Japan, the third-largest economy in the world, has long been a focal point for international stock traders.
Known for its technological innovation and a rich history of corporate governance, Japan offers both diversification and growth opportunities.
Whether you’re an experienced investor or just starting out, understanding how to buy stocks in Japan can be an essential part of your global investment strategy.
Below, we’ll explore all the various methods of buying stocks in Japan, the reasons why you should consider investing in Japanese equities, and several things you should keep in mind before entering Japanese stock market.
Why Invest in Japanese Stocks?
Before we delve into the methods of buying stocks in Japan, it’s important to understand why Japan is an attractive place to diversify your portfolio.
Here are some compelling reasons to consider adding Japanese equities to your portfolio:
Strong Economic Recovery
Japan’s economy has shown signs of a robust recovery, bolstered by government stimulus measures aimed at boosting growth and increasing consumer spending.
The semiconductor and tech industries in Japan have especially performed well lately, in part because of AI-driven developments.
Of course, Japan’s status as a tech leader means that its economy will likely continue this trend.
Recent data reflects improvements in industrial production and heightened consumer confidence, creating a favorable environment for corporate profits.
As businesses continue to grow and evolve, this economic stability could lead to higher corporate earnings. This makes Japanese stocks an attractive option for investors looking to capitalize on a recovering market.
Diversification Benefits
Adding Japanese stocks to your investment portfolio can provide significant diversification benefits.
Japan is home to a wide range of industries. Several of the largest include tech, healthcare, auto manufacturing.
The sheer scale and variety of Japan’s economy lets investors gain exposure to different sectors, reducing overall portfolio risk.
Moreover, Japan’s mature and stable economy offers a buffer against volatility in domestic markets, making it an ideal candidate for international diversification.
Valuation Opportunities
Many Japanese companies are considered undervalued compared to their international counterparts.
Stocks in Japan generally have a lower price-to-earnings ratios are often lower than those found in the U.S. or Europe, presenting appealing opportunities for value-focused investors.
As the global economy improves and investors recognize these undervalued assets, Japanese stocks may experience increased interest, creating a positive atmosphere for investment.
Innovation and Global Leadership
Japan is a global leader in several key industries, including robotics, factory automation, real estate, and healthcare.
The country’s aging population has spurred innovation in these sectors, driving demand for new technologies and solutions.
For instance, Japan is a dominant player in the global robotics market, with five of the top 10 producers of factory automation systems based in the country.
For many foreign investors, Japan is an attractive destination for investment. Not only for diversification purpose, but also for factors such as economic stability and innovation.
This leadership in innovation makes Japan an attractive destination for investors looking for long-term growth opportunities.
Methods of Buying Stocks in Japan
Now that we’ve covered why Japan is an attractive market, let’s explore the different methods available for buying Japanese stocks.
Whether you want to invest directly in Japanese companies or prefer a more hands-off approach, there are several options to consider.
1. Buying Individual Japanese Stocks
One of the most direct ways to invest in Japan is by purchasing shares of individual Japanese companies.
This method allows you to have complete control over which companies you invest in, giving you the flexibility to build a portfolio tailored to your specific investment goals.
To buy individual Japanese stocks, you’ll need to open a trading account with a broker that offers access to the Tokyo Stock Exchange (TSE).
If you’re a Japanese national or a foreigner living in Japan with a Zairyu Card (residence card), you can open an account with a local Japanese broker such as SBI Shoken or Rakuten Shoken.
These brokers provide access to the TSE and offer trading platforms that allow you to buy and sell stocks directly.
For those living outside Japan, many international brokers also offer access to Japanese stocks.
Some brokers even allow you to trade Japanese stocks commission-free, making it a cost-effective option for investors.
Additionally, U.S.-based investors can purchase American Depository Receipts (ADRs), which represent shares in Japanese companies and are traded on U.S. exchanges.
ADRs provide an easy way to gain exposure to Japanese stocks without the need to navigate the complexities of the Japanese stock market.
2. Investing in Japanese Mutual Funds
If you prefer a more hands-off approach to investing, Japanese mutual funds may be the right option for you.
Mutual funds pool money from multiple investors to invest in a diversified portfolio of stocks, bonds, or other securities.
In the case of Japanese mutual funds, these portfolios typically consist of stocks from companies based in Japan.
Mutual funds can be actively or passively managed. Actively managed funds are run by professional portfolio managers who conduct in-depth research to identify companies with strong growth potential.
These managers and large institutional investors aim to outperform the market by selecting stocks they believe will deliver superior returns.
On the other hand, passively managed funds, such as index funds, aim to replicate the performance of a specific market index, such as the Tokyo Price Index (TOPIX).
One of the advantages of investing in Japanese mutual funds is that they provide exposure to a broad range of companies across different sectors, reducing the risk associated with investing in individual stocks.
Additionally, mutual funds are managed by professionals with expertise in the Japanese market, making them a good option for investors who may not have the time or knowledge to research individual companies.
3. Exchange-Traded Funds (ETFs)
Exchange-Traded Funds (ETFs) are another popular way to invest in Japanese stocks.
Like mutual funds, ETFs hold a diversified portfolio of stocks, but they are traded on stock exchanges like individual stocks.
This means that you can buy and sell ETFs throughout the trading day at market prices, providing greater flexibility compared to mutual funds, which are typically priced at the end of the trading day.
