A fallback option, but not my first choice
So I wrote a teaser post about Interactive Brokers just over a week ago and promised to report back once I had opened an account.
After considering a few things I decided not to go through with opening an account (details below) but I think I learned enough about the company to write it up here.
The short version is that it is a financial account that you can open from Japan using English and keep if you move to another country, but has several important drawbacks that make it a less attractive option than Japanese stockbrokers.
This is a long post, so if you just want the pros and cons skip to the review conclusion.
Important Background
In Japan the major stockbrokers (Rakuten, SBI, Citibank, etc.) all have a legal requirement to have clients read and understand their terms and conditions. At the moment I haven’t found one that is willing to provide the T&Cs in English. I guess the market isn’t big enough to deal with the legal hassles.
So in fact there is a linguistic barrier to opening a stockbroking account in Japan. In practice your Japanese does not have to be good enough to read the T&Cs (you can do it at home with a friend or use an online dictionary to help you or, as I’m sure many Japanese customers do, just skim through them) but it does need to be good enough to take a confirmatory phone call from the company and allow them to think your Japanese is good enough.
For a lot of my readers this is a problem, so I was really interested to find a company that allowed people to open an account in Japan using English.
What are Interactive Brokers?
Interactive Brokers (wikipedia page here) are actually a US broker. They have a Japan office, but it seems the only purpose of the Japan office is to funnel people to the parent company in the US and comply with Japanese regulations to be registered with the Ministry of Finance in order to do business with residents of Japan.
What’s the process to open an account?
It’s fairly straightforward, although the Interactive Brokers website is not as slick as it could be, and some of the information is missing or wrong in some cases.
I’m going to write about my experience of opening an account, and I may misremember some parts, or they might have changed by the time you get around to applying, so don’t take my word for this 🙂
The application is mostly done online and you need to read a bunch of terms and conditions, check some boxes, choose which account to open, and upload some documents.
You can choose to open a bunch of different accounts (I am only really interested in stocks but bonds, forex, options, and some other things I don’t understand are also available). They have access to dozens of markets in the US, Europe, and around the world.
You have to choose whether you want an account to deal on the Japanese market (for which you need to submit your My Number as part of the application) or one for other markets (which does not require the Number). I already have access to Japanese markets through my Rakuten account so I chose to only open a foreign account.
I was then asked to upload two documents, one to prove identity and date of birth, the other to prove address. I chose to upload my passport and a bank statement as indicated on the website but I received a phone call in English the next day from a woman with an American accent asking me to upload my zairyuu card instead, as they require this from all Japanese residents.
I did this then got another phone call the next day telling me they needed the back too 😉
Finally got through all the paperwork, and the last step was to receive a security device via registered mail (to confirm the address you submitted). I signed for it, then received an email that my account was approved and I needed to fund it by transferring $10,000 US to the US home company by wire transfer in the next 45 days. Failure to do so will result in the account being closed and the whole process restarting.
What did I do?
Well, I thought about going through with the application, but decided I don’t really need a US stockbroking account, don’t have $10,000 in cash right now (I could get it, but I don’t really feel like it), and don’t want to deal with the complications in reporting taxes (see below).
The pros and cons of opening an Interactive Brokers account
Pros
- You can do it in English
- The costs seem fairly reasonable
- Easy access to a huge number of markets
- You can keep the account if you move countries
- They have an office in Japan so your account probably won’t be closed at short notice due to pressure from the MoF
Cons
- They are not really based in Japan (just have an office here)
- They can’t provide you with a kakutei kouza (tax reporting account) which sends you a single piece of paper to submit to the tax office
- You will have to report dividends, capital gains, etc. to the tax office, who will know about the account because of the initial funds wire transfer
- I believe you won’t be able to use losses to offset gains for tax purposes
(edit: I can’t find any evidence of this so please ignore for now) - You have to send money to and from the US to use the account
Conclusion
This is probably not the best option for long-term residents. If you have good enough Japanese, or have some way of getting around the language requirement, an account with a Japanese stockbroker will be much cheaper and more convenient to use.
