Japanese stocks have broken out, with both the TOPIX and the Nikkei 225 at levels not seen since August 1990. The inbound tourism revival is in full swing and foreign investors, including the great Warren Buffett are pouring in. So is it too late to get involved?
After a volatile year for stocks in 2022 and a big drop in the yen, it feels like there is a lot of money sitting on the sidelines. And while ‘scared money don’t make money’, Japanese stocks have been quietly putting together a world-beating two quarters. Here is a selection of year-to-date performance numbers:
Nikkei 225 +19.1%, Toyota +7.5%, Honda +30.6%, Fast Retailing +26.7%, ANA Holdings +12.8%, Keisei Electric Railway +44.6%, Kyoto Hotel Ltd +9.25%, Panasonic +32.8%, JFE Holdings +17%, Marubeni Corp +31.4%, Hub Co Ltd +28% (yeah boiiii!), Japan Tobacco +16.6%, Takeda Pharmaceutical +10.8%, Yaskawa Electric +38.2%.
You get the picture. Japanese stocks are on a tear and not many people saw it coming. Not so the eternal Japan Optimist, Jesper Koll. I had to smile at the title of his recent post ‘We’re all bullish Japan now…’ I’ve seen countless bullish articles on Japanese stocks this last week – suddenly everyone is jumping on the train.
Jesper has of course been riding this train for some time and does a great job in his post of identifying the reasons for the surge in Japanese risk assets. If there’s one lesson that we all should learn from the past few years, it’s that liquidity drives markets. And as developed markets go, Japan is the last remaining source of cheap money. As the US and European central banks raise rates to fight off inflation, the Bank of Japan has, predictably, kept things very easy. There was a slight blip as a new governor took over at the BOJ and a host of people, who should know better, speculated that he would be forced into tightening monetary policy and blowing up the bond market just to fit their narrative. Ueda-san quickly put such rumours to rest and confirmed that policy will remain easy for the foreseeable future.
Jesper rightly points out other factors in the rise of risk assets in Japan: inflationary fiscal policy, a refreshing wave of pro-shareholder regulation, the expansion of NISA, increased business investment and a rising corporate metabolism. To that, we can add a few sector-specific catalysts: the weak yen providing a tailwind for exporters, Chinas’s economic reopening boosting commodities and shipping-related business, and the inbound tourism revival pushing up travel-related stocks.
However, none of this means much without that steady stream of delicious liquidity; mmmm zero interest rates and yield curve control are still on the menu!
A lot has been made of Berkshire Hathaway’s investments in Japan’s big five trading companies. And without wanting to diminish the fact that one of the world’s greatest living investors is buying in Japan, a lot of the coverage ignores the blindingly obvious: Warren pigged out at the last cheap money buffet in the world! He issued debt in yen at around 1% to buy quality companies that pay 4% income. It’s an exquisite arbitrage, but hardly a ringing endorsement of corporate Japan. If interest rates remain high in the US and low in Japan, you can bet he will be back. That man can’t turn a good deal down!
So, the big question is, if you don’t have much exposure to Japanese stocks already, is it too late? Once more it’s fascinating, and somewhat alarming, to see almost total consensus from commentators: the market is going to keep going up! I’m not one to fight the trend, but when everyone thinks one thing is going to happen it’s usually time to open your eyes to the exact opposite scenario…
Quoting Jesper himself here: ‘after more than thirty years, a positive break-out above the historic “Bubble Peak” of 40,000 on the NIKKEI stock index is finally becoming a realistic prospect over the next 15-18 months.’
So let’s be cautiously optimistic here, while keeping in mind the second part of Jesper’s post, what could go wrong? If you’re serious about owning Japanese stocks, I urge you to read the post yourself, but clearly, the number one thing that could derail this rally is inflation refusing to die down as expected, forcing the BOJ to take action on yield curve control and interest rates. My personal take on this is that any attempt to ‘normalise’ rates will be met with chaos and a hasty U-turn, but the damage will get done very quickly amongst the chaos. There’s obviously an argument here for long-term investors to ride out the storm and wait for the rebound, but I would prefer not to ride into that storm with too much JP stock exposure myself.
So if you own JP stocks already, enjoy the ride, but keep an eye on those inflation numbers and an ear to any rumblings from the BOJ. If you are planning on getting in now, then you are probably not too late but you don’t have a lot of cushion on the downside, so act accordingly.
Disclaimer: This should go without saying, but the information contained in this blog is not investment advice, or an incentive to invest, and should not be considered as such. This is for information only.
Ok, terrible clickbait title, I know. But you clicked it and you’re here? Nice, I’ll keep this one short.
I wrote this Bitcoin is Dead post on 6 June 2022 when the Bitcoin price was around $30k, and here we are on 12 April 2023 and the price is once more around $30k. Feels different on the way back up doesn’t it?
When FTX went down it felt like the end, but what we just witnessed was a standard Bitcoin bear market. An 80% drop from the peak is the norm in the 4-year cycle. $69k to $16k – close enough. Here’s a great video of Bill Miller x2 talking about why they’re bullish on Bitcoin. Check out the price ticker in the top-right corner.
That’s called conviction ladies and gentlemen. Likewise Michael Saylor and Microstrategy, whose Bitcoin position just made it back into the green.
Anyway back to the D. The D of course stands for Demand. You knew that. When you have an asset with a known, fixed supply, all you need to ask yourself is ‘What is going to happen to demand?’
The US seems to be doing its best to block crypto, and specifically using the recent bank crisis as cover for removing on and off-ramps to crypto. That would be bad for demand, right? Yes, maybe, but what happens to demand for things when people are told that they can’t have them? Oooh, Bitcoin is too risky for you so we need to protect you…
Meanwhile, Hong Kong is ramping up on crypto. If America wants to block innovation then guess what? It’s just going to move elsewhere. Good thread on Hong Kong’s crypto reopening here.
