After all “There is no stock market as undervalued and as misunderstood as Japan”Subheading to “Investing in Japan” by Steven Towns
For those who are really serious about investing in Japanese equities, Dr Michiro Naito’s book below gives a great introduction to the market.
Before reading on, check out our post on buying Japanese stocks from inside Japan if you are a long term resident in Japan.
For those living outside Japan, there are three ways to invest in Japan’s equity markets.
Exchange-Traded Funds or ETF are listed securities that track stock market indexes.
Essentially, ETFs hold the same proportion of stocks that are included in the tracked index. Since ETFs are listed on the stock exchange, they can be traded like normal company stocks.
ETFs try to fully replicate their respective indices by buying the stocks that constitute the index they are meant to track.
Buying ETFs that track Japanese indices can be a convenient way for foreigners to gain exposure to the Japanese stock market. You can open an account with a number of online brokers to invest in these ETFs.
Japan’s Stock Market Indexes
Before looking at the ETFs themselves, here are some of the popular indexes that are made up of Japanese stocks.
- Nikkei 225: Simply known as the Nikkei, this is the most popular Japanese stock index. It tracks 225 of the most actively traded stocks on the Tokyo Stock Exchange (TSE). The word is an abbreviated form on Nihon Keizai, or “Japan Economy” and it is names after Nihon Keizai Shimbun (translating as Japan Economy Newspaper) which began calculating the index in 1950. Something to beware of that the Nikkei is weighted by stock price and not market capitalization, which means that smaller cap stocks with high stock prices have disproportionally high weight on the index.
- JPX-Nikkei 400: This tracks 400 stocks in Japan selected on the basis of their profits and Return on Equity (ROE).
- FTSE Japan: This index is constituted of large and mid-cap Japanese stocks.
- MSCI Japan and MSCI Japan Large Cap: Both these indexes track Japanese stocks and Japanese large-cap stocks respectively, weighted by market capitalization
- TOPIX: The Tokyo Stock Price Index tracks stocks that are on the TSE’s first section, weighted by market capitalization
Now that you know some of the important indices that track Japanese stocks, we will now list popular ETFs that track these indices.
These ETFs are based in different countries but can be bought by investors in the US, UK, Australia, and Canada.
Expense Ratio: 0.48%
This ETF is domiciled in Ireland and fully replicates the Nikkie 225. YTD (since the start of the calendar year 2020), this ETF has posted a return of 17.87%; all profits are accumulated.
Expense Ratio: 0.09%
This ETF is domiciled in Luxembourg and fully replicates the Nikkie 225 with AUM (Assets under Management) of 1.8bn GBP. YTD, this ETF has gained 18.4% and it distributes the profits.
Expense Ratio: 0.48
This ETF tracks the JPX-Nikkei 400 index, it is listed on the NYSE Arca with AUMs of $97M. It has a YTD return of 13.7%.
This ETF is domiciled in Ireland and approximately replicates the FTSE Japan Index. It has total AUMs of $1.9bn and a YTD of 12% and distributes the profits as dividends.
This ETF has AUMs of $1.08bn and approximately replicates MSCI Japan Net Total Return Index. It has a YTD return of 11.8% and accumulates the profits.
These are just some of the ETFs that track Japanese stock indices. It is a good idea to ensure that the expense ratio is under 0.5%; this is the management expense charged by the ETF.
Currency Hedged ETFs
One issue with all the ETFs we have listed above is that they are not currency-hedged, meaning they are exposed to exchange rate volatility.
If you do not want to take on currency risk then you can buy currency-hedged ETFs that use currency forwards and options to hedge against exchange rate volatility.
In the US
In the UK
If you want your money to be actively managed with the aim of getting higher return, you can opt for Mutual Funds or investment trusts that hold Japanese stocks.
Naturally, an actively managed fund costs more than an ETF with expense ratios of around 0.75% or more. Mutual funds are also riskier than ETFs and include other securities like bonds.
A few funds that invest in Japanese stocks include T. Rowe Price Japan Fund, Hennessy Japan Fund, Matthews Japan Fund, Fidelity® Japan Fund, and DFA Japanese Small Company Portfolio.
Japan Mutual Funds in the US
|Fund Name||Compund Annual Growth Rate (CAGR) over last 10 years||Expense ratio (%)|
|T. Rowe Price Japan Fund||11.25%||0.97|
|Hennessy Japan Fund||13.57||1.03|
|Fidelity Japan Fund||6.57||1.32|
|Matthews Japan Fund||10.45||0.93|
In the UK
If you would rather invest directly in Japanese stocks, you can do so by opening an account with a broker. We would recommend to you not to open an account with a Japanese brokerage firm since you may need knowledge of the Japanese and it is likely that you will end up paying higher taxes and commissions.
There are a number of online international brokers, where you can open accounts to invest in the Japanese stock markets.
Available in US, Canada, Australia, UK and many more!
Interactive Brokers is a US based broker offering a variety of pricing structures which include fixed commissions and zero commission trades.
Their registration process is simple and completely online.
The documents required are for proof of address and date of birth and a bank account statement to link your bank account. Individual countries may have their own additional requirements, for e.g. in Canada you have to submit United States Internal Revenue Service (IRS) Form W-8.
Here are a few other brokers who allow for international investing in their respective countries:
In the US
Investing in Japanese stocks using American Depository Receipts (ADRs)
If you live in the US, a convenient way of gaining exposure to foreign stocks is by buying that company’s ADRs (American Depositary receipts). Foreign companies that want to raise capital or create a presence in the US, issue ADRs which are held by a bank. ADRs essentially represent a share or a number of shares of the underlying company.
ADRs are sold “over-the-counter” (OTC), which basically means they are not on a centralized exchange.
There are many Japanese ADRs listed in the US, for the full list click here. It is important to remember that through ADRs you will gain indirect ownership of the underlying Japanese stock.
ADRs and Dividends
The owner of ADRs still gets paid dividends. The trustee bank which holds the foreign stocks collects dividends paid in the foreign currency (JPY in this case) and converts them into U.S. dollars to be paid out to the U.S. shareholder.
For countries other than the US, companies can issue GDRs (Global Depositary Receipts). The majority of GDRs are listed on the London Stock Exchange, Luxembourg Stock Exchanges, and exchanges in Frankfurt, Dubai, and Singapore. A number of Japanese companies have issued GDRs – we are looking for a list; please let me know in the comments if you can find one!
How to use ADRs
ADRs are available with selected brokers who allow their transactions on their platform. One such broker that has now announced listing of 250 ADRs on their platform is Robinhood.
Robinhood announced the addition of ADRs of 250 international companies in 2018, which include Japanese companies like Sony, Nintendo and Nissan.
In the UK
Interactive Investors, Freetrade
There are others as well like Halifax, Hargreaves, Lansdown etc. but they offer limited markets and limited reach.
You can participate in the Japanese market through mutual funds, ETFs or by buying individual stocks using the various brokers above. Depending on the company, you may also buy ADRs/GDRs for the same companies in your local market, avoiding the hassle of juggling multiple country accounts.