Japan Mortgages – Fixed or Floating?

I know….

Things are heating up in Japan in more ways than one. Scrolling through Twitter I have recently seen a lot of chatter about what is happening to the yen and the Japanese economy, so I tried a little sentiment check and ran a Twitter poll as follows:

I was genuinely surprised to see fixed win this one so easily. Of course there is no wrong answer, and your choice depends a lot on your attitude to risk and overall financial confidence. However, there is also an element of prediction involved. Will mortgage rates increase in the years to come? If so, by how much? If rates pop up over 1.5%, you’re suddenly going to wish you had taken that fixed rate deal. A variable rate mortgage in the US is around 5.2% now and rising. Imagine that in Japan! Seven years ago, when we bought our house, my wife and I bit the bank’s hand off for a floating rate loan. No way were rates going up in our lifetime! I’m fairly sure we would still make the same choice now, but we would certainly think about it a little more…

So why the hesitation? Everyone knows that interest rates in Japan have been near zero for a quarter of a century, and raising them, even a little, would lead to financial chaos. Well, as the US and Europe are raising rates in order to fight inflation, suddenly all eyes are on the one country that hasn’t blinked yet. And right there in the spotlight is Haruhiko Kuroda, Governor of the Bank of Japan. Since his nomination in 2013, Kuroda has spearheaded the BOJ’s loose monetary policy and, despite accusations from the west of deliberately weakening the yen to favor Japanese exporters, he has always maintained that his policy goal is the break out of deflation by targeting the magic 2% inflation level. In pursuit of this target the Bank of Japan has employed both quantitive and qualitative easing, meaning it has not only purchased vast quantities of government bonds, but also stocks and REITs. 2016 saw the start of yield curve control and negative interest rates. Yes everything but the kitchen sink has been thrown at the deflation problem and guess what? It finally worked!

You would think that reaching the holy grail of 2% inflation (actually it stands at 2.5% right now) would be greeted with celebrations, however over the past 25 years the Japanese populace has gotten rather used to things staying much the same price. Wages have also remained stagnant, making people rather sensitive to price hikes, as Kuroda himself found recently after remarking that households were “becoming more accepting of price rises”. The rebuke from the public was swift and clear: times are tough in the households of Japan.

And so the global media has begun to speculate over what comes next. The rise in rates in the US in particular has made the yen less attractive and it has quickly slid as far as 136 yen to the dollar, a 24 year low. What’s more, Japanese bond yields have been surging, with the Bank of Japan deploying vast amounts of money to defend its 0.25% yield curve control target. It appears that Kuroda-san can save the bond market or the yen, but not both. Given the massive JGB holdings held in pensions alone, you can bet it will be the bond market.

Now it’s being reported that a $127 billion hedge fund called BlueBay is attempting to pull a Soros by attacking the BOJ’s yield curve control position in an effort to force it to adjust its monetary policy.

It all sounds a little scary, doesn’t it?

It is not, however, the BOJ’s first rodeo. Betting against the central bank has long been known as the widowmaker trade. And many widows have been made in the last 20 years. It turns out that bringing a knife to a bazooka fight is not a smart move.

Japan’s debt to GDP is estimated to be around 248%, the highest in the world. Proponents of Modern Monetary Theory (MMT) will argue that as long as the fiscal deficit spending leads to an increase in the share of GDP retained by households, the funding of the debt is not an issue. However, who trusts the government to make sure the money ends up in the right places? After all, this is the country that just spent 1.42 trillion yen on the Olympics. How many households felt the benefit of that I wonder? And what is the the next sector up for a big spending spree in Japan? Defense…

So can you really just keep printing more money to pay back the debt? It looks like we are going to find out at some point, but we may be surprised how long this seemingly unsustainable status-quo can be maintained. Fresh after making a killing betting on the European debt crisis a decade or so ago, Kyle Bass turned his attention to the widowmaker trade, memorably declaring investing in Japanese stocks as “picking up dimes in front of a bulldozer”. However the bulldozer still hasn’t rumbled into town and Kyle has moved on to other trades. Inflation at 2.5% hardly calls for drastic action when the US is at 8.5%, but that can change.

So if you have a floating rate mortgage can you relax for now? Most likely yes, you have nothing to worry about in the near future. The BOJ is clearly ready to do whatever it takes to keep rates where they are. At some point further down the line though, that could lead to a continued weakening of the yen, which in turn would bring a rise in “imported inflation” as the cost of foreign goods would continue to grow in yen terms. If that gets bad enough then something drastic will have to be done…

In the short term, a drop in inflation later this year would certainly take the pressure off Kuroda-san somewhat, and Jerome Powell too for that matter!

Let’s all hope “This is fine”…

My Twitter poll, of course, only offered two options and, as people rightly pointed out in the comments, you can mix fixed and floating rate mortgages. 10 years fixed and floating after that is quite typical in Japan. If you do have a floating rate, it is always a good idea to save up money separately so you have the option to pay the loan off quicker if rates were to rise. For fixed rate mortgages you can also check if you are eligible for Flat 35.

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.

Bitcoin is Dead!