Is demand going to keep rising? That’s all you need to ask yourself. If you think no, then stay out of it. If yes, then you want to own it. What do you think CBDCs, the ultimate big brother government-controlled money, are going to do for demand for a decentralised, permissionless protocol like Bitcoin?
So, $30k. Are we too late? Did we miss the bottom? Probably, yes. The idea was always to dollar-cost-average through the bear market. Will we get another bite at lower prices? That depends more on the macro situation than anything else. Remember March 2020? The whole world went into a panic about covid and BTC sold off from around $9.5k to $6.5k. It would take something like that to get back to $16k again, which I would say is unlikely. However, we are not yet done with this Fed tightening cycle and a summer recession is looming. A significant sell-off in risk assets is very much on the table. It takes guts to buy then, but take a look at the BTC chart from March 2020 to today.
Can you see the March 2020 panic? It’s the little red candle in the bottom left (8 candles from the left) That’s the one that had everyone terrified. If we get another one of those, what are you going to do?
Disclaimer: This should go without saying, but the information contained in this blog is not investment advice, or an incentive to invest, and should not be considered as such. This is for information only.
How are people getting their financial advice these days? After 3 years pretty much at home during covid I’m wondering how it all works now. You used to have some bloke at the pub giving you stock tips, now it’s all on Twitter? When I first started in the business I used to call up guys at investment banks who knew way more about finance than me and try to blag them into meeting me. Are people still doing that? Maybe you just dance on TikTok these days?
I don’t have as much time to write this blog as I used to, so I apologise for the big gap between posts. (I wasn’t exactly prolific before, I know) However, if you only have time to write once in a while it does sharpen you up somewhat. So let’s get to the point.
I’m not your financial adviser, but you really need to get things organised. I sound like your dad, don’t I? What are you going to do with your life??? Let’s try and boil it down to the basics. Where are we and what should you be doing?
As WBC’s go, I enjoyed the World Baseball Classic much more than I’m enjoying the World Banking Crisis, but at least we are learning some stuff. The US treasury backstopped the banks. That means everyone else is going to have to backstop their banks or all the money is going to flow to the US as the least risky jurisdiction. Liquidity bottomed in October. If you don’t know what that means, listen to this podcast. The stock market bottomed around then too. Inflation is unlikely to just go away, but the Fed has raised rates about as high as they can go. Maybe another 25 bps in May but that’s about it. That doesn’t mean they will start cutting. We could sit around the 5.25% mark for the rest of the year.
Whichever way you slice it, it doesn’t look good for the yen. I discussed that here. If you are holding yen and not planning to spend yen in the future then you need to seriously consider your options. Drop your phone number in the comments and I will happily call up and shout at you like your dad.
So what should you do? Well, I may have mentioned this before, but you need to figure out your base currency and have a diversified portfolio. Diversified means cash, bonds, equities, property, commodities and alternatives, allocated according to your risk profile. If you are smart, you will want to spice it up a little by taking a core/satellite approach. 70-80% goes into the diversified portfolio, that’s the core. The other 20-30% goes into satellites. The satellites you want to own in this environment are gold and bitcoin. If you think bitcoin is silly then just buy gold. Gold mining stocks are a leveraged play on gold – maybe toss some of those in too. Ideally, your diversified portfolio should be rebalanced once a year so it doesn’t grow three heads and deviate from your risk profile. Clear?
You can either:
Do this yourself
Get someone to help you to do it
Pay an asset manager to do it for you (except maybe the bitcoin part)
Any combination of the above is fine. There’s no shame in wanting to spend your time doing other things and paying someone competent to take care of this for you. Just be aware that for number 3, you will probably need to work with a financial adviser to find the right product and not all financial advisers are the same. Some may not have your best interests at heart.
And that’s it – what was that, like a 3-minute read? I hope the weather forecast is wrong and it doesn’t rain all through cherry blossom season so you can get out and enjoy it. I’m not really going to call you up, but ask me anything, any time. Until next time!
Disclaimer: This should go without saying, but the information contained in this blog is not investment advice, or an incentive to invest, and should not be considered as such. This is for information only.
February 2023…wow, where does the time go? Our daughter was born almost a year ago, and when I think about it now it feels both like yesterday, and an age ago. The mind sure can play tricks on you sometimes.
Remember the Lehman crash? Was that really almost 15 years ago? It’s clear as day to me still, but an awful lot has happened since then. I remember in late 2008 listening to what, for me, was an early podcast. It was called the Financial Sense Newshour, and it is still going today. Boy, was that some doom and gloom! You see, they were looking at the government response to the meltdown, which was basically printing money and bailing out the banks, and discussing how this was going to destroy the global economy as we know it. The advice was to get into your bunker, buy gold and other precious metals, and wait for the storm to hit.
I knew a couple of people back then who took this to heart. They stopped buying stocks and only invested in metals. They were ready for the total debasement of Fiat currency as we knew it. And for a few years that was actually a solid strategy. Gold outpaced stocks until around April 2013. After the lines crossed though, gold was left in the dust and these guys missed out on, perhaps, the greatest bull market in stocks in their lifetimes.
They are still waiting to be right about armageddon today. They see no way that governments in developed markets with a ton of debt (hey, Japan!) can survive without destroying their currency, and paper assets with it. And, of course, they are right! It’s totally unsustainable over the long term. However, as Japan has proven, you can keep printing money and propping everything up for a hell of a long time before the music actually stops.
In the meantime, life goes on. Opportunities arise. March 2020 was one of those opportunities. I hold my hand up and say I didn’t see that one clearly enough at the time, but as risk assets plummeted, the thing to do was buy them! Not to be too hard on myself, I did buy them, but nowhere near aggressively enough.
The purpose of this post is not to prepare you for the unwinding of this gigantic, unsustainable debt bubble, although prepared you should be. It is simply to try to make you aware of something perhaps even more terrifying: You don’t really know what you are doing. Not just you, of course. Me, too. All of us. We think we know. We think we are smarter than the herd. But we are just human beings, governed by fear and greed, trying to think our way past our emotions.
