It has never been easier for Japan residents to organise and manage their investments. This guide covers a few financial planning basics and breaks down two tax-advantaged investment products.

Before getting started

Regardless of nationality or country of residence, there are three basic things that people should consider to protect themselves financially:

• Emergency cash reserve
  
• Basic insurance
  
• Pension / long-term savings

Firstly, it is prudent to build up an emergency cash reserve. This money is kept in cash in the bank. It is not invested and should be easily accessible. The purpose of the cash reserve is to meet monthly expenses in the event of loss of employment. The typical advice is to build up 3-6 months of expenses in cash before beginning to invest for the longer term. Some people may feel comfortable with a larger cash reserve.

Secondly, it is wise to consider private health insurance and income protection insurance. Company employees in Japan are enrolled in the national health insurance scheme. However, this does not cover longer-term sickness. Income protection insurance is designed to pay a portion of the policyholder’s income if they become unable to work due to illness or injury.

Lastly, people should consider allocating part of their disposable income to longer-term investments to help fund their retirement. Again, company employees will likely be enrolled in the national pension scheme. They may choose to supplement these contributions by making further investments themselves.

Are you interested in setting up a credit record in Japan, but you don’t know how it works? Head to our simple guide How Does Japan’s Credit System Work? and learn more.

What kind of investment products are available?

Investors have many options, both domestically and internationally. Two Japanese investment products stand out because they offer significant tax advantages.

• The Nippon Individual Savings Account, or NISA, was launched in January 2014, and the offering has been significantly improved in recent years. NISA was designed to encourage residents of Japan to invest for the future.
  

• iDeCo stands for the Individual Defined Contribution Pension. It is a self-managed retirement savings plan that can be used to supplement contributions to the national pension.

More about NISA

• Eligibility: Anyone over the age of 18 who lives in Japan can open a NISA account
• Annual Investment Limit: Up to ¥3.6 million per year
• Contributions are divided between the regular investment allocation, which can invest in mutual funds, and the growth allocation, which is free to be invested in mutual funds, stocks and Exchange Traded Funds (ETFs)
• Tax Benefits: Capital gains and income from dividends are free of the standard 20% tax charged on regular investments
• Lifetime Contribution Limit:  Up to ¥18 million total
• Holding Period: Unlimited, you can keep assets tax-free for as long as you want.
• Flexibility: No minimum holding period, you can sell anytime without losing tax benefits.

To summarize, individuals can invest up to ¥18 million over their lifetime, and the investments will be free of tax on capital gains and dividends. Detailed information can be found on the Financial Services Agency website. (Japanese only)

More about iDeCo

• Eligibility: Generally, anyone over the age of 20 who resides in Japan and contributes to the National Pension is eligible
• Tax-Deductible Contributions: All contributions reduce your taxable income.
• Investment returns are tax-free
• Tax deductions apply when receiving benefits
• Payout Options: Benefits are available from age 60 onwards and can be received as a lump sum, an annuity, or a combination of both

Detailed information on iDeCo, including the maximum contribution limits, can be found on the iDeCo official website, which is available in English.

NISA vs. iDeCo: What’s the Difference?

How to apply for NISA and iDeCo

Both NISA and iDeCo are available through a range of financial institutions, including banks, insurance companies and securities firms. These days, many investors use online brokerage accounts to access these products. Rakuten Securities and SBI Securities are two of the most popular online brokerages. 

Applications can be made on the website. Foreign residents will be asked to send copies of their residence card and My Number card by mail following the initial application.

A word of caution: U.S. citizens are subject to global taxation, and NISA and iDecCo are generally not considered suitable for them due to the onerous tax reporting requirements on Passive Foreign Income Companies (PFIC). With careful planning, it is possible to avoid PFICs in the growth part of NISA, however, people unsure of the tax situation should seek professional advice.

To conclude, Japan has excellent tax-advantaged investment options available to residents. Unfortunately, the online brokerage accounts still require users to navigate in Japanese, although online translation tools make that easier.

Martin Phillips is a UK and internationally certified financial planner. He has lived in Japan since 1997, where he works as a financial adviser serving expatriate clients across the Asian region. Check out his financial planning blog for foreign residents in Japan: smartmoneyasia.com

Last summer Bank of Japan issued new designs of the ¥1,000, ¥5,000 and ¥10,000 banknotes. Read about the new notes in our article Bank of Japan Introduces New Banknotes.