It is becoming evident that the Japanese pension system, like most other government pension systems around the world, is under growing strain. The current demographic shift in Japan would also indicate that this strain is likely to get worse before it gets better. For those readers unfamiliar with Japan’s pension system (the nenkin system), here is a quick plain-English summary: each year every employed person in Japan has a certain portion of their regular salary deducted and deposited into the nenkin system and each year that money is used to pay out the income benefits to retired pensioners. In order to qualify for full pension benefits in Japan, you will typically be required to pay into the system as a worker for 40 years. It is possible to receive nenkin proceeds after less than 25 years, but this would typically involve receiving a substantially reduced benefit. This is where demographics become an obvious issue. If there are less and less workers paying into the system, this alone would create a strain on the system. If there are more and more retirees demanding their earned benefit each year, this alone could also cause troubles for the system. Japan is facing both at the same time: less paying into the system and more taking out of the system. This tends to be the driving factor behind why more people are thinking seriously about saving and providing for their own retirement, rather than relying solely on government benefits. As mentioned above, this is the general trend around the world as it becomes obvious that the old systems may not be sufficient to provide a decent quality of life in old age.
Not wanting to become liable for angry and penniless pensioners in the future, governments around the globe are offering incentives to those that set up their own private retirement accounts. In the US they have created 401Ks and IRAs, as well as other similar tax efficient accounts. The UK offers their ISA accounts and insurance wrappers, and Canada also has a similar private retirement account, the TFSA. Following this lead, in 2014 Japan launched their own version, the NISA (Nippon Individual Savings Account).
The NISA resembles its foreign counterparts in a some aspects, but falls short in others. Here are the answers to a few key questions often asked regarding NISAs.
Who can invest in the NISA?
– Anyone who is resident in Japan, or has a legal or fixed-asset presence in Japan; and is over the age of 20
Where can I open a NISA?
– Banks or securities broker/dealer firms are able to open a NISA account for you.
What can I hold in a NISA?
– You can invest in listed stocks, funds, ETFs, and REITs. If you choose to set up the newer “Tsumitate NISA” then you can only invest in mutual funds.
How many NISA accounts can I open?
How much can I deposit into a NISA account?
– “Ordinary NISA” – A maximum of 1.2 Million JPY per year. You can invest for either a 5 year period to a maximum of 6 Million JPY.
– “Tsumitate NISA” – A maximum of 400,000 JPY per year for a period of 20 years to a maximum investment of 8 Million JPY.
-If you contributed less than the maximum in any given year, you are not able to then carry that balance over and deposit more than 1.2 Million or 400,000 JPY in any following year.
What taxes am I exempt from?
– Capital gains and Dividends
How long is the tax exempt period?
– 5 Years for the “Ordinary” type NISA, and 20 years for the “Tsumitate” type NISA
When can I sell the assets held in the NISA?
– Whenever you want. However, if you sell before the 5 or 20 year holding period is over, you are not able to re-invest that capital within the same period
Like any government sponsored tax scheme, the NISA has its share of upsides and downsides. On the plus, it is a way for ordinary people to receive a small amount of tax relief for a short period of time. This certainly would on the surface seem better than nothing. The apparent goal of the NISA program is the hope that some portion of the Japanese citizenry’s approximate 17 Million JPY average cash savings per household gets invested into the stock market. This aims to bring a two-fold benefit to society in that driving capital investment is healthy for the present-day economy, and that this nudges the general public towards funding their own retirement. However, it would seem that the program has experienced only limited uptake, with the majority of individuals making use of the accounts being the elderly; rather than workers in their 30’s saving for the long term. This should come as no surprise, as the downsides to the NISA program are embedded in the above explanation of the upside.
As mentioned, it is indeed only a small tax relief for only a short period of time. The maximum total contribution being pegged at 5 Million JPY limits the ultimate impact of the NISA account over the long term. Even with astronomically lucky growth it would be rather difficult to turn 5 Million JPY into a fully funded pension, as studies confirm the average person will need between 100 and 200 Million JPY for retirement. In addition to the small maximum contributions, the tax relief itself is also for a limited period of time relative to a typical retirement-savings time horizon. The most preferable retirement investment vehicles typically provide gross roll-up and tax-free growth all the way until retirement, with further preferential tax treatment during retirement income draw-down. Although the NISA account can be held for up to 10 years, you would only be able to benefit from 5 years of tax relief; in comparison to the on average 25 to 30 years’ worth of tax relief provided by other structures.
NISA for foreigners?
In addition to the positives and negatives briefly highlighted above, the decision of whether to set up a NISA is further complicated when in the context of being a foreigner living in Japan. An expat considering the NISA would also of course best hold it up in comparison to any of the other investment options in Japan and around the world. In order to set up a NISA, as mentioned above you would need to go through a Japanese bank or financial institution. This almost always necessitates a strong Japanese language ability in order to be comfortable navigating the investment account and avoid making simple administrative mistakes that could cost you considerable amounts of money. In addition, the vast majority of broker/dealer companies in Japan will not allow a foreigner to set up an investment account unless they can prove to have a command of the Japanese language, as well as being fully literate in both reading and writing kanji.
For such small account values, due to the NISA’s low annual deposit allowance (1.2 Million JPY maximum), you would be hard pressed to find a Japanese financial advisor that would work with you to provide quality professional advice. This would likely then lead to a NISA becoming very much a DIY project. While some people are fine taking a DIY approach to their investments, many end up deciding that they do not have the interest, time, or dedication to do it properly. Or worse, they open the account with a full head of steam, but over time take a more lackadaisical approach to managing the account, resulting in poor risk management and potential heavy losses.
Another drawback to the NISA for foreigners in Japan is the investment selection. It should come as no surprise that if the Japanese government is going to give you a 5-year tax relief on capital gains and dividends in order to spur the economy, they are going to require that your investments stay here in Japan. While there may be a few internationally focused mutual funds available through some NISA platforms, the overwhelming majority of tax relief approved investments are going to be domestic Japan investments, denominated in JPY. The savvy investor looking to diversify internationally might tend to want experts from each respective market or country running their non-Japan funds, as the overseas professionals might have a better chance of succeeding on their home turf rather than an analyst in Otemachi looking at data on a computer screen.
Investors in NISA accounts also only benefit from this tax relief so long as they are resident here in Japan. If for example there is a chance you might be moving overseas in next the two or three years, then you would not be able to fully benefit from the tax relief. In addition, if you have to leave Japan and thus maintain no further legal presence in the country, you would then be legally obligated to move your liquid assets out of Japan. If not, your assets could be frozen. This could require being forced to sell any investments in stock or ETFs held in your NISA during a period of unfavorable market conditions.
Due to the NISA’s under-performance in terms of popularity and uptake in the younger generations, there is a chance that the program could be improved in the future. This could have the potential to make it a more attractive retirement savings vehicle for Japanese citizens and those planning to live permanently in Japan that have the time and energy to manage their own investments. However, for the majority of foreigners living in Japan, there is no shortage of alternatives for private pensions and retirement planning.
Note: Updated as of January 2020. Any governmental changes to the NISA system could change annual limits, allowed investments, or plan length. Please speak with an advisory to confirm up-to-date information.