Stocks go up if you hold them for the long term. That’s it. If you buy a bunch of stocks, hold them and don’t sell them, you will make money. If you buy them when nobody else wants to buy them, you will make even more money. It’s really as easy as that. And nothing you believe, no matter how true it might turn out to be eventually, is likely to change that.
Do you want to be right, or do you want to make money? I think about this question sometimes. I get this with Bitcoin sceptics a lot. They are usually smart people, often quite technical and analytical. And they look at Bitcoin and say things like: “I don’t see this ever being used for day-to-day transactions” or “There’s no way governments will ever let this take over from actual money that they control”.
I don’t disagree with them on either count. In fact, they are probably right. However, the value of Bitcoin will likely go up regardless. And I can make a number of solid arguments for why that is the case, and these people will not care. Which is totally fine. I’m not interested in being right, or in convincing them. I’m interested in making money.
As an aside, there’s a neat little segment in this podcast, which comes around the 52-minute mark, where legendary investor Howard Marks describes how talking with his son helped him overcome his knee-jerk scepticism about Bitcoin. If you think you might need a little help overcoming your own scepticism, then maybe start by reading my encouragingly titled Bitcoin is Dead post.
Back in April 2019, I wrote a short post about how Bitcoin was in an accumulation phase. It was a really short post, because I didn’t actually understand very much about Bitcoin at the time and was just quoting other people’s work! But I owned some, and I was pretty sure I was going to make money. The Bitcoin price was about $5,200 then. It had shot up to $20k in the 2017 bull market, crashed back to $3k in short order, and was gradually being accumulated ahead of the next halving in 2020. The 2021 bull market which followed saw it peak at $69k.
And so here we are in February 2023 in an accumulation phase. You might hate Bitcoin. You certainly might hate crypto and crypto bros. You might have lost money on FTX or Luna. You might worship Charlie Munger and think that a 99-year-old man is a good source of opinion on blockchain technology. But we’re in an accumulation phase regardless. The halving is around April/May next year. And in the bull market that follows, where quite coincidentally central banks might just have cut rates to head off some devastating crisis, it will hit prices that will make your eyes water. Especially if you don’t own any…
Do you want to be right, or do you want to make money?
Disclaimer: This should go without saying, but the information contained in this blog is not investment advice, or an incentive to invest, and should not be considered as such. This is for information only.
If there is one thing I have learned in all of my years of financial planning, it is this: people are way more focused on product than on what to invest in within the product. People will spend hours comparing investment accounts to find the one with the best tax advantages, lowest fees, and most comfortable user interface. Then once they decide, they just chuck all their money into the first global stock fund they find on the list. Somebody once said, “people will spend more time deciding on a pair of jeans than on what to invest their retirement fund in.” What follows is far from the definitive guide to investing in NISA, but it should provide some angles to consider it from.
Before that, I have a simple security tip for you. A friend of mine realised recently that someone was trying to change the email address on one of his financial accounts. They knew his email, and had figured out that he had an account with this particular institution, and were trying to get the institution to change his email address so they could get access. Scary, huh! Luckily my friend caught it in time, and rather than responding to emails/chat messages, he set an appointment to talk to a representative. (don’t get phished!) That representative gave him a great security tip: make an email address that no one (except maybe your immediate family) knows about, and only use it for your financial accounts. I thought that was pretty good advice and am implementing it myself. It may be a bit of a pain, but not as painful as having one of your accounts drained – this particularly goes for crypto accounts!
Ok, back to NISA. Obviously, I can’t give blanket advice that works for everyone. The investments you choose will depend on your base currency, attitude to risk and timeframe. Another big factor to consider is that NISA itself is changing from next year, which perhaps affects your strategy for this year. Given the above, I will try to provide a general guide with some helpful ideas:
Yes, this again…Currency may seem irrelevant in a Japan-based account such as NISA, but I would argue that you have to at least think a little about when and where you will spend the money. If you are living and working in Japan, I would assume you at least have some need for yen as a base currency. However, if you plan to move or return home in five or ten years’ time, should you really be building assets in yen? I can’t speak to all of the NISA products out there, but my SBI account allows me to buy US-listed stocks and ETFs through their international site, and you can buy these for your NISA account too. Now, given that NISA is not a good fit for US citizens, why would you buy USD assets? Well take a look at my previous article on the yen and think if you really want to build all of your assets in yen. Yes, when you cash out you will have to cash out to your Japan yen account once, but you can then quickly convert to the currency of your choice. You can also buy yen-denominated funds / ETFs that invest in global assets, so even if the investment is priced in yen your underlying exposure is to other currencies.
So, if you are going to spend the money in Japan, should you only buy Japan-based assets? That would depend on your overall asset allocation and whether you have some exposure to overseas assets through other investments. Compared to the rest of the world combined, Japan is not such a big market and it would seem like a risk in itself to only have Japan exposure, but I would still aim to keep a reasonable amount in yen, just in case it’s 80 yen to the dollar when you want to sell the assets and spend the money. Personally, I already have global exposure, so am mostly buying JPY assets in my NISA account.
Managing risk
Knowing your own tolerance for risk is important. No one wants to be lying awake at night worrying about their investments. The only thing I go on about more than base currency is diversification. The problem with Japan-based accounts is it is hard to diversify well if you are investing in yen. Japanese government bonds? No yield and more risk than anyone at the BOJ wants to admit, hmmm. I think REITs offer an opportunity for diversification and a quasi-bond type profile. Also, diversification across styles can help: don’t just buy a Nikkei 225 tracker – look at high dividend stock ETFs, look at value ETFs and growth ETFs. You can also buy individual stocks if there are companies you know well, or that fit your risk profile. Warren Buffet is buying Japanese trading companies. Maybe he knows a thing or two? Also, perhaps put 5-10% in a gold ETF.
