Population: 126 million

Wealth in domestic bank deposits: 9,060 billion USD (November 2023)

Offshore expatriated wealth: 181.1 billion USD

Main offshore banking locations: Panama, Cayman Islands

Number of individual brokerage accounts: 60 million (2021)

Crypto adoption (% of population): 2.1 million (1.74%)

TLDR

Japan presents immense potential as a market for foreign financial services and investment products, given the vast pool of domestic wealth and an investment-savvy population. However, navigating the local regulatory environment requires deep knowledge and likely local partnerships. 

Overall, Japan maintains a robust financial regulatory system oriented toward investor protection and systemic stability. The rules for offering foreign securities and funds are extensive compared to some jurisdictions, including registration, disclosures, reporting and local representation requirements. Marketing is easier when dealing solely with qualified institutional investors.

The country has taken a nuanced stance toward cryptocurrencies and cryptoassets, choosing regulation over prohibition. It has emerged as a global leader in crypto regulation, recognizing such assets as property and imposing rules to prevent illicit usage while encouraging innovation. Further legislation is pending to refine the framework.

Exchange controls

Historically, Japan imposed extensive exchange controls from the pre-war period until the 1980s, when gradual liberalization began. The current Foreign Exchange and Foreign Trade Act, along with oversight from the Ministry of Finance and Bank of Japan, allows for minimal restrictions on cross-border capital flows.

Some approvals and reporting requirements remain for certain transactions like direct investments, lending/borrowing, and derivatives. But normal business activities face little impact, besides needing to go through authorized foreign exchange banks rather than freely buying/selling currencies.

The Bank of Japan occasionally conducts forex interventions, both unilateral and coordinated with foreign central banks, to stabilize the yen exchange rate and counter disorderly market moves. But these have faced diminishing returns and political backlash in recent decades.

Overall, Japan’s exchange control regime is now one of the most liberal among developed economies. The shift has boosted the country’s international investment position. It plays a part in making Japan an attractive destination for foreign financial services firms.

Distribution rules for foreign investment products

The offering and marketing of foreign securities in Japan is tightly regulated under the Financial Instruments and Exchange Act (FIEA). The law is extensive, exceeding 1,300 articles, and enforced by the Financial Services Agency (FSA).

Key requirements include:

• Registration with FSA for both sellers of securities and investment managers targeting Japanese investors.

• Public offering rules including filing a securities registration statement and prospectus if marketing to general retail investors.

• Limits on marketing foreign funds exclusively to qualified institutional investors (QII), a narrow category of banks, insurers, brokerages.

• Continuing periodic disclosures and reporting obligations around semi-annual performance.

• Mandatory usage of local representatives and distributors for foreign funds and issuers.

• Strict conduct standards for sales practices, suitability requirements, conflicts of interest avoidance etc.

• Tax obligations applicable on investment gains made by Japanese residents.

While exemptions apply for private equity-style activities focused on professional investors only, the rules pose a substantial burden for internationally oriented firms seeking to tap into Japan’s vast pool of retail savings and investments.

Navigating the regulations likely requires engaging local counsel and partners. But the potential scale of opportunity makes it worthwhile for foreign financial institutions.

Qualified investors

Japan has three main categories of professional investors with increasingly relaxed regulations:

• Qualified Institutional Investor (QII) – strictly limited to banks, insurance companies, securities firms, investment managers and other large institutions. Historically used for private placements exempt from prospectus requirements.
• Specified Investor (SI) – includes QIIs plus other entities like listed companies, SPVs, and high net worth individuals by agreement. Allows simplified explanations by securities brokers and participation in private placements and new markets with less disclosure.
• Qualified Investor (QI) – most expansive category including SIs, pension funds, corporations and high net worth individuals. Allows fund managers to register with fewer regulatory requirements.

These categories have expanded over time, indicating a willingness to ease regulations for professional investors. However, there are concerns about inexperienced investors like pension funds lacking asset management expertise, especially after recent scandals. Overall, the trends are positive for financial firms seeking Japanese clients but risks exist for less sophisticated investors with relaxed regulations.

Further expansion of qualified investor categories is likely as Japan tries balancing innovation and prudential aims. The pool remains narrow compared to jurisdictions like the United States.

Cryptocurrency regulation

Japan has cemented its status as one of the most crypto-friendly jurisdictions globally. It has taken a nuanced approach that welcomes innovation in blockchain and digital assets while emphasizing consumer protection.

Cryptocurrencies are recognized as a form of property under the Payment Services Act. They serve as means of investment or value transfer – not as legal tender.

Stringent regulations require registration of exchanges and imposing anti-money laundering rules. Tax obligations apply on crypto investment gains.

The Financial Services Agency (FSA) has issued investor alerts about crypto risks. New investor protection legislation is upcoming.

In parallel, Japan is also exploring the possible introduction of a central bank digital currency (CBDC) to supplement private cryptocurrencies.

The government aims to balance enhancing the crypto ecosystem with preventing potential harms to consumers and the financial system. This forward-thinking stance makes Japan an attractive destination for both cryptocurrency firms and institutional investors.