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.
For those living inside Japan
Jump to how to buy Japanese stocks from inside Japan here
How to buy Japanese Stocks from outside Japan
ETFs or Exchange Traded Funds are essentially listed funds that track a group of securities; these groups of securities can either be stock market indices or industry sectors. What sets apart ETFs from mutual funds is that they are listed and can be traded throughout the day similar to normal stocks.
ETFs that track particular stock market indices try to fully replicate them as in they hold the same stocks in the same proportion as the index.
There are a number of ETFs listed on stock exchanges worldwide that track Japanese Indices. Buying them can be a convenient way for foreigners to gain exposure to the Japanese Stock Market. Before we move on to Japanese ETF, it is important to first take a look at some of the Japanese stock market indexes.
Japan’s Stock Market’s Indexes
Nikkei 225: The Nikkei 225, or simply “The Nikkei” is the most popular stock index in Japan and is composed of 225 of the largest companies that are listed on the Tokyo Stock Exchange. One thing to be aware of is this index is “price-weighted” meaning that companies with high stock prices, regardless of their market capitalization, have the most impact on the index as a whole.
TOPIX: TOPIX is another popular Japanese stock index that consists of stocks that are on the Tokyo Stock Exchange’s First Section. TOPIX is a market capitalization-weighted, which means that each stock’s weight on the index depends on its market capitalization.
JPX-Nikkei400: This includes 400 stocks from the First Section and Second Section of the Tokyo Stock Exchange, the Mothers, and the JASDAQ Markets. Stocks are chosen based on a number of quantitative and qualitative factors that include ROE (Return on Equity).
FTSE Japan: This index includes large-cap and mid-cap Japanese stocks.
MSCI Japan: MSCI tracks the performance of approximately 300 of the large-cap and mid-cap Japanese stocks; it covers nearly 85% of the free float-adjusted market capitalization in Japan.
MSCI Japan Large Cap: The MSCI Japan Large Cap Index consists of approximately 105 large-cap stocks of the Tokyo Stock Exchange and covers about 70% of the free float-adjusted market capitalization of the exchange.
Now that we know about the major Japanese stock indexes, we will discuss a few Japanese ETFs that investors can actually buy. One thing to look out for before investing in an ETF is to make sure that the expense ratio is under 0.5%.
Robinhood users can choose between a selection of 5 different ETFs that are available on the platform. These are:
iShares MSCI Japan ETF (EWJ)
This ETF tracks the MSCI Japan Index and is listed on the NYSE Arca; it has a market cap of USD 13.46 billion and an expense ratio of 0.51%.
JPMorgan BetaBuilders Japan ETF
This ETF is designed by JPMorgan to track the Morningstar® Japan Target Market Exposure IndexSM, consisting of stocks traded on the Tokyo and Nagoya Stock Exchanges. The Index is a free-float adjusted market-cap weighted index and has a market cap of USD 8 billion.
Franklin FTSE Japan ETF
The Franklin FTSE Japan ETF tracks the FTSE Japan Capped Index and is listed on the NYSE ARCA.; it has a market cap of USD 576 million.
Xtrackers Japan JPX-Nikkei 400 Equity ETF
Xtrackers Japan JPX-Nikkei 400 Equity ETF is designed to replicate the performance of the Nikkei400 index. It is listed on the NYSE and has a market cap of USD 16.4 million.
WisdomTree Japan Hedged Equity ETF
This ETF tracks the WisdomTree Japan Hedged Equity Index, which is designed to gain exposure to the Japanese stock market while hedging against USD/JPY currency fluctuations. This ETF has an expense ratio of 0.48% and a market cap of USD 1.5 billion.
Other ETFs that are available to investors include:
Blackrock’s iShares Nikkei 225 UCITS ETF:
This ETF fully replicates the Nikkie 225 and is domiciled in Ireland. All its profits are accumulated and it has an expense ratio of 0.48%; Net assets are worth JPY 38 billion.
Xtrackers Deutsche Nikkei 225 UCITS ETF 1D
This ETF fully replicates the Nikkie 225 and is domiciled in Luxembourg with AUM (Assets under Management) of 2.15 billion EUR.
Blackrock’s iShares JPX-Nikkei 400 ETF
Listed on the NYSE Arca, this ETF tracks the Nikkei 400.
Vanguard’s FTSE Japan UCITS ETF
Vanguard’s FTSE Japan UCITS ETF replicates the FTSE Japan Index and is domiciled in Ireland with total AUMs of USD 2 billion.
Lyxor Core MSCI Japan (DR) UCITS ETF
Tracking the MSCI Japan Index, the Lyxor Core MSCI Japan (DR) UCITS ETF has total AUMs of GBP 1.245 billion.
Blackrock’s iShares MSCI Japan ETF (IJP)
iShares MSCI Japan ETF (IJP) (not to be confused with iShares MSCI Japan ETF EWJ) is domiciled in Australia making it is perfect for Australian investors who want to avoid complicated tax implications. It is listed on the ASX – All Markets and has AUMs of AUD 349 million.
