The Weak Yen Dilemma

If you watch Japanese news you will have noticed a new topic that is featured in almost every broadcast. Along with Ukraine and Covid, no news program is complete without discussion of 円安 or the weak yen. JPY has indeed taken a battering this last few weeks, slipping from the 112 range vs. USD to as low as 129. I also noticed a lot of discussion on Twitter as to the reasons for the drop and what to do about it, so let’s take a look.

Why has this happened? There is no limit to how deep you can go into exploring the reason for the yen’s fall, but the simple explanation is always best: Currently the US is raising interest rates, and Japan is not. That makes the USD a more attractive currency than JPY. It’s simply supply and demand at work.

What are the effects of a weak yen? The Japanese government and the Bank of Japan have been perfectly happy with a weaker yen for some time. It’s a big boost to Japanese exporters as it makes Japanese products cheaper overseas. However, you can have too much of a good thing. The current yen level is certainly doing more damage than good to the Japanese economy as businesses are hit with the double whammy of rising energy prices and a weaker currency. For the Japanese consumer, who is already facing rising prices, it means the cost of imported goods are going to rise even further. In a country with stagnant wages that means less money in the pockets of the populace, who in turn are cutting back on the little luxuries. This leads to a vicious circle where businesses must keep the cost of their products low, because low wages mean people won’t buy them otherwise, so those businesses make less profit and are therefore unable to raise wages… It’s not a pretty picture.

For the foreign resident in Japan a weak yen can bring either joy or pain, depending on your situation. Paid in dollars? Life is good! Paid in yen with expenses / debt overseas? Times are hard. Trips back home are certainly going to be more expensive. There are probably things you wish you had thought about earlier, which is why this financial planning thing is kind of important.

How long will this last? The simple answer to this is nobody knows. The last time the yen was anywhere near these levels was 2015. However in 2012 it was 76 yen to the dollar. So it’s unlikely it will go on forever – things move in cycles. That said, we are in a precarious place at the moment. Usually if the US is raising interest rates it is to keep pace with inflation. However inflation in the US is already almost 8% and the federal funds rate is only 0.25%. The Fed is well behind the curve, but is sharply aware that raising rates too rapidly will crash the economy. So expect the US interest rate to keep rising through this year, which means more pain for Japan. Also, as noted in this thread by Santiago Capital, what is happening now is the Bank of Japan is sacrificing its currency to save its bond market. Other nations should take note as they may end up doing the same thing further down the line…

What could reverse it? Firstly, what won’t reverse the current position is Japan raising rates, because that is not going to happen. That would sink the whole ship. The thing most likely to bring things back into balance is inflation starting to ease in the second half of the year, meaning the Fed is under less pressure to raise rates. So if you are looking for a ray of hope, keep an eye on that.

What can I do? Here is the crux of the matter. Obviously what you should do depends on your own situation, but now is as good a time as ever to make sure you understand what your base currency is. Your base currency is the currency you are planning to spend your savings in. If your BC is JPY, you don’t really have a big issue. Real inflation in Japan is probably running at around 2% so you should look at investing in some dividend paying Japanese stocks to beat that. (see my previous post) If you have money overseas that you would like to bring to Japan, now is a great time to do it!

If your BC is something other than JPY and your money is in yen, you have a dilemma: It’s not a good time to exchange your JPY for your base currency right now, but if you don’t you are losing purchasing power in your BC to inflation. I’ll use the US as an example: inflation in the US is 8% – if you have money in the bank in Japan you are losing 8% per year to inflation. If you switch that money to USD cash you are still losing 7.75%! So ideally you want to have that money invested in USD in something that will, on the average, generate an 8% p.a. return, which pretty much means US stocks. So you have to weigh the trade off – is it worth taking the currency hit to get into the correct currency and get the money invested? If that was me, I have to say I would be inclined to wait for now and see how things develop in the coming months, but I wouldn’t want to do nothing for too long.

If you have debt overseas, such as a student loan, which you are paying interest on, I would probably say you should bite the bullet and keep paying it, despite the poor exchange rate. That debt isn’t going to get any smaller if you leave it.

Finally, if you understand, or are learning Japanese I came across this video by Nakata Atsuhiko, which is both a wonderfully simple explanation of the current weak yen situation, and an excellent Japanese comprehension exercise where you will likely learn some new financial terms.

Hang in there everyone!

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.

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