10 Q&As about the new NISA

[northSaver]

ETFs have fees, and the dividends from US-domiciled ETFs are automatically taxed at 10%. You can claim this back and pay the proper Japanese tax later though.

How would you go about that?
Does it require transactions outside the Tokutei Koza 源泉徴収あり account setting, which most of us use to have tax withheld at source?

I try to avoid US-domiciled ETFs but when there is no other option (e.g. SGOV) I buy them through my Interactive Brokers LLC account. We (my wife mostly) then deducts the 10% withholding tax payments from my Japanese taxes when she submits our end-of-year tax returns.

[adamu]

ETFs have fees, and the dividends from US-domiciled ETFs are automatically taxed at 10%. You can claim this back and pay the proper Japanese tax later though.

How would you go about that?
Does it require transactions outside the Tokutei Koza 源泉徴収あり account setting, which most of us use to have tax withheld at source?

No, you can use the annual statement generated by the Tokutei Kouza in your tax return to help you claim it back. It's complex and there is an upper limit depending on your income of how much you can claim, with options to carry forward remaining amounts to future years. There's no good English guide as far as I know. I've done it twice, maybe I'll write a guide next time round... Maybe...

[ToushiTime]

No, you can use the annual statement generated by the Tokutei Kouza in your tax return to help you claim it back. It's complex and there is an upper limit depending on your income of how much you can claim, with options to carry forward remaining amounts to future years. There's no good English guide as far as I know. I've done it twice, maybe I'll write a guide next time round... Maybe...

Thanks, that’s useful to know.

[ToushiTime]

I try to avoid US-domiciled ETFs but when there is no other option (e.g. SGOV) I buy them through my Interactive Brokers LLC account. We (my wife mostly) then deducts the 10% withholding tax payments from my Japanese taxes when she submits our end-of-year tax returns.

Thanks. I only have Japanese brokerage accounts so I’d probably try Adamu’s way.

[sutebayashi]

The risk is this,

A. You buy a 10 year now in Yen. Yield/coupon @ 5% ( rounded).

B. In the next 18 month the FED announces rate hike pause and begins lowering interest rates.

C. The yen appreciate relative to the dollar.

D. Your investment is now underwater.

That is a distinct, increasingly likely outcome.

This currency risk is not limited to bonds, the same is true for equities etc too.

Whether it’s a bond or an equity one could have a positive dollar return on the investment, but “lose” money in yen terms if the yen appreciates. (That’d be good for Japan tax purposes.)

Personally, I think a lot of that yen strengthening reaction already happened after the inflation data started cooling. Just my guess.

If one wants to speculate on the currency rates (guilty!), I like to go with explicit fx trading. But this is basically gambling and experts are rarely hitting the mark with forecasts short or long term. One never knows for sure, but in the long term, is Japan going to stop printing trillions of extra yen each year? For me this is a No, and supply and demand thus suggests to me that the yen’s value will continue down until policy changes. When that might be is unknowable, like much else.

Coming back to US bonds - they are cheaper now than they had been prior to the current inflation episode. And if you can get 4% return on shorter term debt, it seems like a fair choice to make if you feel as if you would later rotate that money back into US assets like equities. I am reading talk of heavy shorts on the equities markets at the moment, but whether the market goes down and presents a buying opportunity or goes up and kills those shorts is also speculation.

[TokyoBoglehead]

The risk is this,

A. You buy a 10 year now in Yen. Yield/coupon @ 5% ( rounded).

B. In the next 18 month the FED announces rate hike pause and begins lowering interest rates.

C. The yen appreciate relative to the dollar.

D. Your investment is now underwater.

That is a distinct, increasingly likely outcome.

This currency risk is not limited to bonds, the same is true for equities etc too.

Of course, but that's of little concern to a long term global equity investor, as equities have potentially unlimited growth.

Bonds do not, your upper range is capped and predetermined.

......

For currency gamblers Japan is a paradise. Binary options (illegal in most countries), CFDs, Futures.....

[ToushiTime]

You understand that we are speaking to the currency risk, right? We are not suggesting us government bonds themselves are up risky.

I was talking about both risks, and basically ruling out the risk to Treasuries themselves. Maybe you missed the bottom part of my earlier post, which was talking about the longer term risk of the dollar weakening versus the yen:

"I can imagine Japanese rates coming up if/when inflation really takes off here, so the yen could easily strengthen in the near term, but the yen isn't the safe haven it used to be, and the long-term economic outlook for Japan isn't that great, given all the usual reasons."

