Investment Update: Recession Fears, Japan Stocks, Crypto Crash

It’s been a year…

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 Weak Yen – Where to Invest in Japan Today

Source: xe.com

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.

Japan – Is a Cost of Living Crisis Looming?

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:

  1. 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
  2. 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:

  1. Keep an emergency cash reserve – make sure you have a buffer in case prices increase more than expected.
  2. 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.
  3. 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.

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.

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.

2022 Q1 Roundup

It’s been almost two months since my last post. Apologies for the silence but we have been busy at home with a new baby girl, born in early February! I must say that, despite the massive disruption caused by covid, working mostly at home has been a blessing this last couple of months. Some things really do only happen once or twice in a lifetime and it’s important to be present for them.

So I thought I would do a general roundup on things I have been thinking about during working hours, and how I am investing in this somewhat turbulent environment.

In my 2020 Investment Outlook post in December I wrote about having a view that guides your investment plan, and being prepared to change it if necessary. My focus for the year was on inflation and how Central Bank’s efforts to fight it would affect the investment environment. This, of course, has been somewhat overshadowed by the tragic events unfolding in Ukraine. I have no experience in international conflict, so little of value to add in terms of how things may play out there, but obviously we all hope that peace is restored as soon as possible.

The war has, of course, had a huge impact on the inflation narrative, as anyone who has visited a gas station recently will know. I actually accumulated a satellite holding in energy stocks during 2021 based on 2022 being a year of re-opening / reflation, with business getting back to normal, more travel, and therefore higher consumption of energy. It actually looks like energy prices could have some way to go, but I am out of those positions now and have rotated into tech stocks, which took a pretty good hit this quarter, and Japanese dividend stocks – largely inspired by @CacheThatCheque, who I interviewed in December. (that post is here)

My core holdings are unchanged, as they only require rebalancing once a year.

So what can we expect for the rest of the year? Well, the Federal Reserve went ahead and ended bond purchases on schedule, and then proceeded with a clearly telegraphed rate hike of .25% this month, and the market has reacted surprisingly favourably. It is said that stocks climb a wall or worry, and that’s exactly what they are doing at the moment. With more rate hikes to come I still expect plenty of volatility, but I don’t see any reason for big changes in allocation. Another dip in Q2 and a strong second half of the year is my working hypothesis.

Inflation means sitting in cash is a losing trade. Your spending power is being eroded day by day. And if you hold JPY cash, but are planning on spending the money in the US, for example, you are losing almost 8% per year and taking currency risk. However, investing overseas has been somewhat complicated by exactly that risk, as we have seen a sharp weakening of the yen – the Bank of Japan is by no means ready to taper and just announced they would purchase an unlimited amount of 10 year government bonds at 0.25%. If Japan is your home for the long term, I would estimate the real inflation rate, taking into account recent energy prices, at around 2% per year. This is why I think Japan dividend stocks are interesting as there are plenty of opportunities to earn more than 2% if you are willing to take a little risk. If you don’t have the time to research individual stocks, take a look at something like this Japan high dividend ETF:

As readers know, I also invest in crypto, and things have gotten interesting there again recently. A few weeks ago, Terra founder Do Kwon announced that they would be buying some $10 billion worth of Bitcoin to back their UST stablecoin over the coming weeks. And true to his word, Terra set about buying some $125,000,000 in BTC per day last week. If you are wondering if $125 mill per day is a lot, it is. And if you are wondering how you go about buying this much BTC, the answer is TWAP, or Time-Weighted Average Price strategy.

All this twapping appears to have been the catalyst for a rally in BTC to around $47,000, which is close to the year open price. L1 alts have also picked up significantly as a result.