Finally, it’s over. For the 449th time, Bitcoin has been pronounced dead. You can forget about it now. If you sold yours last year, well done. If you were a sceptic all along and never owned any, congratulations. You have been proven correct! RIP BTC…

If bear markets in stocks are not depressing enough, crypto winters are a dank, cold graveyard. You don’t want to be there at night, shivering and hearing strange noises. Unless you are me, and have cheerfully been nosing around Bitcoin Obituaries and Bitcoinisdead.org in search of proof of capitulation. Personally, I’ve only experienced one crypto winter to date, that of 2018/19, but it all looks very familiar around here at the moment.

First a disclaimer: I am not a “Bitcoiner”. In fact, I find the majority of Bitcoin cheerleaders mildly annoying at best. I’m not an OG, a cypherpunk, or a crypto bro. I’m a financial planner by trade and an investor learning on the job. I’m interested in markets and money, which involves a fair amount of poking around and peering into the future. I don’t believe Bitcoin is going to fix the world’s problems, but I think it will change some things. And right now, I think it is on sale.

Imagine being an investor and not having even one dollar invested in an asset that looks like this:

Now imagine being a financial journalist tasked with writing about an asset that looks like this:

Source: @cryptohayes

When the Director of Global Macro at Fidelity is posting charts like the first one, it is hard for me not to be quietly bullish. And with the regular dramatic drawdowns illustrated in the second chart, it’s hard for the financial media not to declare Bitcoin dead over and over again.

So should you really care about Bitcoin? Not unless you want to. There are far more important things in the world to devote your energy to. How about if you are an investor, trying to increase the value of your savings in the face of mounting inflation? Well, probably then yes, you should care, at least a little.

Bitcoin not crypto

Crypto is full of get rich quick schemes. Bitcoin, on the other hand, is a don’t get poor slowly scheme. Few understand this. I’ve lost count of the number of people I’ve met who have said something along the lines of “I’m just getting into crypto, but Bitcoin seems a bit expensive already so I bought some (enter name of soon to be dead sh*tcoin).” If we’re keeping things simple, which I generally prefer to do, Bitcoin is digital gold, Ethereum is programmable money, and everything else is a software startup staring into the abyss of its first global recession. It’s not that there aren’t other protocols out there with incredible potential, but only about 1% of them are ever going to survive and thrive, and you have to chuck a lot of darts at the board to pick the right one.

If you want to educate yourself about Bitcoin, then start with the Bitcoin Whitepaper. It’s only 8 pages long, and most of what you need to know is covered in the first 5 pages. Then you need to get your head around the 4 year halving cycle. And for good measure, read up on Metcalfe’s Law on network effects. In short, if we have a fixed supply, and increasing demand, number go up.

Size Matters!

Of course the increasing demand part is not a certainty, and herein lurks the risk. If nobody participates and buys or uses Bitcoin, then it will, of course, be worthless. That’s clearly not the direction it is going at the moment, but that risk is why you don’t go all in. You need to organise your balance sheet so you are never in a position where you have no choice but to sell. That means holding an emergency cash reserve, and keeping your investment size at a level where you can sleep at night. I’ve said it before: allocate according to your level of knowledge. Start small, and increase as your understanding grows. And be ready to adjust if circumstances change.

Four More Years!

The four year cycle is your guidebook and bible to investing in Bitcoin. 2013 and 2017 were bull market years. 2017 featured a (now) obvious blow-off top at $20k, so many of us believed the 2021 bull market would also come with an easily identifiable exit point. Instead it totally tricked us by topping once at $62k, going all the way back to $30k, then pushing back to $69k and looking like it was about to levitate to $100k before crashing right back to $30k again. So timing the market perfectly is extremely tricky, however catching the meat of the big moves is actually relatively straightforward. Remember, the idea is to buy low and sell high.

The 1-2 years after the bull market is the graveyard. All the news is negative. People who lost money in the crash are openly mocked. Even good news is met with a steady grind down in price. The occasional bear market rally leads to heavy selling by traders trying to make something back. This is the accumulation period. You will hate it, but this is when you dollar cost average and don’t pay much attention to where the price is headed.

Then comes the year of the halving. The grind down turns into a grind up. It’s not up only, and sudden drawdowns like March 2020 are entirely possible, but things are looking rosier. This comes in 2024 and you have two years to get ready for it.

2025 is when things get fun. It’s also musical chairs time. You don’t want to sell too early, but you better be quick if the music stops. The best way is to scale out just like you scaled in, selling a little at a time.

Can it really be so simple? Well, why not? This is how Bitcoin was programmed. Of course there are many variables and adoption rate, regulation, and the macro environment will all be important factors. A US spot ETF approval could speed up the exit from the bear market. More big corporates and nation states adding Bitcoin to their balance sheets could also be catalysts. Hey, China might even ban Bitcoin again! When you get into the game theory of the space things get very interesting.

What about Alts?

If you must sh*tcoin, then sh*tcoin responsibly! The time to buy Alts is at the early stages of the next bull run, and you need to buy a broad spread of them as you don’t know which ones will take off. Also, you need to be merciless about selling them when they pump, because when they crash they will crash 80% and then, just when you think the pain is over, they will drop another 50%. Sure, if there’s a particular Layer 1 protocol that you have studied and you’re convinced it’s a winner, feel free to accumulate through the winter, but remember what happened to Luna just recently. Are you really sure you have found the one coin to beat them all?

So do not despair this winter. Wrap up warm, allocate slowly. If we drop to anywhere near the 2017 all time high it’s time to get a little greedy, but never put yourself in a position where you could become a forced seller. And make sure you buy a little extra every time Bloomberg tells you Bitcoin is dead.

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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