Edit: if you are a US citizen or green card holder, and thus have to deal with the IRS, then for reporting purposes this may be a better option for you than a Japanese stockbroker.
If you don’t have access to a Japanese stockbroker or are not planning to stay in Japan for the medium-long term, then Interactive Brokers may make more sense. The initial $10,000 to fund a new account may be a barrier, and you need to send it pretty quickly, so I would make sure you have the full amount before starting the application process.
Anyone else use Interactive Brokers? Any questions or comments?
Thanks Ben, great overview
This is very nice information. Thanks!
Could you recommend a Japanese investment company? For example, one that requires customers to know some Japanese. One question I have, as do a few of my friends is, “Where do we go to get started on stocks (or bonds)?” (Although presumably it wouldn’t make sense to go into great detail about things like the registration process here, because this is an English-language blog.)
Hi Douglas
Sure! I personally use Rakuten Securities. SBI is also popular.
I’ll be writing about Rakuten more in the future, but if you have any questions please let me know 🙂
Just looking to start using a Japanese investment company as well. Rakuten looks great for ease of use; curious if you have a few bullet points on why you think Rakuten or SBI is good/better compared to others?
(This is me just being lazy of course – just haven’t done the research myself yet to figure out difference in fee structure etc.)
Hi Ad
Lazy is great. I am very lazy myself.
Actually, I don’t know if Rakuten or SBI are better than other options. I have a Rakuten Securities account that I am very happy with, and SBI seems to be popular online. Those are the only reasons I mention them!
I will be writing some articles about Rakuten soon.
If you find any better options definitely let us know 🙂
Andrew Hallam mentions that the main reason you would not want to deal with IB is because they are based in the US, meaning at your death, the IRS will tax you under US Estate tax law, even if you’ve never set foot in the US before (but the US have an Estate tax agreement with Japan so maybe that drawback does not apply for us in Japan?).
For the rest, although I think you made good points in your pros and cons, I’d still be ok with having an account with them, although I’ll probably go with Rakuten or SBI as you mentioned, once I get back to Japan.
In the cons:
why do you think one cannot use losses to offset gains for tax purpose? Pretty sure the rule in Japan here is similar to what they have in the US. The only thing is, you have to do it manually and keep records of it.
Hi SB
Thanks! I understood the US estate law to be based on ownership of US stocks, etc. and not on the stockbroking company. Thus my wife’s Vanguard funds would be subject to the law, even if they were bought and held in Rakuten.
Fortunately as you say the tax treaty (for residents of Japan) appears to raise the exemption from $60,000 US to the same as US citizens. Unless we do very well our heirs won’t have to worry about it…
I was under the impression that you couldn’t offset losses on shares held outside of Japan, but I can’t find any confirmation of that so will edit the post. I think you can’t carry over losses like you can with domestic shares.
Thanks for making the post better 🙂
You can open and IBSJ (locally registered Japanese account) and fund in Yen in Japan. If you want to trade overseas, you need the IBLLC account. The location of your deposit would depend on the currency in which you fund. If you fund in Yen, it will be Japan. If USD, USA. If HKD, HK etc.
IB is excellent for active traders.
Thanks EW! Are you using the two accounts? How do you find them?
I agree with this. I’ve used IB for a number of years and have found that their phone service is excellent – you can pick up the phone and speak with a human immediately, and – in my experience – all of them are pleasant to deal with and knowledgeable. There is a pretty steep learning curve to the platform software, though, but if you work through it then there is a great deal of flexibility in terms of products and tools. Streets ahead of RS (which is my local broker) in any event.
As the article says, putting the account in funds is a royal pain, though, as you have to wire to an “offshore” account, although I gather that the account itself is actually located _in_ Japan, which means you can’t use convenient services like Shinsei GoRemit (which only works for “international” transfers) to fund your account and will have to go through the usual circus required by the big Japanese banks to do an international transfer, which in my experience involves going down in person and paying a hefty fee. Definitely want to be thinking about doing one big transfer at a time rather than a number of small ones if you decide to go the IB route.