One thing I am watching with interest is the Grayscale Bitcoin Trust (GBTC). The trust, which simply buys and holds BTC with a 2% p.a. custody fee is still trading at almost a 28% discount to the value of the assets it holds. At $30.8 bill in assets under management it is major contender for conversion to an ETF, if it receives approval from the US Securities and Exchange Commission. So GBTC, which can be bought through US brokerage accounts and retirement plans, offers the opportunity to invest in BTC at a 28% discount to current price, with a strong possibility that it will be converted to an ETF, whereby that discount will disappear. If you believe in BTC long term, it actually looks like a better buy than the asset itself. Obviously investing in crypto is high risk, but food for thought…

Best wishes to everyone. I hope you are enjoying the warmer weather and the cherry blossom!

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.

Interview: Japan Stock Investing With @CacheThatCheque

And so a New Year beckons. You have made your resolutions, started your iDeCo, opened your NISA and brokerage account, maybe got an overseas account too. What next? What should you actually be investing in? I interviewed stock investor @CacheThatCheque and he kindly provided some insights into how he chooses and organises his investments. I hope you find it useful!

Please tell us a little about yourself. How did you come to be in Japan and what got you started with investing? A little about myself – I am half Japanese, half American, but I grew up totally in the US in an area where there were few other Japanese people around. You could basically count the number of Japanese people living in my area on one hand. Eventually, I decided to move here to Japan to get closer to my roots, and now some 10 years later, I’m still here. While there are pro’s and con’s to living here like with anywhere else, my family and career that I’ve established here mean that I’m here now for good. As for investing – I started out perhaps a bit late. I bought my first stocks when I was 30 years old. My main reason for getting started was rather simple: I decided I wanted to have a way to grow my money and retire in the future. I also got interested in the idea of FIRE- achieving financial independence through investing so that I could either retire early or only pursue the type of work that I enjoy doing on my own terms. The more I read about FIRE, the more I became interested in investing and learning more about it. I really like the idea of being financially independent. I’m in my mid to late 30’s now, so while I wish I had started investing earlier, the best time to start investing is still always now rather than never at all.

What do you think about the current investment climate in Japan? The investing climate in Japan to me is quite interesting. Very few people in Japan actually invest, and when I first started investing while living here in Japan, I talked to many people around me about it, and they all thought I was crazy or eccentric. But since I’ve started investing, many of the same people around me that thought I was crazy for getting started with investing have since started investing themselves. While many people in Japan have an image of investing being dangerous or risky, there has also been an uptick in the retail investing culture here in Japan. More people have opened up brokerage accounts in Japan for the first time in the past few years, and TV coverage about Japan’s stock market and its many different tax advantaged investment products has increased. While many people here still don’t invest, it’s interesting to see how more people around me (whom I personally know) have gotten started with investing in recent years. I have been able to see the change and growth, which is exciting. One of my favorite Japanese celebrity retail investors is Kiritani-san, who is known for having built a small fortune from investing in Japanese stocks that hand out gifts to shareholders. While he’s funny and sort of crazy and wacky, he’s also sort of an inspiration for mom and pop investors like myself. It’s always great to see him talking about Japan’s stock market whenever he’s on TV.

Kiritani-san and his trusty mamachari

How do you organise your investments? At the moment, I organize my investments into different streams – passive US and international index funds (50%) and individual Japanese stocks (50%). This may not be the best way to do things, but it’s a reflection of how I got started out with investing. When I first got started, I opened an account with Interactive Brokers and bought only total market US index funds – simple and boring. I did this for several years until I got more interested in the idea of buying up individual stocks. When I started looking at buying up individual stocks, I then ended up getting really interested in the idea of buying individual Japanese stocks. I was really attracted by the low valuations of many individual Japanese stocks and how so many pay out really high dividend yields. While I also pursue a passive index investing strategy, I also got really into dividend investing the more I read about it, and when I found out how cheap so many reliably earning Japanese companies were, it seemed like a natural fit to make a portfolio made of ½ Japanese dividend paying stocks. I like the idea of getting regular dividend payments from companies I own, and it’s an important part of my goal in the future to one day achieve financial independence either completely or partly through solid dividend paying companies.