What about the new NISA?
You may have heard that NISA is changing in 2024. From next year you will be able to allocate up to ¥3.6 mill per year. You have to put ¥1.2 mill in mutual funds, but you are free to allocate the remainder as you wish. The maximum total contribution limit is ¥18 mill, but you can leave this invested tax-free for life!
This has led me to decide that for this year’s contributions, I am going to focus more on dividend-paying stocks for my NISA and I will re-evaluate when the rules change next year.
Tax-free growth or tax-free dividends?
Here’s an interesting way to look at things. If you only have a limited allocation that is free from tax on capital gains or dividends, which do you try to maximise? Do you go for all-out growth and try to increase the value of your investments as much as possible over time, and take those gains tax-free? Or do you focus on more stable, dividend-generating stocks and REITs, whereby you get a more predictable annual yield with no tax on the dividends?
This again depends on your attitude to risk and how your other investments are allocated. Already have a broadly diversified portfolio elsewhere and NISA is a relatively small part of your overall allocation? Why not go for growth and try to shoot the lights out? On the other hand, if NISA is an important part of your long-term plan, perhaps you should take a more balanced, diversified approach and try to maximise dividends?
How do you actually go about allocating the money in your NISA? Do you dump it all in during January? Or do you allocate a little every month? If you are investing monthly you are taking a lot of the timing risk out of the allocation process, so you can lean more heavily into higher-growth stocks. This works great for Tsumitate NISA. If they go down, you buy more next month. If you are allocating in one go, you might try to diversify a little more.
Do your own research
I was considering putting a list of interesting funds, ETFs, and stocks at the end of this post for people to do some reading/research on, but I don’t want to be seen as recommending particular investments over others. Plus, that’s what my paid coaching sessions are for! The fact is, it doesn’t matter so much which global stock fund you choose. It’s more important that your overall allocation fits your personal situation, time frame and medium to longer-term goals. Putting in the work will lead to a better understanding over time. Don’t be afraid of making mistakes, but do spend a little more time deciding your investments than you would over buying a pair of jeans!
Disclaimer: This should go without saying, but the information contained in this blog is not investment advice, or an incentive to invest, and should not be considered as such. This is for information only.
First of all, Happy New Year! I hope you all had a fantastic holiday season. Keeping with the spirit of the last three years, we have not been anywhere! Ok, we did have a couple of mini-holidays here in Japan and a peaceful family Christmas and New Year at home, so no complaints!
2023 is shaping up to be interesting in many ways. I have taken on a freelance financial writer project that has diverted some time away from writing here. I will link to that at some point, once I am settled into the routine. It’s an interesting project and I am really enjoying the new challenge. However, if there’s one thing that writing to order and to deadlines has taught me, it is to be grateful for the freedom I have to write whatever I want here, hence the somewhat irreverent title of my first post of the year!
So how screwed is the yen???
Well, before we jump into that, let’s take a quick look back over 2022. As per my previous post, the lesson for us all is that liquidity drives markets, and in 2022 Jerome Powell was the first central banker to start draining liquidity. Throughout the year he continued to raise interest rates in order to fight inflation and, in doing so, pretty much killed the bull market in risk assets. Literally adding fuel to the fire, Vladimir Putin invaded Ukraine and fanned the flames of inflation, particularly in the energy sector. The S&P 500 index ended the year -19.4%, the NASDAQ -33.1%. European stocks were down around -13%. And not only equities suffered: US bonds, the so-called safe haven asset, were down around -13%. Even well-diversified portfolios were down somewhere between 15-20% on the year. The only big gains were in energy stocks, with that index up over 60%.
So how about Japan? Well, the Nikkei 225 index was down -9.4% on the year, but I can tell you from personal experience that if you picked the right stocks you actually made money last year. So not bad right? The danger, however, lurked in the fixed-income and currency markets. The strong US dollar crushed everything in its path, with the yen coming off perhaps the worst of the developed market currencies, although the pound and the euro suffered too.
During 2022, after years of zero to negative yields, inflationary pressure caused Japanese Government Bond (JGB) yields to rise by 0.25%. That may not sound like much, but it had a huge effect on the price of JGBs. Remember, as yields rise, bond prices fall. As a result, the Bank of Japan had to repeatedly come out and reaffirm their commitment to Yield Curve Control. (YCC) In short, they had to do more quantitative easing, which meant printing more money and buying more bonds, which also translates to more yen going into the market and a weaker currency.
Keeping it simple – they had to devalue the yen to save the bond market. Why? Because the owners of those bonds are Japanese banks, pensions and insurance companies. Not the kind of institutions you want falling over. Things got so bad that, by the end of September, the BOJ had to come out and artificially support the yen.
Here’s where it becomes a problem: The programs you would have to enact to save the yen are the exact opposite of the programs you would have to do to save the bonds. To save the currency you have to raise rates. To save the bond market you need lower rates.
Then, at the end of the year, the BOJ made the surprise move of widening the band for their Japanese Government Bond Yield Curve Control from 0.25% to 0.5%. When they did that, the yen started to strengthen. However, if you allow interest rates to rise, what happens to bond prices? Down they go!
And herein lies the crux of the matter: you can save both the currency and the bond market for a short period of time, but ultimately, over a longer period of time, you have to choose one. Now, governments always say that they won’t sacrifice the currency, and then they always do. The reason is simple: the currency benefits the citizens the most, to the detriment of the government, and the bond market benefits the government the most, to the detriment of the citizens. Which do you think the government will choose to save?
Also if you save the currency, you will effectively collapse the banking system, which isn’t going to be pretty. And more importantly, as the government, if you sacrifice the bond market, you can’t raise money anymore. You essentially cut off your income. What government is going to do that?
So how screwed is the yen???