I take your point about equities having unlimited upside and not maturing.

However, for me, as I mentioned, I don't want to have just cash and equities.
I am thinking of having cash, bonds and equities.
Maybe I am wrong on that. I'm open to arguments against it.

I have invested in eMaxis Developed Nation Bonds mutual fund, but only about 10-15% of that in in US government bonds, so I have bought and am thinking of buying more US Treasuries, which I plan to hold for the long term.

[TokyoBoglehead]

However, for me, as I mentioned, I don't want to have just cash and equities.
I am thinking of having cash, bonds and equities.

Hopefully, my tone here is coming across as "seeking a pleasant and amicable debate" and not like I'm cross-examining you. It's one of my failings.

....

Now that you understand the downsides, and the poor risk-free ward case for YEN investors why do you continue to pursue bond investments?

Diversity itself is not "better" automatically. Introducing commodities or futures would not necessarily improve your CAGR, but it would definitely increase your risk.

Are you mainly consuming American sources of investing info?

Anyways, if I were 100% set on more diversity than global stocks offer, I would look at Emaxis Slim REIT products personally. Those are tempting

[northSaver]

However, for me, as I mentioned, I don't want to have just cash and equities.
I am thinking of having cash, bonds and equities.
Maybe I am wrong on that. I'm open to arguments against it.

I have invested in eMaxis Developed Nation Bonds mutual fund, but only about 10-15% of that in in US government bonds, so I have bought and am thinking of buying more US Treasuries, which I plan to hold for the long term.

Just to be clear, there is nothing wrong with the portfolio you are proposing. It is very normal to have an investment portfolio consisting of stocks and bonds, with emergency cash on the side. How much percentage of stocks? How much of bonds? How much in the emergency fund? How much extra cash on top of that to purchase more stocks when they crash, or to protect yourself from currency movements? Only you can answer those questions. No one knows which ratio will perform best over the next ten years. You can use portfolio calculators such as myindex.jp to see which worked best in the past as a guide, but of course no one knows if the same ratio will perform just as well in the future.

That said, the eMAXIS Slim Developed Markets Bond Index fund is not a bad choice at all. It holds about 45% of US bonds, though some of those are corporate as well as government. The rest are mostly European, which will help diversify your exchange rate risk. I'm sure there are similar funds that focus on US Treasuries if that's what you prefer.

There are no right or wrong answers, just advice and opinions. Good luck with it all

[ToushiTime]

However, for me, as I mentioned, I don't want to have just cash and equities.
I am thinking of having cash, bonds and equities.

Hopefully, my tone here is coming across as "seeking a pleasant and amicable debate" and not like I'm cross-examining you. It's one of my failings.

....

Now that you understand the downsides, and the poor risk-free ward case for YEN investors why do you continue to pursue bond investments?

Diversity itself is not "better" automatically. Introducing commodities or futures would not necessarily improve your CAGR, but it would definitely increase your risk.

Are you mainly consuming American sources of investing info?

Anyways, if I were 100% set on more diversity than global stocks offer, I would look at Emaxis Slim REIT products personally. Those are tempting

To answer your questions:

No, I’m not convinced it is necessarily a poor risk-free reward case for bond investments.

Yes, I see near-term downside risk for yen-based investment in bonds if the yen strengthens due to the Bank of Japan raising rates.

But surely there is also potential upside over the longer term from dollar appreciation, based on the differing long-term outlooks for the US economy versus Japan’s. That assumes that currencies reflect the strength of economies over the long term, and it assumes the US has a better economic future than Japan over the long term. I'd be open to arguments against both those assumptions.

I know you can get the same benefits from long-term dollar strengthening if you buy US equity funds instead of Treasuries, but surely government bonds are useful to diversify risk (and safer than other alternatives such as futures , commodities etc)?

Isn't that why most/many investors have bonds as part of their portfolio, hence the 60/40 cliché, which is a one-size fits all concept but has become common parlance because most investors hold some level of bonds. In my case I would be thinking of 10-20% bonds 80-90% equity.

For Japan based investors with yen to spend, are you against bond investments per se, or just against buying one nation’s government bonds?

Do you own bonds yourself? From your profile/tag, I think no. I was considering a bond-free portfolio too. It doesn't seem like a clear-cut issue, as northSaver seemed to imply. There again most of this stuff isn't

I thought you recommended the eMaxis Developed Nation Bond to me the other day, but maybe that was just as an alternative if I insisted on buying bonds?

I bought Emaxis Slim REITs on your recommendation. Thanks for that.