Japan is certainly an interesting country and, if you are a foreigner who has residence there, the experience is surely one that began with a bit of a cultural shock as there are so many differences in societal norms and in the living of simple, everyday life.
Japan is unique in that it has both low birthrates (about 1.3 children per woman of child-bearing age) and astounding gains in life expectancy (going from 77 years in 1980 to around 83 years presently). These two demographic facts have made Japan one of the oldest societies on the globe and have also created a myriad of fiscal challenges due to the relative shrinking of the resulting labor pool. This, of course, has also led to efforts on the part of the government to find ways to remain solvent and this often translates to more taxation schemes. Expatriates who live and work in Japan are certainly in no way exempted from this need to find sources of revenue to keep services and pensions in effect…
Regarding the pension system in Japan and how it affects foreigners who are residents, perhaps a quick history would be in order. The Japanese Kokumin Nenkin or national pension is a system in which all registered residents of Japan, both Japanese and foreign, are mandated to be enrolled. Since early 2010 it has been managed by the Japan Pension Service. There are essentially three parts to the system:
Part 1 – All residents of Japan who fall between the ages of 20 and 60 but do not fit into the other categories listed below, are required go to a local National Pension municipal office and enroll. Usually this group includes the unemployed, self-employed, or employees of smaller companies. After accomplishing this, they are considered in the system and assured of some kind of retirement income.
Part 2 – Employer enrolled workers in various traditional employee pension schemes, which include the basic national pension, make up this category. In this case pension contributions are automatically deducted from a worker’s salary by the employer. As things change in Japan, this more traditional system is being eroded.
Part 3 – This section includes people who are aged between 20 and 60 years and who are considered dependent on those making up the second category. These folks are not required to pay contributions and their costs are paid by the individual upon which they are dependent.
As Japan changes, the old fashioned cradle to grave pension system is becoming all the more threatened and new ways to save and to avoid excessive taxation are now wise undertakings, certainly for those who are non-national residents.
Building up one’s personal assets and thereby becoming more self-reliant is an essential endeavor for any Japanese resident as the old-fashioned pension system can no longer be relied upon by individuals for future prosperity in this rapidly aging society.
There are a few tax exemption or deferment schemes to promote investment by individuals that have already been in existence in other countries like the U.S. with its Individual Retirement Account (IRA) and Canada’s variation called the “TFSA” or Tax Free Savings Account. Japan’s version is the “NISA,” or the Nippon (Japan) Individual Savings Account, which was just initiated this past January. This newly minted tax exemption program for small investment should be an effective method for an individual in Japan to accumulate asset value over the mid-to-long term, as well as to serve as a source of investment funding for promising businesses, hence stimulating what has been a rather moribund and static economy of late.
For the purposes of an individual who is a resident of Japan, the most important aspect is the potential for personal asset formation for future retirement while also enjoying certain tax benefits that have been, unlike many Western countries, previously unavailable to the individual seeking relief from tax burdens and the unpredictability of the long-term solvency of the traditional pension system.
NISA was conceived as a savings vehicle for any residents of Japan aged 20 years or older. With the NISA account, people are availed an exemption of the 20% levy on income from capital gains, dividends and coupons from yearly investments, up to one million yen (or around 10K dollars U.S.) made over a five-year period. This is limited to those who have had their residence in Japan over that time period. Under this new law, tax-exempted investments can be made through NISA for up to 10 years (beginning in 2014 for a total cumulative investment of 5 million yen or $50k U.S.).
For those who are not native to Japan but are residents there, this is perhaps a bit of light in what has been a rather dark tax environment, especially for those who are used to more tax-friendly places of birth. It is something to be seriously investigated by any who are now calling Japan “home.”