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.
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.
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.
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.
Smart Money Asia 