Do you have a regular investing routine? I invest regularly in the sense that I contribute every month into various index funds. I buy total stock market index ETFs every few months. I also manage family tax advantaged mutual fund accounts for my wife (ideco and tsumitate nisa) where money is contributed every month automatically. I allow the dividends I get from my Japanese companies to accumulate every few months where I then reinvest them into more dividend paying companies. Sometimes I buy more shares of the same companies I own but other times I add new positions into other companies that I am interested in. At the moment, I have about 30 different Japanese dividend paying companies in my portfolio.

What is your investment philosophy? My investing philosophy (if you can call it that) is basically a mix and blend of Boglehead investing, dividend growth investing, and value investing. Every month I buy index funds automatically regardless of whether the market is up or down. My index funds accounts are 100% passive. The price movements of my index funds day to day isn’t so important to me because they will only be relevant to me in 20-30 years when I decide to retire. My other part of my investing strategy is a combination of dividend growth investing and value. For this part of my investing strategy, I also see it as simple and long term oriented. As much as possible I want to buy shares of dividend paying companies at the best price possible. My goal is to buy up as many quality companies at cheap prices. For me, Japan happens to be one of the best places for this type of strategy. So many quality companies in Japan are at such deflated prices, it’s really astounding. My personal favorite sweet spot: a company with a single digit price earning ratio at half its book value paying out a 3-5% dividend yield – amazing how a search of a Japanese companies can bring up dozens of such companies that have nothing really wrong with them (aside from being unloved and unwanted because they are Japanese companies). While many detractors will say that buying up such companies is meaningless if their share prices hardly move, for this part of my investing strategy I am concerned only with the dividend payouts. My basic feeling on this is that if I lock in the basement price of a quality company already paying out a 3-5% dividend yield, I can just sit back and wait, while enjoying a good return through dividends while benefitting from any good potential upside while limiting my downside. I also think that if you’re an investor in Japan who can speak the language, it’s a major niche in your favor if you can read and learn about the Japanese stock market and all the quality companies that exist here that those outside of Japan who can’t speak the language don’t have access to.

How do you pick the actual investments? For my Japanese stock picking part of my portfolio, it’s almost like a shopping and bargain hunting experience for me that I enjoy doing. There are over 3,000 stocks in the Japanese market so there is no shortage of good deals out there. There are some good Japanese screeners like Buffett code that are useful that I recommend. Basically, while Japan has many quality large caps, the Japan small cap space is the most interesting. There are so many companies here that no one has ever heard of with net cash, zero debt, family controlled, paying more attention to shareholder value raising their dividends. Those are the stocks I am always looking to add more of to my portfolio. Stock screeners, Japanese blogs, youtube, and twitter are all ways I try to keep myself on the hunt for good companies to add to my portfolio.

What is a stock or stocks that you are really excited about now? I’ve posted about my portfolio before on twitter, but stocks that I really like are Japan’s many different trading companies – large, mid, and small cap. They’re often very old and established companies used to brokering deals and relationships with customers all over the world in all kinds of niche fields. They’re always very cash flow positive and also run many other different businesses as well, so they’re very diversified.

Do you hold any stocks that you will never sell? In principle, whenever I buy a stock I do so with the idea that I will never sell it. While I sell out of stocks sometimes for various reasons, I try to keep true to my rule.

I know you as a stock investor, but do you also invest in other asset classes? I only invest in stocks and some ETFs that have allocations to bonds. I don’t own any crypto. As there are people much smarter than me out there that have very contradictory views on crypto (“It’s rat poison! “crypto is the future!”) I’ve stayed away from crypto completely as an investing class. The way I see it, I can still reach my goal of achieving financial independence regardless of whether or not I ever buy any crypto or something I do not understand well.

Could you tell us about an investing mistake you have made, and what you learned from it? I think everyone makes mistakes in investing at some point. For me, while it’s not a major mistake perhaps, I used to make the mistake of checking my accounts constantly when I first started out with investing, which would lead to temptations to sell out of positions whenever they would dip in the market. Nowadays, I rarely check my accounts and feel content to know that there’s no need to do so when you’re confident and secure that you own many good companies for long term.