Currency Hedged ETFs
One of the issues with the ETFs that we have highlighted above is that they are not currency-hedged, which means that they are prone to exchange rate fluctuations. In order to protect against currency risk, you can opt for currency-hedged ETFs. A few examples of currency hedged Japanese ETFs includes:
Blackrock’s iShares Currency Hedged JPX-Nikkei 400 ETF (Hedged to the USD)
This ETF is similar to Blackrock’s iShares JPX-Nikkei 400 ETF.
UBS ETF (LU) MSCI Japan UCITS ETF (hedged to GBP)
Domiciled in Luxembourg, this ETF fully replicates the MSCI Japan Index and is hedged to the GBP.
AMUNDI JAPAN TOPIX UCITS ETF – DAILY HEDGED GBP
This ETF is hedged against the GBP and tracks the TOPIX; it is listed on the London Stock Exchange, Nyse Euronext Paris, and the SIX Swiss Exchange. The AMUNDI JAPAN TOPIX UCITS ETF has AUMs of GBP 831 million.
Blackrock’s iShares Japan Fundamental Index ETF (CAD-Hedged)
This is a Canadian Dollar hedged ETF which tracks a Japanese Index provided by FTSE RAFI; it is listed in the NEO Exchange.
ETFs simply track the performance of indexes, but for investors who want to gain exposure to the Japanese markets and have their investment actively managed, one option is to opt for Mutual Funds that invest in Japanese stocks.
Mutual funds are not only riskier than ETFs since they could have more concentrated positions, but they are also more expensive with expense ratios exceeding 0.75%. Mutual funds can also hold other asset classes such as binds or options which may not exactly match with the investor’s goals.
Japan Mutual Funds in the US include:
T. Rowe Price Japan Fund
Hennessy Japan Fund
Matthews Japan Fund
Fidelity Japan Fund
DFA Japanese Small Company Portfolio
Japan Mutual Funds in the UK include:
Baillie Gifford Japanese Fund
Lindsell Train Japanese Equity Fund
Fidelity Japan Trust
Man GLG Core Alpha Fund
AVI Japan Opportunity Fund
Japan Mutual Funds in Canada include:
RBC Japanese Equity Fund
Fidelity Japan Fund
Japan Mutual Funds in Australia include:
Platinum Japan Fund
Nomura Australian Japan Growth Trust
Commonwealth Japan Fund
Baillie Gifford Worldwide Japanese Fund
ADRs and GDRs
American Depositary Receipts (ADRs) are convenient way for investors to gain exposure to foreign stocks. ADRs are essentially a way for foreign companies to raise capital and establish a presence in the US. These are not actual shares of the company are rather representative of a number of shares, so the buyer of an ADR will have indirect ownership of that company.
US investment banks buy and hold stocks listed on foreign exchanges and then issue ADRs in lieu of these stocks. ADRs are either listed on the US stock exchanges or traded in the OTC markets. They also get paid the full amount of dividends in US Dollars.
Currently, there are 12 Japanese ADRs listed on the NYSE, these include, Canon Inc. (CAJ:NYSE), Honda Motors (HMC:NYSE), Sony Corporation (SNE:NYSE), Kyocera Corporation (KYO:NYSE), Mitsubishi UFJ Financial Group Inc (MUFG:NYSE), ORIX Corp (IX:NYSE), Takeda Pharmaceutical Co Ltd (TAK:NYSE), Nomura Holdings Inc (NMR:NYSE), Mizuho Financial Group Inc (MFG:NYSE), Sumitomo Mitsui Financial Group Inc (SMFG:NYSE), and Toyota Motor Corp (TM:NYSE).
Apart from these, another 300 Japanese ADRs can be bought in the OTC markets. A full list of Japanese ADRs can be found here.
Global Depositary Receipts (GDRs) are similar to ADRs except they are issued in countries other than the US. The most popular destinations for issuing GDRs are London, Luxembourg, Frankfurt, Dubai, and Singapore.
How to invest Directly in the Japanese ADRs
Owning a Japanese ADR is preferable to owning the underlying Japanese stocks for many retail investors for the simple reason that it is possible to buy individual stocks. When buying the underlying Japanese stock, a minimum purchase of 100 shares is required, meaning that investing in Nintendo’s stock would require a minimum investment of 3.15 million yen ($28,500). The Tokyo Stock Exchange is currently considering introducing individual stock purchases.
You can invest in individual Japanese ADRs by opening an account with any online broker that offers Japanese them. Robinhood and Webull also offer the option for investing in Japanese ADRs. Currently, there are 87 Japanese ADRs available on Robinhood. As we mentioned earlier it is important to remember that when you invest in ADRs you are not actually buying that company’s stock but rather security that represents a share in that stock.
Another option for ADRs is Interactive Brokers, however you will need some experience with stocks in order to trade on OTC markets, so this is not an option for beginners.
