The Ultimate Guide to Trading in Japan

 

If you are already trading online, you may be interested in branching out and trading in different countries. Expanding your trading activities in this way gives you many more opportunities and the experience of trading with a broad array of international brokers. Trading in Japan is especially attractive to many investors. The Tokyo Stock Exchange is well known, well established, and highly respected. In 2013, the TSE merged with the next largest stock exchange in Japan, the Osaka Securities Exchange, to form the Japan Exchange Group (JPX) which is now the third-largest stock exchange in the world, behind the New York Stock Exchange and the NASDAQ.

Top Forex Brokers in Japan

How to Start Trading in Japan

The first step if you are interested in trading stocks, bonds, funds, or other financial instruments in Japan, is to find a suitable online broker. Trading in Japan is available via various brokers that operate in the region, or offer access to the JPX, which, as we’ve explained, includes the Tokyo Stock Exchange and the Osaka Securities Exchange. You have two choices here. You will either open an account with a broker based in Japan or open an account with an international broker that gives clients access to the Japanese stock exchanges.

Check carefully when signing up to a new broker. Not all local brokers offer accounts for international clients, so you may find the perfect Tokyo based brokerage, and then find you are not eligible for an account there. Also, not all brokers in your country will offer access to the Japanese stock markets, even if they say they are a global or international broker. Some brokers simply don’t have the facility for clients to trade on the Japanese stock exchanges, even though Japan is such a major player in the global market.

It is sometimes hard to understand why some brokers allow access to so many international markets, and some so few. It costs money for the broker to register at each overseas stock exchange, so expense is definitely a factor. However, you should never assume that a broker has access to more markets because it is bigger or more well-known. The HSBC bank is a large and well-known bank, but its brokerage subsidiary, HSBC Invest Direct Plus only offers access to a couple of stock markets. Interactive Brokers claims to provide access to over 70, including Japan.

Forex Brokers in Japan

If you want to go down the route of a broker based in your country, but with access to trade in Japan, you may find it helpful to look for local brokers with an office in Japan. Many large brokers based in your country may have a strong international presence, with several offices in different countries around the globe. Brokers who state they operate in Japan include Interactive Brokers and Saxo. However, you will need to do your research, and ensure that any broker you consider gives you the kind of access to Japanese Stock Exchanges that you require, in order to trade the instruments you are interested in. Plus, of course, you’ll have to make sure that any broker you consider meets all your other trading needs and requirements. Some well-known brokers who do operate in Japan include:

• IG
• Ayondo
• Interactive Brokers
• Saxo Capital Markets
• Pepperstone

International Brokers in Japan

Be aware that international brokers who offer access to the JPX have some advantages, allowing you to trade in Japanese stocks and assets, without having to open an account with a Japanese broker. However, not all brokers in the UK and Europe will be able to offer direct trading on the Japanese stock exchanges, or even access to Japanese stocks and ETFs.

When looking at brokers for trading in Japan, or international brokers that have offices in the region, you will, of course, want to ensure you are working with a fully regulated and authorised broker. The regulating body in the region is the Financial Services Agency (FSA). International brokers who allow access to the JPX, but who are not actually based in Japan, may not need to be regulated under the FSA as they don’t have a presence in the country. In this case, always ensure that they are regulated by appropriate bodies according to the jurisdictions they operate in. Most Japanese brokers have their headquarters in Tokyo or Osaka.

Once you have an account at a suitable broker, you can start trading. As you would expect, there is a wide range of tradable instruments on offer, from stocks and bonds to ETFs and ETNs. The benchmark index in Japan is the Nikkei 225 Index, which is a good indicator of the health of the Japanese stock market, and the economy in general. It includes the top 225 companies listed on the JPX. There is also a Nikkei 400 Index.

Trading Japanese Stocks

It certainly won’t surprise those familiar with trading in Japan to know that top publicly-traded companies on the Japanese stock exchange include household-names such as Sony, Fuji, Honda, Nissan, Mazda, Toyota, Yamaha, and Suzuki. These are all holdings on the Nikkei 225, along with many other high profile, blue-chip companies that may not be that well-known outside of the region.

Investing in an exchange-traded fund (ETF) that tracks the Nikkei 225 or the Nikkei 400 is one way to get started with trading the Japanese markets. There are several to choose from, including Daiwa Asset Management’s Daiwa ETF Nikkei 225, the iShares Nikkei 225 ETF from Blackrock Japan, and Nomura Asset Management’s Nikkei 225 ETF. To trade Japanese ETFs, you’ll generally need to have an account with a suitable broker, as outlined above. However, there are always exceptions. For example, Blackrock have now issued ETFs withholdings from the Japanese Stock Exchange in Europe and the USA, so you can now trade Blackrock ETFs on several exchanges, in different currencies.