I try to avoid being sensationalist about this kind of stuff. People have been predicting the collapse of the Japanese economy for decades now and it still kept muddling through. The thing that has changed is that it was muddling through in a low inflation environment, which allowed the BOJ to keep rates low. If you are hoping that the value of your yen will hold up, you better hope that inflation calms down pretty soon! The thing that shocked me about the interview with Brent was not the fact that he thinks the yen is screwed – I always thought it would be at some point down the line – it’s that he thinks it is already screwed now and it gets really ugly from here. The ECB and the Bank of England are in a similar position, but Japan is so much further down the road. In terms of monetary policy, Japan is not just the canary in the coal mine. It’s the whole damn coal mine!
I wrote a post back in April 2022 called The Weak Yen Dilemma, where I basically noted that over time things tend to revert back to the mean, and that is what would eventually happen for the yen. In the realm of ‘nobody knows’, that is still a possibility but I am starting to think that from a financial planning/investing perspective we need to consider the big question: What if it doesn’t?
What if the yen is screwed?
I am not an intellectual and have no interest in a debate about the fate of the yen. As a financial planner and investor, I deal in probabilities. So I think it’s important to consider what we can do in case the yen is actually in trouble.
If you have been reading this blog for a while, you will know that I am the guy who never shuts up about base currency. I’m sure it’s annoying but here’s the thing: you can have the perfect tax-advantaged, low-fee account with the best asset allocation, but if you are in the wrong currency you are shooting yourself in the foot and by the time you realise it, it may be too late. If you found yourself last year saying “I want to do x but the yen is too weak” then you know what I mean. Base currency is not the currency you are earning in, it’s the currency you plan to spend the money in. So let’s take a look at what people living in Japan with different base currencies can actually do to prepare:
JPY Base Currency
If you live in Japan, earn yen and plan to spend it here until you die, you have the least to think about. The main thing you need to concern yourself with is beating inflation in yen terms. However, are you really 100% yen base currency? Might your kids want to study abroad? Do you plan to travel overseas regularly to visit family or for other reasons? If you think that Brent might be right, do you want to maybe allocate a portion of your investments to USD so you can take advantage of the eventual collapse of JPY?
USD Base Currency
If your BC is the global reserve currency and you have all your money languishing in yen, it’s time to start putting in some serious thought. You probably experienced severe pain last year watching the yen slide to ¥150. You’re probably waiting for it to get back to something reasonable, like say ¥110, before you convert your yen to dollars. Right? But what if it doesn’t get there? Maybe ¥130 is the best deal you’re going to get? I’m not saying you should panic and convert everything today, but you need to consider the probabilities. Maybe you should start converting a little every month, or every quarter? Again, I’m really not the alarmist type, and maybe things will gradually get back to normal. But what if they don’t?
GBP/Euro Base Currency
The good news for you guys is that the UK and Europe are just as screwed as Japan! Japan might go down first, but you are the next dominoes in line. So you may find that there is less of a differential between GBP/JPY and EUR/JPY than there is with dollar vs. yen. All the same, if you are not planning to spend the money in Japan, you should be saving and investing in your base currency. And maybe, given the situation we are describing here, you should consider owning some dollars too in case there is something to this milkshake theory?
Other Base Currency
Please forgive me for lumping everyone else together but there is only so much time that can be spent on one post. If you are from a country considered an emerging market, you are probably already well-experienced with currency fluctuations. Saving in your base currency is a great idea, but you should perhaps consider USD as an option too as it offers more stability. If you are going to retire somewhere like Australia or New Zealand then again, the local currency plus maybe a dash of USD seems like the way to go.
Outlook for Japan Investments in 2023
I will likely get into this in more detail in future posts. I’m thinking, given it is January, of writing a post on strategies for investing in NISA. But for the time being, here are some things to consider: Bonds are a no-go in my opinion. Stay away from them. Equities are likely to struggle just due to the general economic climate and the spectre of recession, but there are some stocks paying nice dividends out there that are probably a better option than cash. However, if the BOJ really does enter a tightening cycle, which has been unthinkable for longer than I care to remember, I would be pretty concerned about Japanese stocks. Remember that liquidity drives markets! Inflation, troublesome as it is, may provide a tailwind for property values.
I hope that provides some food for thought. Wishing you all the best for 2023 and let’s hope that the yen isn’t actually screwed!
Disclaimer: This should go without saying, but the information contained in this blog is not investment advice, or an incentive to invest, and should not be considered as such. This is for information only.
November 2021 was when we heard the first whispers of the Federal Reserve reversing course and hiking interest rates. The very smart few realised right then that risk assets were heading for trouble and made their way to the exit. For the rest of us, things weren’t looking so bad. Tech stocks were hitting home runs, Bitcoin was over $56,000. Christmas was coming!
It always looks so clear in hindsight. Risk assets were, of course, swimming in a giant pool of liquidity. Low interest rates, massive covid stimulus, glorious liquidity! And the spectre of inflation, caused by that very excess, was about to prompt the Fed to drain the pool. The onset of war in Ukraine certainly did not help the cause, but those who blame Putin for the economic state we are in are (sometimes deliberately) missing the big picture. If there’s a lesson we can all learn from this year, it’s that liquidity drives markets. When central banks are cutting and keeping rates low, risk assets make money. When they start increasing rates, and draining that liquidity, look out below.
Risk-off assets have not behaved well either thus far. Your typical 60/40 stocks/bonds portfolio is down almost 20% year to date. Even well-diversified investors haven’t really escaped the pain, but that’s how it can go when liquidity is sucked out of the market. One of the few bright spots this year has been energy, and that one does have more to do with President Putin than underlying economic conditions.
When’s the recession?
‘A recession is a significant, widespread, and prolonged downturn in economic activity. A common rule of thumb is that two consecutive quarters of negative gross domestic product (GDP) growth mean recession, although more complex formulas are also used.’ – Investopedia
Talk of recession has been swirling for some time, with governments even accused of changing the definition above to prevent the mood from getting too dark. The consensus view is that much of the world will be in recession for some part of 2023. It’s more of a when than an if thing, although the severity of the coming downturn is yet unknown. Unsurprisingly, stocks do not fare well during recessions – when income and employment decline, companies struggle to stay profitable.
