Migration to Japan works only for lower-middle-class Americans

I often see posts about Americans moving to Japan for affordability and other reasons, such as food and culture. It is true that life in Japan is quite affordable these days, perhaps due to the weak yen and over three decades of economic stagnation. I sometimes dream about living in Japan after I retire.

However, after doing some math, I have to conclude that migrating to Japan works only for lower-middle-class Americans.

The reason is taxes. As in many countries, Japan has a progressive income tax system, with a maximum marginal tax rate of 45%. This is not just significantly higher than the United States’ maximum marginal tax rate of 37%. The maximum tax rate of 45% kicks in at a taxable income of 40,000,000 yen (about 250,000 dollars), which is basically a middle-class income in the United States.

Let’s also not forget that, in addition to the national income tax, there is a flat-rate 10% resident (municipal) tax, so the maximum income tax burden is really 55%.

When you spend money using your after-tax income, there is also a 10% consumption (value added) tax (8% for food).

Japan also has a high inheritance tax: the maximum tax rate is 55%, which applies to estates exceeding 600,000,000 yen (about 3.75 million dollars). And you can’t avoid inheritance tax just by moving abroad: for Japanese citizens, the inheritance tax applies up to 10 years after leaving the country.

But perhaps the most significant impediment to living in Japan (establishing residency) is the annual requirement to report foreign assets to the National Tax Agency. In addition, capital gains and dividends from foreign assets are taxed as ordinary income. Of course, Japan does not recognize Roth IRAs in the United States, so even incomes within Roth IRAs are taxed.

These rules mean that any middle-class (or above) American moving to Japan will face a significant tax and administrative burden. If you have some assets and still want to move to Japan, I suggest converting all your assets into a portfolio of stocks that do not pay dividends (such as Berkshire Hathaway and many tech stocks) and that you do not sell stocks while you live in Japan.