That said, I agree with the general thrust of the main article that for people who intend to be here long-term and who are largely sticking to a sensible Bogleheads-type strategy, the local brokers are a more straightforward bet and you can’t beat the convenient tax reporting. IB doesn’t offer a NISA, either (or didn’t last time I checked). IB is a great pick if for active traders, though, or those who want to put in place more complex strategies (and benefit from the English-language interface, which makes a world of difference even if your Japanese is pretty good, honestly).
On balance, my two cents is that _most_ sensible Japan-based investors can get by with just a local account with SBI / RS / etc., but that there’s probably also a significant portion for whom there would be substantial benefits to opening an IB account as well. On the other hand, I think that there would probably be very few long-term Japan-based investors who would use an IB account by itself.
Thanks Alex! Great to hear from someone with direct experience of the product 🙂
Just found this very informative post!
I’ve tried to open an account at Rakuten Securities but was denied as I couldn’t convince them of my Japanese ability when they phoned.
Does anyone know of any Japanese brokers who won’t call to confirm your Japanese speaking ability? I can fill in online forms/emails in Japanese no problem with my friend, but phone calls no good.
Incidentally I already have an Interactive Brokers account, but want to open a NISA.
Hi Bruce
Sorry to hear that! I am not aware of any, but I’ll ask on Facebook too.
I’m American as well. While this article talks about Interactive Brokers for Americans wanting to invest from Japan, Andrew Hallam recommends several times in his “Millionaire Teacher” book about investing with Vangaurd (US Bond Index, Total US Stock Market Index, and Total International Stock Market Index), which also has an office in Japan. I just called the American Vangaurd office, asking about investing with them from the Japanese Vanguard. It seems that they don’t have a whole lot of information about how exactly to invest from the Japanese branch and taxes and whatnot, but in order to open an account using the US branch, you have to have a US address, a social security number, and a bank routing number that they can use to take funds out. I tried giving them my Japanese bank information to see if that would work, but none of it registers on their system, so I assume you’d need a US bank account in order to open a US Vanguard account in the end.
With Interactive Brokers you have to send all funds to the US, and there is a minimum $10,000 deposit. I have yet to talk to the Japanese Vanguard office, but I wonder if that might be a cheaper option (and recommended by Andrew Hallam) for Americans, who have limited investment opportunities in Japan.
Hi Ryan
You can buy Vanguard ETFs through any of the major Japanese brokers (SBI, Rakuten, Monex, etc.) but not directly from Vanguard Japan.
If you are going to stay in Japan and have enough Japanese to get by, investing in US shares/ETFs through a Japanese broker might be a good option.
If not, Interactive Brokers will let you open an account as a non-resident American (very rare).
Hope that helps!
Thanks to Ben for the report. I have been using InteractiveBrokers for almost a year, so I’ll comment here on a couple of the Cons you mention.
>They can’t provide you with a kakutei kouza (tax reporting account)
>You will have to report dividends, capital gains, etc. to the tax office
If you can find the Activity Statements in their website, you can generate a report with dividends, realized profits, and fees/costs, (in English or Japanese). Print it out and either bring it with you when you go to TaxOffice or submit it to your tax accountant if you have one. Not so difficult.
>You have to send money to and from the US to use the account
Yes, their receiving bank is in the US.
>Conclusion: … an account with a Japanese stockbroker will be much cheaper and more convenient to use.
Disagree here. Most funds and fees are much cheaper in the US (similar to the robo-advisors mentioned elsewhere).
Also there are a lot of dividend-producing funds (CEFs) etc. available with I.B. that Rakuten and other Japanese brokers dont have. So I.B. is good here.
One other negative point is, if you have your savings in I.B. or other overseas brokers for the very (we hope!) long term, it may be a lot of hassle for family who inherit your funds.