ETFs that focus on Japanese stocks are available through most major brokers, and they offer a convenient way to gain exposure to the Japanese market without having to pick individual stocks.
Some ETFs track broad market indices like the TOPIX or the Nikkei 225, while others focus on specific sectors such as technology or healthcare.
The largest Japan ETF is iShares MSCI Japan (NYSEARCA:EWJ) which. Currently, it manages about US$15 billion worth of assets.
You’ll also find plenty of smaller, more focused Japan ETFs including iShares MSCI Japan Small-Cap ETF (SCJ) and JPMorgan BetaBuilders Japan (BBJP).
Just in the US alone, there are dozens of Japan ETFs. You certainly don’t have any shortage of options.
4. American Depository Receipts (ADRs)
For U.S.-based investors, American Depository Receipts (ADRs) offer a simple way to invest in Japanese companies without having to navigate the complexities of the Japanese stock market.
ADRs are certificates issued by U.S. banks that represent shares in foreign companies.
The Tokyo Stock Exchange (TSE) is owned by Japan Exchange Group (JPX). It’s one of the largest stock exchanges in the world and have almost 4,000 listed companies, including globally recognized names such as Sony, Toyota, and Panasonic.
These certificates are traded on U.S. exchanges, making it easy for American investors to buy and sell shares in Japanese companies.
ADRs provide several advantages, including the ability to trade in U.S. dollars and the convenience of being listed on U.S. exchanges.
Additionally, ADRs often come with lower fees compared to trading directly on the Tokyo Stock Exchange, making them a cost-effective option for investors looking to gain exposure to Japanese stocks.
Risks of Japanese Stocks
While investing in Japanese stocks can offer significant opportunities, it’s important to be aware of the unique challenges and risks associated with the Japanese market.
Here are some key considerations to keep in mind:
Market Volatility
The Japanese stock market can experience significant fluctuations, influenced by factors such as global economic conditions, currency fluctuations, and domestic policy changes.
Events like shifts in interest rates or geopolitical tensions can lead to rapid price swings, impacting both individual stock prices and the broader market.
Investors should be prepared for potential volatility and consider using risk management strategies to navigate these uncertainties.
Cultural and Regulatory Differences
Japan’s corporate culture and regulatory environment are different from those in Western markets.
Japanese businesses often emphasize consensus and long-term relationships, which can affect how companies operate and disclose their earnings.
Understanding these cultural and regulatory nuances is crucial for evaluating Japanese companies and making informed investment decisions.
And unfortunately, you’re at an immediate disadvantage in this regard as a foreigner in Japan.
Economic Dependency on Exports
Japan’s economy is heavily reliant on exports, particularly in industries such as technology, automotive, and machinery.
This makes Japanese companies sensitive to changes in global demand and trade relations.
Investors should monitor global economic indicators and trade policies, as these factors can directly impact the profitability and growth of Japanese firms.
Should You Buy Stocks in Japan?
Investing in Japanese stocks offers a unique opportunity to diversify your portfolio and capitalize on the growth potential of one of the world’s largest economies.
Whether you choose to invest in individual stocks, mutual funds, ETFs, or ADRs, understanding the nuances of the Japanese market is essential for making informed investment decisions.
It’s true that you’ll encounter challenges such as market volatility and fluctuations in the yen. Yet simply being aware of these issues will help you better navigate the market as a foreigner.
With the right strategy, buying Japanese stocks is a relatively stable way to diversify your portfolio away from the western world.
FAQs: Stocks in Japan
How Can I Buy Stocks in Japan?
To buy stocks in Japan, you can open a trading account with a broker that provides access to the Tokyo Stock Exchange (TSE) or other Japanese exchanges. For residents in Japan, local brokers like SBI Shoken or Rakuten Shoken are popular choices.
Foreigners living outside Japan can use international brokers or invest in American Depository Receipts (ADRs), which represent shares of Japanese companies and are traded on U.S. exchanges. ETFs and mutual funds focusing on Japanese equities are also viable options for indirect investment.
Is the Japanese Stock Market Safe?
The Japanese stock market is one of the largest and most established markets globally, with the Tokyo Stock Exchange ranking as the third-largest by market capitalization. It offers a stable environment supported by Japan's strong economy and corporate governance.
However, like any market, it is subject to risks such as economic dependency on exports, currency fluctuations, and market volatility. Investors should conduct thorough research and consider diversification to mitigate risks.
What is the Largest Japan ETF?
In terms of total market cap, iShares MSCI Japan (NYSEARCA:EWJ) is the most prominent ETF that focuses on Japanese stocks. It currently manages about US$15 billion worth of assets.
Can I Open a Brokerage Account in Japan as a Foreigner?
Yes, foreigners can open brokerage accounts in Japan, but the process requires proper documentation, including a residence card (Zairyu Card) for those living in Japan.
For non-residents, international brokers that offer access to Japanese stocks are a practical alternative. Note that some brokers may have restrictions or additional requirements for foreign investors.
What are the Biggest Risks in Japan's Stock Market?
Key risks in Japan's stock market include market volatility influenced by global economic conditions, trade policies, and currency fluctuations.
Additionally, Japan's corporate culture and regulatory environment differ from Western markets which may pose challenges for foreign investors. The economy’s reliance on exports also makes it sensitive to global demand shifts.
