Why Invest Your Money?

Simply put, keeping your money in a savings account isn't enough to secure your financial future. This is especially true in Japan, where savings account interest rates have been near zero for decades. When you invest your money wisely, you're not just storing it – you're putting it to work for you.

Over the next few chapters, we're going to help you understand investing fundamentals, pick a portfolio appropriate to your life situation and goals, and learn about the different types of investment accounts in Japan. We'll also dive into different tax-efficient (or tax-free) ways to help you grow your investments for retirement.

When is the Best Time to Start Investing?

The best time to start investing is now. It doesn't matter how young or old you are, the more time your money spends in the market, the more time it has to grow.

The reason is that investments don't grow linearly. A simple but powerful concept called compound interest is what makes investing magic. Think of compound growth like a snowball rolling down a hill. As it rolls, it picks up more snow, getting bigger and bigger. The bigger it gets, the more surface area it has to collect even more snow. Compounded over decades of time, your small investment now can grow in to a major nest egg in the future.

How Compound Interest Works

Here's a simple example: Let's say you invest ¥1,000 and earn 10% interest each year. As you can see, the amount that you earn gets bigger and bigger every year, all without you having to do anything but watch it grow.

• Year 1: ¥1,000 grows to ¥1,100 (earned ¥100)
• Year 2: ¥1,100 grows to ¥1.210 (earned ¥110)
• Year 3: ¥1,210 grows to ¥1,331 (earned ¥121)

A Real-World Example

Now, let's compare the average growth rate of a globally-diversified portfolio (7%) versus how much the typical Japanese savings account offers (0.2%).

Simply by investing and holding your money, you would see a 760% increase in value. You would earn ¥65,505 more than if you had just left your money in a savings account, without any additional effort involved. Seems like a good deal, doesn't it?

The Psychology of Investing

Now, as you may be aware the market doesn't always just go up in a straight line, and it can be distressing at first to see your money out of your control and at the whims of the market. On top of that, there are tons of cautionary tales of gambling on the stock market and losing it all, which naturally makes some people scared to invest in the first place.

By remembering these simple tenets, you can set yourself up for long-term success:

1. The market trends upwards: Over the last 100 years, the global stock market has always trended upwards, even through recessions.
2. Diversify and invest globally: Picking individual stocks to invest in can seem fun, but it's more akin to gambling than investing. Globally-diversified mutual funds are readily available and let you get exposure to thousands of stocks worldwide without having to put in effort or expense. Instead of betting that one stock will go up in value, you're betting that the whole world economy will continue to grow, which is a much safer bet.
3. Time in the market, not timing the market: Don't try to guess whether or not now is a good time to invest. What's more important is giving your money more time to grow, so invest on a consistent basis and forget about the guesswork.
4. Invest for decades, not days: When the market goes down, your first instinct might be to panic, but it's important to remind yourself that bumps in the road are perfectly normal. Over the span of decades of investing, ups and downs will happen, but you're almost always likely to come out ahead.
5. Invest only what you can afford to lose: Don't put yourself at financial risk just to invest. Make sure you have adequate savings available before investing any money.

Why Start Investing While Living in Japan?

You might have noticed that many Japanese people tend to keep their money in savings accounts, but that doesn't mean that Japan doesn't offer the same types of investment products as the rest of the world. Though Japan's economy has been lagging for decades, you are still just as easily able to invest internationally in a globally diversified portfolio to capture some of that growth potential.

In addition, the Government of Japan is trying to incentivize its residents to invest with the following:

Tax Advantaged Accounts

Whether you're saving for a big purchase, or investing to fund your retirement, Japan offers some pretty great tax-advantaged accounts like the NISA and iDeCo. Broadly speaking these let you invest your money while receiving significant tax breaks, or in the case of NISA allowing you to invest entirely tax-free. We'll cover these accounts more in future chapters.

Low Capital Gains Tax

One of Japan's key advantages for investors is its relatively low capital gains tax rate of 20.315%. To put this in perspective, many developed nations charge significantly higher rates – some European countries have rates exceeding 30%, while in the United States, short-term capital gains can be taxed at rates up to 37%.

What Kind of Investment Protections Does Japan Have?

The Financial Services Agency (FSA) maintains strict standards for financial institutions, and offers robust investor protections that rival or exceed those found in other developed countries. This means you can be assured that your money is safe when you invest with a well-known and reputable brokerage.

Investing in any country, however, carries a certain amount of risk, but as you might know, risk can equal reward. By making wise investments that align with your own personal risk-tolerance, you can exponentially increase the amount of money you have saved over decades. We'll delve deeper into risk and reward in the next chapter.

Understanding Your Resident Status and Investment Options

Japan's investment landscape is welcoming to foreign residents, and it is relatively easy to open a brokerage account here. If you're living in Japan with a valid residence card (在留カード, zairyu card), Japanese bank account, and My Number card, you'll have access to most investment options available to Japanese citizens.

For most working professionals in Japan (those with work visas, spouse visas, or permanent residence), the doors are wide open. You'll be able to open regular brokerage accounts, invest in globally diversified funds, and participate in tax-advantaged accounts like NISA (Nippon Individual Savings Account) and iDeCo (individual-type Defined Contribution pension plan).

However, if you're new to Japan or planning to stay for a shorter period, you'll want to pay special attention to the requirements and restrictions of tax-advantaged accounts. For instance, while anyone with a residence card can open a regular brokerage account, accounts like the NISA and iDeCo are better suited for those who plan to stay long-term or retire in Japan.