Japan is a fantastic place to live and work. Many will be quick to praise the high standard of living, safety, hygiene and efficiency of the world’s 3rd largest economy, and rightly so. Where you will be less likely to hear praise, is with reference to Japan’s financial service, banking and insurance industries. Japan could be accused of being behind the times by global standards and expats all encounter the same financial planning problems sooner or later. In no particular order…
1) Japan Bank Accounts Are Not “Interesting” to Expats for Financial Planning
You have probably had the same experience of checking your bank account statement from your Japanese bank and seeing a peculiar payment to your account of 1 JPY, perhaps even going up as high as 4 JPY or 6 JPY. This, far from being a clerical error, is the interest that your account has earned. Interest rates in Japan for deposit accounts are comically low. The current Bank Of Japan base interest rate is -0.1%. Your bank will probably be paying you around +0.01% p.a in your deposit account, whilst lending your deposited money to home-buyers to finance their mortgage at a cost of around 1% p.a. That’s a profit for the bank of 0.9% if we are working on the premise that all of their capital is subject to negative rates (which it isn’t). Of course, running a bank is not free, so calculating the real profitability for bank lending would be difficult, but we are happy to make the statement that having your money sitting in a bank account in Japan is great for the bank, and not great for you, or your money.
2) Bank’s Are Not As Safe As You May Think
Although many people would perceive the risk of having an account with a major Japanese retail bank to be less than having an account in a “tax haven“, the truth might not necessarily confirm that assumption. Like bank accounts in the US and UK (and a number of other big GDP, developed countries) ordinary deposits made at banks are insured by a branch of the government. This amount insured however only goes up to 10,000,000 JPY. If you are only using your bank account to store the money needed to pay for the cost of living month to month then this is not going to be a problem. If you have accumulated substantial savings, then you should be aware that if your bank becomes insolvent, it is conceivable that you will lose everything about 10,000,000 JPY. Expats in Japan with more than 10 million JPY in savings would be wise to consider financial planning strategies more advanced than simple cash deposit accounts. Having multiple accounts with balances sub-10 million JPY would be better than having everything in one place, but from a wealth management point of view, it is still the same as leaving your ice-cream outside on a hot summer afternoon (see above!).
3) Inflation’s Ghost
Many will tell you that keeping money in the bank is fine, even if you are not earning interest because there is “no inflation in Japan“. Although this would have been a true statement, if limited to the “lost decade” in Japan after the implosion of the real estate bubble in the 1990’s, a lot has changed since then. The Bank Of Japan and the Abe administration have been making concerted efforts to spur inflation in Japan, and despite not yet meeting their target of 2% p.a, the results are positive. The long-term trend is that inflation is increasing, with annualized figures currently projected in excess of +1% p.a. Because of this, if your money is not at least growing at the the same level as inflation, despite not seeing a visible decrease in your account balance, your money is worth less each year- meaning that you cannot buy as much with it.
Do not be fooled by the “it does not matter” camp. Their data is 10 years out of date, and if you are not yet retired, or already financially independent, then the value of your money should be of interest to you at this stage of your financial life. Again, history cannot reference a single millionaire who created their nest egg by leaving money in the bank and earning interest on cash deposits. Cash is for spending or investing- not depositing.
4) Insurance Is A Minefield
It is easy to find the same multi-national insurance companies that you are familiar with from your home country in Japan. However, all is not as it seems. They are overseas subsidiaries of their foreign parents and their products are 100% Japanese, and as such, designed for the Japanese market (and Japanese people). Insurance contracts are usually in Japanese, and where English versions are available, they are non-legally binding translations of the bona fide Japanese contract. This makes financial planning for expats in Japan a bit difficult; if you can’t even understand your insurance contracts. If you are comfortable with technical Japanese there may be other things to consider. Some policies do not insure for the event of a death overseas- which for an expat, might be a possibility. Another common complaint is the structure of the policies themselves. “Hybrid” policies are popular in Japan. They attempt to provide an element of health insurance or cancer insurance, as well as a payout on death. Although this may tick all of the boxes on your insurance shopping list, they are often cost-inefficient and only provide a fraction of the cover required by an average person with a family. There are only a couple of providers that actively target the foreign resident market in Japan, but at first glance the small size of their operations may be a cause for concern. As an international person, you are likely better off working with an international insurance company that services all markets- Japan included.
5) Give Me The Money! (To Buy A House) – Expats in Japan: Financial Planning on Hard Mode
As far as Japan has come in recent decades regarding equality, when walking into a Japanese bank, not all humans are created equal. First and foremost, if your Japanese is not good enough to explain who you are and what you want the loan for then you can save yourself the journey. Getting a mortgage as a foreign person living in Japan can be tricky, but it is far from impossible. The likelihood that your Japanese bank will lend you money is contingent upon a number of factors:
– your Japanese language ability
– the length of time you have lived in Japan
– whether or not you are married to a Japanese person
– your type of employment contract
– your job
– your annual salary
– your existing debts and liabilities
– what you are trying to buy
If you score enough points across the above areas then your bank will extend you an offer of financing. The bar for securing financing for a home-loan is much lower than that for an investment loan and interest rates will also vary depending on the bank’s assessment of your credit worthiness. That withstanding, as a foreign resident, you will likely end up with a higher interest rate than your Japanese body-double. These higher interest rates make financial planning in Japan much more difficult for expats than for locals. Be sure to ask your peers what banks they have had success with in the recent past as the lending environment is constantly changing- knowledge is power (to buy houses).