money from losing value or being eroded by taxes.
• Achieving your financial goals and dreams. Thirdly, by investing your money, you can save for your short-term or long-term goals, such as buying a house, starting a business, retiring comfortably, traveling the world, or leaving a legacy for your loved ones.

How to Start Investing in Japan?

• First, set your goals and budget.

Before investing your money, you must clearly understand your goals and financial situation. It includes setting SMART goals, which are specific, measurable, achievable, relevant, and time-bound. For example, instead of “I want to save for retirement,” you can say, “I want to save 100 million yen by age 65“. You also need to set a budget that shows how much income you have, your expenses, and how much savings you have. Similarly, allocate a portion of your savings for investing, depending on your goals and risk tolerance.

• Next, choose an investment platform and account.

After you have set your goals and budget, you need to choose an investment platform and account that suits your needs and preferences. An investment platform is a service that lets you buy and sell diverse types of investments online or through an app. An investment account is a type of account that holds your assets and offers features and benefits. There are many types of investment platforms and accounts available in Japan, such as:

1. Online brokers let you buy and sell stocks, bonds, mutual funds, ETFs, and other securities online or through an app. They charge fees or commissions for each transaction or offer a flat fee for unlimited trades. Some examples of online brokers in Japan are Rakuten Securities, SBI Securities, Monex, and Matsui Securities.
2. Robo-advisors use algorithms and artificial intelligence to make and operate a diversified portfolio of investments based on your goals, risk tolerance, and preferences. They charge a percentage fee for your assets under management or a flat fee. Some examples of robo-advisors in Japan are WealthNavi, THEO, Money Design, and Rakuten Robo.
3. Retirement accounts permit you to save for retirement with tax advantages. There are two types of retirement accounts in Japan: individual-type defined contribution pension plans (iDeCo) and corporate-type contribution pension plans (DC). iDeCo are accounts you open and manage with an online broker or robo-advisor. Also, they allow you to deduct up to 23% of your annual income from your taxable income but pay taxes on your retirement withdrawal. You open and manage DC accounts through your employer with a plan provider. They allow you to contribute up to 27% of your annual income (up to 55% if combined with iDeCo) before taxes but pay taxes on your retirement withdrawal. Some employers contribute matching assistance to your retirement savings plan, a great way to boost your savings.
4. Education savings accounts allow you to save for education expenses with tax advantages. The two main education savings accounts are education savings plans (ESP) and education endowment insurance (EEI). ESP allows you to save for college or other post-secondary education expenses. They offer tax-free growth and withdrawals for qualified education expenses. Depending on the plan, financial institutions sponsor them and have different rules and features. EEI accounts allow you to save for education expenses from kindergarten to college. They offer tax-free growth and withdrawals for qualified education expenses. They have a limit of 40,000 yen per month per beneficiary and have age restrictions for contributors.

• Then, choose your investments and strategy.

After you have chosen your investment platform and account, you need to select your investments and plan that match your goals, risk tolerance, and time horizon. Stocks are riskier than bonds, but they have the potential for higher returns. Bonds are less risky than stocks but have lower potential returns. Investing in stocks and bonds lets you balance your portfolio’s risks and rewards. Balance your portfolio between domestic and foreign investments, depending on your needs and preferences.

Domestic investments are investments in Japan, such as Japanese stocks or bonds. Foreign investments are investments outside Japan, such as US stocks or bonds. Also, decide whether you want to be an active or passive investor. Active investors buy and sell investments frequently based on market trends, news, or analysis. Passive investors buy and hold investments for a period based on a predefined strategy or index.

Is It a Good Idea to Invest in Japan?

Japan has long been an economic powerhouse, home to renowned corporations like Toyota, Sony, and SoftBank. Its stable political environment and industrial solid base make it an appealing destination for investors. Additionally, Japan is at the forefront of technological advancements, presenting exciting opportunities in sectors like robotics, artificial intelligence, and clean energy. The potential for growth and diversification makes Japan a compelling prospect.

The Best Way to Invest in Japanese Stocks: Strategies That Work

Investing in Japanese stocks can be achieved through various avenues. 

• Exchange-Traded Funds (ETFs). ETFs offer diversification across a range of Japanese stocks, reducing risk.
• Individual Stocks. Investing directly in Japanese companies can yield substantial returns, but it requires research and knowledge of the market.
• Mutual Fund. Mutual funds managed by professionals can provide a balanced approach to Japanese equity investment.
• Global Investment Platforms. Utilizing global investment platforms that offer access to Japanese markets can be a convenient choice for international investors.

How to Invest in Japan for Foreigners: The Pathways to Success

Foreign investors have multiple options when it comes to investing in Japan:

• Direct Stock Purchase. Some foreign investors can buy Japanese stocks directly on the Tokyo Stock Exchange (TSE). However, this typically requires a local brokerage account.
• Global Brokerage Accounts. Utilize international brokerage platforms that provide access to Japanese markets, offering convenience and a wide range of investment options. They offer flexibility and access to a broad range of investment products.
• Japan-Focused Mutual Funds or ETFs. Invest in Japan-centric funds available through global investment platforms.

Is Now a Good Time to Invest in Japan?

Timing is a crucial consideration for investors. Predicting market movements is challenging, but we believe in the long-term potential of the Japanese market. You can adhere to the principle of “time in the market, not timing the market.” Dollar-cost averaging, where you invest regularly regardless of market fluctuations, helps mitigate timing risks.

Should I Invest in Japan in 2023?

Indeed, 2023 holds promise for Japan, with ongoing innovations and a commitment to sustainable technologies. While we acknowledge that market conditions can change, we see the growth potential and are excited to be part of Japan’s economic journey.

Conclusion: Japan’s Investment Landscape

Overall, investors worldwide can explore Japan’s captivating possibilities. They can create sound decisions by understanding the advantages, utilizing diverse investment strategies, and considering their financial objectives. While market conditions may fluctuate, Japan’s enduring appeal makes it a destination worth exploring for those seeking stability and growth in their investment journey.

After you have chosen your investments and strategy, you need to monitor and adjust your portfolio periodically to ensure that it is performing well and aligned with your goals. Similarly, review your portfolio at least once a year or whenever a significant change in your situation, such as a change in income, expenses, objectives, risk tolerance, or market conditions. Also, rebalance your portfolio by selling some of the investments that have grown too much and buying some that have fallen too much. It can help you maintain your desired asset allocation and risk level. Moreover, reinvest your income from your investments, such as interest, dividends, or capital gains. It can help you compound your returns and grow your portfolio faster. Thanks for reading, and see you at the next one

References:

WealthNavi. 2020, October 20. How to invest in Japan: A guide for foreigners. https://wealthnavi.com/en/blog/how-to-invest-in-japan-a-guide-for-foreigners/

Yamada, T. 2019, June 25. How to start investing in Japan as a foreigner. Retrieved August 19, 2023, from https://www.youtube.com/watch?v=Z9Xl6Y7Qw0k

Japan Securities Dealers Association. (n.d.). How to start investing in Japan. Retrieved August 19, 2023, from https://www.jsda.or.jp/en/investing-in-japan/how-to-start-investing-in-japan.html

Nomura Securities. (n.d.). Investing in Japan for beginners. Retrieved August 19, 2023, from https://www.nomura.co.jp/english/individual/investing_in_japan/