Direct Investment in Japanese Stocks
Investors who are looking to directly purchase Japanese stocks can do so by either opening a Japanese brokerage account or an international brokerage account. Some of the most popular Japanese stockbrokers include Rakuten Securities, GMO Click Securities, SBI Securities, and DMM.com Securities. However, these will require knowledge of the Japanese language.
One of the most popular online brokers that let you invest directly in Japan is Interactive Brokers. It lets you invest indirectly Japanese stock indexes, stocks listed on the Tokyo Stock Exchange (TSEJ), Osaka Exchange (OSE.JPN), JAPANNEXT, and CHI-X Japan (CHIXJ). Although Interactive Brokers is popular amongst professional traders, it also recently launched IBKR Lite for casual investors.
Furthermore, benefits of Interactive Brokers include low commissions, better margin rates, the ability to buy fractional shares, and its trading platform. Requirements for opening an account are relatively simple, however; they do vary depending on the country you are based in.
IF you want to look for specific brokers in your country who will let you invest in the Japanese stock market then you can just follow this list.
- Charles Schwab
- Saxo Markets
- Monex Securities
How to buy Japanese stocks from inside Japan
To start trading stocks in Japan, you will need to open a Japanese trading account. But you will need to be a Japanese national or have a Zairyu Card that proves your status as a foreigner living in Japan.
Most Japanese stockbrokers don’t have English Language support for foreign investors. However, SBI Shoken and Ratuken Shoken have full English language support for foreign clients – a significant benefit.
You can click the links below where both companies talk about opening an account as a foreigner.
Another option is the Line Smart Invest app, which is available through the famous app Line – which most people use in Japan. Line Smart Invest aims to make trading stocks easy for those who have little experience of the financial markets and little to or experience investing in stocks.
The platform uses sophisticated UI that reduces investment barriers. Furthermore, the platform sees itself as a better alternative to standard investment pages, which are cluttered with information – which is very confusing for a novice investor.
You can invest in various themes, including women’s fashion, drones, cosplay, and much more. It’s a good idea to invest in something you’re passionate about or have an interest in. The benefit of obtaining theme-based investment stocks with a minimum of 100,000 yen mitigates stock price volatility. It also provides an excellent opportunity for asset building.
There is an alternative, which is to buy stocks through an international broker. Some international brokers gave clients the potential to trade Japanese stocks with no commissions.
Many American stockbrokers offer ADRs (American Depositary Receipt), equity security created for investing in foreign companies from the United States – it might be cheaper to do this instead of investing with a Japanese broker.
It’s essential to conduct research and due diligence to find the option for you.
Finance your Trading Account
If you are living in Japan, you probably have a Japanese bank account. You will need a Japanese bank account to send funds to your trading account to begin purchasing stocks. SBI Shoken and Ratuken Shoken have lists of some of the central banks in Japan.
One of the best benefits of trading with the Rakuten Group is the online bank, which can link straight to your Rakuten trading account – that is an excellent convenience and offers group benefits.
Suppose you’re looking to invest in other markets worldwide? In that case, you might want to use an excellent international broker because they will have a strong understanding of the global markets such as Hong Kong, Singapore, and London.
Not all Japanese stockbrokers are experts in international markets, but they are specialists in the Japanese Stock Exchange. You should take that into account when deciding on a Japanese stockbroker or an international one.
So you’ve completed the first steps towards investing in stocks in Japan. Now you have a livestock trading account with an excellent Japanese stockbroker or an international stockbroker.
Japan is a diverse market with powerful industries such as automobiles and electronics, which they export worldwide on a gigantic scale. These stocks are top-rated for foreign investors because of the stability of these industries. But you can also invest in other sectors such as food, textiles, and pharmaceuticals, which are powerful industries in the Japanese market.
You can now select the stock that you want to buy. The number of stocks that you can buy is different depending on the company. However, a general rule of thumb is if you’re going to buy stock with a unit price of 1000 yen, you’ll need 100,000 yen in your trading account.
When you want to invest in a stock, you can enter a ‘Sashine’ (指値) order where you state your price and patiently wait for the market to exchange at your price. Another option is a “Nariyuki” (成行) order, a Japanese style market order, where the cost of your immediate stock fill is defined by the current market price.
Selling stocks is very straightforward. You need to set the time and price, and once that has reached, you will have a deal. And you will either earn a profit or a loss.
There is a critical point to note if you’re investing in Japanese markets. If you gain or lose money on your stock investment, you will have to report it in the annual earning declaration. This declaration will determine how much tax you have to pay to the Japanese government. If you make or lose a small amount – they’re unlikely to know. But you shouldn’t ignore this process regardless.
If you have a Japanese stockbroker who can provide English language assistance, they will likely inform you about this. And the same goes for international brokers that deal with foreign markets.
You can participate in the Japanese market through mutual funds, ETFs or by buying individual stocks using the various brokers above. Buying individual stocks via American Depository Receipts is preferable to many retail investors who are unable to invest in blocks of 100 of the underlying stock.