Anyone living in Japan for longer than a tourist visa has experienced the usual headaches associated with local retail banking. Applications, brochures, terms and conditions, etc. all in Japanese; possible lack of universally accepted ATM cards, lack of debit cards, lack of functional online banking, unattractive F/X rates, lack of international investments… the list goes on. Most people are not necessarily looking for anything special or flashy; all they want is an easy account, in a language they can read, with an ATM/debit card they can use anywhere in the world, and with convenient services. More often than not, the best answer is to open an offshore bank account.
What is an offshore bank account?
An offshore bank account is simply an account which is not domiciled in your country of residence. However, a typical offshore account would also likely be domiciled in a location separate from your home country as well. Depending on your nationality, an offshore account is likely to offer better international portability and access, wider investment selection, and overall better service designed for international professionals. Simply put, “the local bank” is great in each of our respective hometowns, but not so convenient when you are halfway around the world.
Is it legal to open an offshore account?
Thanks to Hollywood depictions of offshore banking, as well as the recent Panama Papers; the question of legality as pertains to offshore banking is sure to come across nearly every client’s mind at some point. Simply put, yes, it is legal to open an offshore bank account. The key is being sure that you make all necessary disclosures to your country of residence and possibly your home country. The potential illegality of offshore banking arises when people take advantage of the confidentiality that it can provide in order to hide assets or hide income from the tax office- or in the case of the Panama Papers, politicians hiding their side dealings. It is however worth noting that any foreigners living in Japan for less than 5 out of the previous 10 years are not taxable on foreign earned income not remitted to Japan (the five year rule). In addition, it is not required to report foreign assets under 50 Million JPY or currency equivalent in total value. So long as you follow the simple rules related to reporting and fulfill any tax obligations, you are free to enjoy all the benefits of offshore banking.
Key benefits of opening an offshore account:
Reduce currency risk
Wider investment selection
Easily access money outside of Japan
In addition to the above benefits of setting up an offshore bank account is the issue of sovereign risk or country risk. In other insights articles we have talked about the typical risks an investor would come across in the normal course of their career such as credit risk, market risk, or currency risk. Another primary risk to consider is sovereign risk. Sovereign risk is, simply put, the risk that some change in the domestic government, public policy, or legal code could directly impact your savings or access to your savings, as well as the risk of a government defaulting on its debt. It should come as no surprise that this type of risk is not typically associated with Japan, as it is a famously stable country. In fact, the JPY is often referred to as “safe haven” currency. For instance, Japan is not likely to experience unexpected hyper-inflation of +200% in a single year, nor will it go through a radical political revolution anytime soon. Cash held in Japan is relatively safe. That said, Japan also has a worryingly high level of government debt outstanding, and anyone holding JPY should bear this in mind when looking to the mid to long term. In addition, there is another side to this coin that could still fall under the heading of ‘sovereign risk’ or ‘country risk’ as it pertains to your savings. This is the risk of creeping capital controls.
Expats that have been living in Japan for at least a few years, and especially if they periodically send money abroad, are likely to have experienced an increasing tediousness when it comes to taking money out of the country. Of course, this can vary from bank to bank, and even branch to branch within one bank, but overall it would appear that each year the banks are requiring more documentation to allow larger overseas transfers. In some cases, some banks have been known to outright reject requests to transfer funds outside of Japan. Yes, it is your money, and yes the bank technically can deny transfer requests. Such practices are established with the primary stated objective of ‘protecting their clients’ money’, claiming that the bank is not comfortable making an overseas transfer to a foreign institution or recipient they are not completely familiar with. It should however come as no surprise that the list of recipients that they are familiar with does not include very many non-Japanese institutions. Starting to accumulate savings outside of Japan now can help to reduce this risk of capital controls, making it increasingly difficult to transfer funds out of the country in the future.
How do I set up an offshore bank account?
In the past, there were a number of offshore banking institutions domiciled in international financial centers all across the world that would consider applications for new accounts, regardless of your residence. Often this would involve flying to the country to make an in-person visit with the bank manager. In some cases, you could simply apply through the post or even the internet. However, in recent years it has become much more difficult to open up such accounts. For instance, due to their proximity to Japan, Hong Kong and Singapore used to be popular destinations for setting up simple offshore bank accounts; but now their banks will in almost all cases require you to be resident in the country and have a documented source of income payable in the country.
However, there are still many offshore jurisdictions in Europe and the Americas that offer accounts. As is the case with any bank, they will typically require a certified proof of ID and proof of address. Notary services in Japan can cost around 10,000 JPY; plus the cost of certified post overseas (1,500 JPY to 2,000 JPY). The downside is that applying to an offshore bank out of the blue by yourself comes with no guarantee they will accept your application, even after undergoing the above costs. If you have a friend with an existing relationship with the bank in question, an introduction through him or her would help with the approval process. However, a financial advisory firm that has a long-term working relationship with the bank or bank managers would carry the most weight in ensuring a successful and smooth account opening. Depending on the bank, the firm may be able to certify your proof of address and ID documents as well, saving you on the above notary fees.
[ Sources ]
– Capital controls and bank risk – Gerard Gennotte, Journal of Banking and Finance, Vol 15 No.4-5
– Capital Controls, Political Risk, and Deviations from Interest-Rate Parity – Michael P. Dooley, Journal of Political Economy, Vol 88 No 2
– Capital Controls and International Capital Market Segmentation: The Evidence from the Japanese and American Stock Markets – MUSTAFA N. GULTEKIN, The Journal of the American Finance Association, Vol 44 No 4