Hi AR
Thanks for the update. Always good to hear from people with experience of using the service.
May have to reconsider!
Here’s a dumb question about US citizens: if a “US Person” creates an account with someone like Interactive Brokers, do they have to do tax reporting to Japan as well as the US?
Hi Evan
No such thing as a dumb question 😉
It depends on how long you have been in Japan. If you have been here for five years you are considered a ‘permanent resident for tax purposes’ (this is different from the residence status).
After this you have to report all worldwide income for tax purposes. If you have assets abroad that are worth 50m yen or more you also have to declare this.
Thank you for the answer!
Re: declaring all world wide income: Yuck.
Do you know how US citizens avoid getting double taxed on that? Since the actual broker is a US corporation, I would imagine Uncle Sam is reluctant to accept it under the Foreign Earned Income Exclusion. No doubt Japan also wants its cut as well though?
There is a tax treaty so you won’t be taxed twice, but you will pay the higher tax.
Investment income is not ‘earned’ so I believe it doesn’t fall under the FEIE.
Is the Interactive brokers good for penny stocking? I’m not u.s resident and Japanese neither, but I’m based in japan
Hi Marcelo
I’m not really familiar with penny stocks, but I think Interactive Brokers is a large and low-cost option. I wouldn’t be surprised if they can provide that service.
They can also provide everything in English.
Yes. U.S. citizens (and I think Green Card holders) have to declare income from Interactive Brokers on their U.S. taxes.
This is slightly pedantic, but you asked about “creating an account”. Merely creating an account (for example, with no money in it) doesn’t go on your taxes. The income is what matters, and that’s what you declare.
Thanks, Douglas!
Certainly the IRS will want paperwork filed; my primary concern was if Japan required it to be filed as well. Do you know how US citizens avoid getting double taxed in this case? Can you put this on your FEIE (f2555EZ)?
Another thing to add to the ‘cons’ if you don’t intent to trade actively: after the first 3 months, IB will charge you $10 per month unless one of the two following conditions is met:
– You have more that $100,000 on your account,
– You have spent $10 or more in fees during the month (which translates to performing 10 transactions).
If you spend less than $10 in fees, then you are only charged the difference. For instance, if you did 4 transactions in the month, then you have spent $4 and will be charged $6 for inactivity.
This is a bit of a downer as I didn’t plan to be very active overall, so I am starting to consider whether I really need this account at all now that Rakuten’s fees for US ETFs and stocks are lower.
But as other comments have noted, nothing beats IB in terms of cost and choice of products for people who want to trade actively.
Can anyone tell me what the fees for Rakuten would be?
Also, I am able to exclude all my Japanese income from being taxed by the US, but I am trying to save money and put it into a retirement account (hopefully, a Roth account). What can I do? I have read that I cannot contribute more to an IRA than the money I earn in the US. Does that mean I am out of luck for a retirement account? Or could I just not exclude all of the Japanese income so that I can have enough to fund the IRA? Or can I just set up an ETF and pay taxes on the dividends every year? This is so complicated!!!
Hi Jen
I recommend you post these questions in the forum: https://www.retirejapan.com/forum/
It’s much easier to get answers there 🙂
Hey guys,
I recently tried to create an SBI NISA account but seems like I am unable to sign for the trading account due to the fact my wife’s Japanese father is working for a multinational investment bank.
This would mean all his family members even myself are not allowed to buy stocks because we are registered under the same household. (some sort of insider trading potential) according to the Japanese trading law. Something like:
上の原則が同居する家族にも当てはまるのです。
In principle, it is prohibited for employees of brokerage houses to place orders with other brokerage houses.
Would I still be able to set up an IB here in Japan? I think this rule only applies to domestic trading accounts although I’m not sure.
Any thoughts on this?
Sounds like the domestic IB might be out, but the US IB may be okay. I’d call them up and ask them. They have good English-language support.
On the other hand, the rule you posted refers to 同居 which means living at the same address. If you aren’t you might be okay.