Recessions are, however, usually accompanied by the cutting of rates and at some point, a trough is formed and both the economy and stock prices begin to recover. There’s that liquidity we’ve been thirsty for!
For those who can afford it, recession offers an opportunity for careful accumulation of growth assets. There is no need to try to catch the absolute bottom, just keep adding to your long-term positions.
What about Japan?
As discussed in previous posts, Japan has avoided the worst of the inflation that has caused so much trouble this year. This, coupled with the Bank of Japan’s commitment to continue providing massive liquidity, has also sheltered the stock market from a lot of damage, albeit at the cost of the yen. I have been buying Japan dividend stocks on dips throughout the year and am pleased to find myself in positive performance territory, with some nice dividend payments to boot. The capital gains can, of course, disappear quite quickly, but the dividends will still be paid.
Warren Buffet clearly sees something in Japan, as Berkshire Hathaway has just raised its stakes in the 5 major trading houses to more than 6%. This is a serious long-term investor who says he may not be done buying yet. (see Reuters article) Who would have thought that Japan would look so attractive in a year like this?
For a foreign resident, trapped in yen due to currency weakness, there are some pretty good options here to outperform inflation over the next few years. See my previous post for ideas.
Crypto really is dead this time, huh?
My thoughts on crypto winter were laid out pretty clearly in my Bitcoin is Dead post. It was always going to be ugly but wow…just wow! I’m not going to dig into the details of the crimes and insolvencies because if you’re interested you already know, and if you’re not you don’t care. Suffice it to say that human greed and leverage will always be a bad mix when liquidity dries up.
So is it all over this time? Of course, it is not. The Bitcoin protocol is no more affected by all the drama than it is by the outcome of the World Cup. Companies have blown up, and people have lost money, but Bitcoin didn’t do it to them. The protocol keeps churning out blocks, the next halving is around April 2024, and things will get interesting again after that.
If you know what you are doing, now is the time to average into BTC. It’s another accumulation game. If you want to study up during the winter, check out Jameson Lopp’s treasure trove of information and resources.
Also, take a look at this incredible chart from CryptoShadow:
And this one from Fidelity:
Lessons in crypto frequently have to be learned through painful experience, but if you are not learning them, you shouldn’t be involved. Here are my main takeaways from recent events:
Do not leave your coins on the exchange unless you are actively trading, no matter how high-profile the exchange may be. Learn to self-custody or research multisig solutions. Find what works best for you and use it.
Stay away from services offering interest on your crypto – they will make a comeback at some point and they are a massive house of cards. Locking up your coins with a centralised institution for a yield means you cannot move them when the rumours start and you go down with the ship.
Also a word on the other project you should be following. Since its merge and transition to proof of stake, the issuance of Ethereum has dropped significantly. The network that is likely to power the majority of NFTs and DeFi being deflationary, in a market as weak as this, is actually quite remarkable. We all need some hope during crypto winter and if I was going to pin it anywhere it would be on Bitcoin and Ethereum.
Disclaimer: This should go without saying, but the information contained in this blog is not investment advice, or an incentive to invest, and should not be considered as such. This is for information only.
The chart says it all. The Yen is toast, brown bread even, if you know your cockney rhyming slang. Talking to people about money, as I do, I keep hearing the same refrain: “With markets down it seems like a good time to invest, but I don’t want to convert yen at this rate.” I feel your pain, I really do. I feel it so strongly that I needed to sit down and bash out some ideas to help us all get through this. Where do you invest if you are holding JPY at a time like this?
First of all, if you are wondering how we got here, please take a peek at my article on The Weak Yen Dilemma from April. In short, America is raising interest rates to fight inflation, Japan does not want to raise rates, so money seeking a “low risk” return goes from JPY to USD and hey presto, 145 yen to the dollar! Secondly, we are really talking about USD strength here rather than Yen weakness. If your base currency is GBP, for example, nothing much has changed for you as the pound has taken, well, for want of a better word, a pounding against the mighty dollar too.
If you are a dollar investor though, there is little doubt: If you hold yen you are pretty much stuck with it until inflation eases and Jay Powell backs off on rate increases. It most likely will take a recession, or at least a short-term panic in markets, before we see this though so there is still a way to go. So what are you going to do with your yen? Leave it sitting in the bank earning nothing with Japan inflation at 3%, and other developed market inflation at 8-10%? Below are a few ideas to get you thinking. For the most part, you will need a Japan brokerage account to access these opportunities. Als0 kindly note, below I am going to name actual investments, stocks, ETFs etc. that I feel are worth investigating in this environment. I have positions in some of these already, and will likely buy others soon. This is not an invitation to jump in blindly, get burned, and blame me for it! If central bankers ditch this jetliner in the ocean, we’re all going to get wet! Do your own research and know your own tolerance for risk. With that said, let’s brainstorm a little.
The Tourists are Coming Back Baby!
Unless you have been living under a rock, you will be aware that Japan finally re-opens to tourists on October 11th. This time it’s for real – no tour group requirement, no daily limit. Put on your mask and get ready for it! So what kind of businesses are going to be happy to see the return of the horde?
Airlines are an obvious one. JAL (9201) and ANA (9202)stock have already pumped in anticipation so I think we’re a little late here. Plus the cost of fuel is a bit of a concern. No reason they won’t continue to do well, but I’m not feeling the airlines.
Hotels are also obvious, but I like them a little more. In case you didn’t know, it’s really easy to get exposure to hotels in a Japan brokerage account. Check out Japan Hotel REIT Investment Corporation (8985), Invincible Investment Corporation (8963), and the Ichigo Hotel REIT Investment Corporation (3463). As business comes back these REITs should start paying a better income, and there’s room for a little growth too.