Trading Opportunities in Japan

Japan has a vibrant and growing economy, which is not surprising given the country’s economic and industrial background. Many Japanese companies have a strong global presence, especially in the automotive and technology sectors, along with being a stable and competitive base for the worldwide financial services industry. The long-term health of the country and its economy is backed by some impressive statistics.

• Japan has a highly educated population, with PISA figures placing it second in the world
• Japan has the third-highest overall GDP in the world, behind only the USA and China
• Japan spends a higher percentage of GDP on research than all the other G7 countries
• Japan ranks 10th out of 163 countries (and 1st in Asia) on the Global Peace Index
• It also ranks as the 4th healthiest country in the world, according to the 2019 Bloomberg Index

These figures bode well for the future of Japanese society and the Japanese economy, making the country a place worth investing in, for many traders.

Trading the Japanese Yen

One thing foreign investors need to keep an eye on when trading in Japan is the value of the yen. This can present a challenge, as outlined below, but also an opportunity. As an international broker, when the yen is weak, it is worth adjusting your trading strategy to capitalise on it (as is the case with any foreign currency exchange rate). For example, the Trump victory of 2016 significantly increased the value of the US dollar against the yen, but this actually gave Japanese stocks, and the long-term economy, a boost. Many US traders (and other traders who hold US dollars) saw that as a good time to invest their dollars in the Japanese, yen-based, stock market. Forex traders are naturally well-informed on using foreign currency fluctuations to make money, but when investing in other financial instruments internationally, currency price changes can also be used to your advantage.

It’s counter-intuitive, but a weak currency can often have a positive impact, and the weaker yen has certainly allowed Japanese exporters to become more competitive, with the result of better long-term profits. Many forex traders jump on a weak yen, buying while the price is low. This is a strategy that can potentially be used with any currency, of course, but many currency traders seem to feel a little more bold about buying when the yen is weak. The long-term health of Japan’s GDP and other economic indicators perhaps makes them feel that over time they are unlikely to make a loss on buying up yen at a reduced price.

Trading challenges in Japan

Overseas investors need to be aware that the Japanese economy is still facing challenges. This is in spite of the overall strength of its economy, a strong industrial base, and a well-educated population. The country has relatively high levels of debt compared to GDP, and some of the country’s larger companies are suffering from market share loss. The country has an ageing population, which is predicted to cause a significant demographic unbalance in the future. This issue can only logically be solved by increasing immigration, but this is an unpopular solution in Japan, which is a country that has always kept immigration low, with the result of a society that traditionally lacks racial and ethnic diversity.

When it comes to trading in Japan – stocks specifically – there are always challenges to trading in a local market as an outside investor. Japanese stock listings are, naturally enough, denominated in yen, so those operating outside the region, and using a different base currency, will have to, of course, consider exchange rate fluctuations, as well as the performance of companies based in Japan, which are subject to local fundamental issues that may not be on the radar of international investors. As mentioned above, fluctuating currency rates can be used to the advantage of the international investor. However, it does add another layer of complexity to your trading, and give you one other issue that can, potentially, negatively impact your trading activities and reduce or negate overall profit.

Choosing a Broker

You will also need to be very careful with picking a broker for trading in Japan. We have covered this in detail above, so you already know there are many factors to consider, and things can get quite complex as you weigh up the pros and cons of each option. If you have a dispute with a Japanese broker, it may be harder to resolve than one with a domestic broker. You will, of course, pick a reputable broker regulated by the Financial Services Agency (FSA), but you may find filing a complaint with a foreign regulatory body more complicated than filing one with the national regulatory authority in your home country. The need to make an official complaint against a reputable broker arises very rarely, of course, but it is still a possibility you will want to consider.

 

Summary

It is always exciting, as a trader, to branch out and explore new markets and opportunities. And trading in Japan is attractive, given its well-developed economy and fully-regulated financial system. Japan is a developed country, with a high GDP, a solid industrial base, and some of the best-known companies in the world. There are many Japanese and international brokers to choose from, and brokers in Japan are overseen by the FSA to help assure compliance with financial regulations and best practices. Trading here feels relatively safe, and certainly easier than in most other Asian countries. Trading in Japan gives you access to the third-largest stock exchange in the world, and household-name publicly traded companies, from Sony to Honda.

When trading in Japan, it is crucial to be aware of various economic and demographic factors that may have an impact on the Japanese economy, as well as being constantly vigilant for issues which will impact the value of the yen, either positively or negatively. In addition, those simply looking to gain broad exposure to the Japanese stock exchanges, in a relatively simple and lower-risk way, may want to consider Japanese ETFs that track the Nikkei 225 Index. Overall, trading in Japan is an exciting opportunity with fewer challenges to confront than in many other countries.

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