The winter ski season is shaping up to be a big one, with revenge tourists from Australia and elsewhere itching to get back to Japan’s ski fields. It may not sound like the most exciting company, but Nippon Parking Development Co. Ltd (2353) operates ski resorts and theme parks and is worthy of research.
Holiday-makers in Japan need to get around, and they love to shop, so the likes of Tobu Railway Co. Ltd (9001) and Hankyu Hanshin Holdings Inc (9042) do a great job of covering both. These companies also operate numerous hotels and leisure facilities, so will be looking forward to the reopening. Isetan Mitsukoshi Holdings (3099) is another big department store operator.
Whether Chinese tourists will be able to travel freely due to Covid restrictions is still a question, but once they come back you know how much they love tax-free shopping in Japan. They particularly like to stock up on electronics and are also renowned for shopping heavily at drug stores. Bic Camera Inc. (3048) and Laox Co Ltd (8202) cover the former, with Sundrug Co. Ltd (9989) and Tsuruha Holdings (3391) leading the drug store operators. Another big favourite with tourists are the colourful Don Quijote stores, operated by Pan Pacific International Holdings Corp (7532)
Japan boasts some of the best food and drink in the world, but you know the tourists love The Hub! Hub Co. Ltd (3030) has had a torrid time the past two years and will be looking to recover strongly, especially with the opportunity to screen the Football World Cup coming up in November. I have owned Hub stock for much longer than I probably should, and it’s just hovering around my average buy price now, so let’s all hope I’m right about this one!
Mmmmm Dividends
John D. Rockefeller sure did love his dividends, and so should you. If you are stuck in Yen and trying to keep up with inflation, Japanese Government Bonds are not going to do it for you. Get yourself some dividend stocks and hold on to them. If you are looking for the easy way to do this, just find yourself a Japan dividend stock ETF and buy that. Then maybe check out their top ten holdings and see if there is anything there you want to own directly. This is exactly what I did with the Next Funds Nikkei 225 High Dividend Yield stock 50 ETF (1489)
Who Else Benefits?
Put on your thinking cap and consider what other businesses benefit from a weak yen. Exporters are an obvious beneficiary, which in Japan generally means, but is not limited to, automakers. A few months back a friend of mine tipped me off that he was interested in a high-end Tokyo residential property REIT, given that foreign buyers are going to love Tokyo property at 145 yen to the dollar. That made sense to me, especially as it pays over 4% income. Sekisui House REIT Inc. (3309) is the one if you want to take a look, but remember, my friend won’t take responsibility for your decisions any more than I will!
Get Me Out of Fiat!
If you are paying attention to what is going on, you will realise that as the Yen, Pound and Euro are beaten down, eventually the US Dollar will suffer the same fate. This is not likely to end well for Fiat Currency. So buy yourself some insurance. Get an allocation to gold, and if you have the risk tolerance, Bitcoin too.
That’s all I’ve got for now. Hope it provokes some thought. Do your own research, make your own decisions, further disclaimer below blah blah blah!
Disclaimer: This should go without saying, but the information contained in this blog is not investment advice, or an incentive to invest, and should not be considered as such. This is for information only.
Inflation, inflation, inflation. If you have been reading the financial news, or even just the regular news, you will have heard a lot about the rise in the cost of goods and services this year. From the US to Europe, politicians have been desperately trying to shift the blame for the crisis away from their own central bank’s unprecedented money printing to the President of Russia. Whether they get away with such misdirection is yet to be seen, but President Putin himself is having none of it, as you can tell from this excerpt from one of his speeches.
Putin, while clearly not deserving of support, is absolutely right that Europe and the US have created this mess for themselves, and there is no doubt that he is now exploiting this weakness by regulating the flow of gas into Europe, making for a very uncomfortable winter ahead for Germany in particular, and the rest of Europe and the UK also. I didn’t realise until I read this BBC article that “A younger Vladimir Putin did his PhD thesis on the importance of Russian energy exports.” The Germans should have seen this coming a long way out. Having pumped up the money supply, and also made themselves dependent on cheap Russian energy, the EU and UK leadership have some gall to refer to the current situation as a “cost of living” crisis…
However, the goal of this post is not to discuss geopolitics. As a resident of Japan, I am interested in knowing if the inflation monster is lurking in Tokyo Bay, ready to go Godzilla on the Japanese consumer? As fellow Japan residents are well aware, Japan has not seen inflation in decades, and, as noted in Japan Mortgages – Fixed or Floating?, Bank of Japan boss Kuroda-san threw everything but the kitchen sink at the problem in order to reach the magic 2% mark. Now, with inflation at 2.5%, the yen at 25-year lows against the dollar, and the rest of the world facing a food and energy crisis, you can’t help wondering if prices aren’t going much much higher.
Of course, when it comes to the big questions of economics, the only correct answer is that no one knows. Financial journalists and macro gurus generally have a bleak outlook for Japan. With the US Federal Reserve still intent on raising rates to fight inflation there, the yen looks anything but safe at the 140 level, and a weaker yen could mean higher imported inflation. Another spike in energy prices due to the Russia / Ukraine situation and things could get expensive quickly.
Interestingly though, there is an optimist in our midst. Jesper Koll, according to his profile, is an economist, strategist, angel investor, patron, producer, and yes, a Japan optimist. A resident of Japan since 1986, and with experience at two major US investment banks, he has a new substack titled, of course, Japan Optimist. And it was there I found his July post titled: Who’s afraid of inflation? Not Japan
I encourage you to read the post yourself, but here’s a short summary:
There are two reasons that Japan is less impacted by inflation than other developed countries, for example, the United States:
The government here is not afraid to intervene in markets to preserve the purchasing power of the people. About one-quarter of goods and services are subject to government regulation, which effectively means price controls. This goes for health care, education, transport, and staple foods. This year surging gasoline prices have been kept under control by government intervention
At the same time, Japan’s domestic industrial structure is much more cut-throat competitive. In the US, the big players control twice as large a share of the manufacturing and service industries. Japan is more fragmented and competitive, and that competition keeps prices low.
Jesper notes that the Japanese government not only considers it important to protect citizens from economic shocks, but it also has the necessary parliamentary majority to act far more quickly than the US government is able to. So unlike in the US, where the Federal Reserve is having to fight inflation on its own, the Bank of Japan gets plenty of backing from the government.
Japan’s government and economic system comes in for so much bashing in the media that it’s almost shocking to hear from someone as positive as Jesper. And once more I’ll remind you that no one really knows how the global inflation issue will play out, here or abroad. However, the lack of polarization over every issue certainly puts Japan in a better position to take action than much of the western world.
From a financial planning perspective, inflation is something you should always be concerned about. I would argue that the whole point of investing is to at least keep pace with, and preferably outperform, the rise in the cost of goods and services over time. To put it another way, it’s all about preserving and increasing spending power. Remember, it’s not the cost of things that is going up, it’s the value of money that is going down. At the risk of sounding like a broken record, beating inflation in your base currency is the name of the game. Whether inflation in Japan gets worse or not, if you are going to spend the money in Australia, saving and investing in JPY does not really help you.
If you are planning to stay in Japan long term and JPY is your base currency, here are a few things you can do to protect yourself against inflation:
Keep an emergency cash reserve – make sure you have a buffer in case prices increase more than expected.
Invest – anything surplus to your cash reserve can be invested for the medium to long term, whether it’s NISA, iDeCo, a brokerage account, ETFs, dividend stocks, REITS, gold. You are not going to preserve your spending power sitting in JPY cash.
Expect volatility – you need to be mentally prepared that your investments are unlikely to just go up in a straight line in this environment. Remember you are trying to beat inflation over time, not in the next 6 months.
Finally, if you enjoyed a bit of optimism for a change I recommend checking out Human Progress. Their Twitter account is here. With all the doom-scrolling it’s sometimes nice to be reminded how much progress we have made as a species!
Disclaimer: This should go without saying, but the information contained in this blog is not investment advice, or an incentive to invest, and should not be considered as such. This is for information only.
Back in April I wrote about the weakness in the Japanese Yen and how it can affect life and the economy here. Since then, I’ve noticed that in relation to the Pound and the Euro, the yen really hasn’t moved quite so much. In fact, both of those currencies have also dropped significantly against one other currency: the mighty US Dollar.
This reminded me of a term that keeps cropping up in my reading, and led me to take a closer look at the Dollar Milkshake Theory. Developed by Brent Johnson, AKA Santiago Capital, the theory envisages a scenario that appears to be playing out before our very eyes, whereby rapid USD appreciation sucks liquidity into the US and destabilizes world markets
This 6 minute Video provides a brilliantly simple explainer on what the Dollar Milkshake is and how it could play out.
A huge “milkshake” of liquidity has been created by global central banks, who have injected some $20 trillion in various currencies into the global economy since 2008. And everyone needs dollars. Whether it is to trade in commodities, shore up currency reserves, or to pay interest on USD debt: China needs dollars, Europe needs dollars, and Japan needs dollars. Despite significant money printing in America in the last decade there is still a shortage of dollars. Other countries have also been printing their own currencies in similar amounts. The demand for dollars is, quite simply, outstripping the supply.
More important even than the availability of dollars, is the rate of change in the level of the dollar. If that level rises too fast, then problems start popping up all over the world. That’s when countries like Sri Lanka and El Salvador start showing up in the news. When things get bad and the dollar rises rapidly, the rest of the world needs to print more and more of its own currency to convert to dollars to pay for goods and service its dollar debt. This means the dollar keeps on rising, forcing other countries to devalue their own currencies, which in turn makes the dollar rise further. And because in this environment the US looks like a safe haven, capital is sucked into the country which again pushes the dollar higher. Sooner or later we end up with a full on sovereign bond and currency crisis, which is bad news for the whole world, the US included.
Long periods of dollar strength have often ended with major financial dislocations, like the Asian crisis of 1997, so if the dollar continues to rise we could see some extreme volatility in markets.
So what does this mean for the Yen? Well, having just broken through a 40 year support line, things are looking pretty treacherous for JPY. We are probably near a point where, if the yen continues to fall against the dollar, we may see the first Japanese intervention in the currency markets in over a decade. You have to go back even further to find the last time Japan sold USD/JPY in order to support a weak yen, and guess what? It was in 1998 during the Asian Financial Crisis, when the USD/JPY was trading at 145. Note, we’re at 138 today…
As the title suggests, the Dollar Milkshake is just a theory. There is no guarantee that things actually play out this way, but there is a reasonable probability that we will witness what Raoul Pal calls a “dollar wrecking ball” scenario either now, or in the next few years. So how do you invest in an environment like this?
First and foremost, as I stressed in the Weak Yen Dilemma, know your base currency. Being in the wrong currency can sometimes hurt you more than a fall in investment value. On the other hand, if you hold dollars, but you are planning to spend the money in yen, you are looking at a golden opportunity to bring some money into Japan.
Secondly, remain diversified. With inflation still on the rise, this is not a good time to be sitting in cash, but it’s not a time for excessive risk either. If things get crazy that little bit of gold and silver (and maybe even Bitcoin) in your portfolio could come in handy.
If you want to be a little tactical, one area to avoid is emerging market debt. These are the countries that often issue dollar denominated debt, and are going to struggle to meet interest payments in a rising dollar environment. So maybe stay away from emerging market debt ETFs / funds for the time being.
Lastly, I think it’s key to stay patient. Extremes in markets do not last forever and reversion to the mean occurs eventually, milkshake or no milkshake.
Disclaimer: This should go without saying, but the information contained in this blog is not investment advice, or an incentive to invest, and should not be considered as such. This is for information only.
Smart Money Asia 