What basic advice do you have for people who are looking to invest more in Japan? Japan is a good market for value investors, but it’s also a peculiar market that has historically paid little attention to shareholders. While things are changing, I think investing in Japan still requires a lot of patience.

Anything else you would like to add? If you’re new to investing, it’s never too late to start. One obstacle to investing if you live here in Japan, though, is the added barrier and suspicion of investing in the stock market as something risky. There’s also the few number of other people around you who have any investments of any kind (aside from idle cash sitting in their bank accounts) who will make you feel crazy for trying to start. The irony of the risk averse nature of many Japanese though is how many don’t realize how many companies in Japan are very low risk to invest in because of their total lack of debt and solid balance sheets. It’s also interesting to me of how unaware many Japanese people are that their government is already using their tax dollars to invest in the stock market through its public pension fund (GPIF) and central bank buying (BOJ ETF buying). My feeling on this is that if the government is using public money to invest in the stock market, you may as well also invest for yourself as well. In Japan, especially, where many people can’t expect much in the way of major pay raises, investing in the stock market seems like the ideal way to grow your money for long term.

Where can people find you to follow your work? I don’t keep a blog or substack. I have a day job and family that keep me plenty busy, but if you want to follow my ramblings and thoughts on Japan and its market you can follow me at my twitter handle: @CacheThatCheque

There’s lots of detail in here that I’m sure readers will find useful. If you have any questions, please post in the comments or ask away on Twitter.

Thanks again to @CacheThatCheque and here’s wishing everybody all the best for 2022!

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.

New NISA – Coming in 2024

I had been wondering for some time if there may be some changes coming for NISA after the current scheduled end date of 2023. The good news is that changes are indeed coming, but it is nothing too severe.

You may remember that NISA is the Japan Individual Savings account, designed to encourage Japanese investors to invest in the stock market. Capital gains and dividends from NISA are exempt from the 20% tax over the investment period. It has actually been pretty successful with around 14 million people using the system across the three account types. (General, Tsumitate and Junior NISA) Of those, approximately 11.75 million people have invested some ¥17.9 trillion into the General NISA system.

So what is going to change? Well the Junior NISA is being discontinued in 2023, and the Tsumitate NISA will be extended as is until 2042, so the main changes come in the General NISA account:

1. General NISA is being extended for 5 years from 2024 to 2028.

2. Contributions will be split into 2 tiers:

The first tier is for up to ¥200,000 per year and this amount must be invested in “Stable Investments” – what is meant by this is collective investments such as funds and ETFs that have been approved by the Financial Services Agency. This is to encourage diversification and sensible investment. There are currently 184 funds and ETFs that have been approved for this.

In Tier 2 you can invest up to ¥1,020,000 per year. There are fewer restrictions on this tier so you can buy funds, ETFs and individual stocks. It looks like there will be some restrictions on highly leveraged funds, but you can pretty much expect to be able to access the same assets as you can now in General NISA.

This means the total investable per year has increased by ¥20,000 to ¥1,220,000 yen. It looks like you have to fill up the Tier 1 ¥200,000 before you can invest in Tier 2 assets.

3. If you started your NISA after 2019, you will be able to rollover the holdings in your General NISA to the New NISA. NISA started before 2019 will not be eligible for rollover.

It also seems that Tier 1 assets from New NISA will be eligible to be rolled over to Tsumitate NISA after the five year investment period. However you will only be able to rollover the book cost, the amount you invested rather than the actual value of these holdings. So if you invest ¥200,000 and it goes up to ¥400,000, you can only roll over ¥200,000 yen.

I have pieced this information together from a couple of different articles, which are in Japanese. I’m pretty confident I have the main facts correct, but there are probably a few minor details that I haven’t fully understood yet. Will update if I think I missed anything. For now, rest assured that NISA will still be available as an investment option to you from 2024 onwards!

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 Japan National Pension – How Much Can You Expect?

I just came across this Bloomberg Article which looks at a survey on the state of the world’s pensions. The Netherlands and Denmark are the only countries to come out of the survey with an A-Grade, and there is some concerning news for people planning to retire in Japan, which came in 32nd and received a D-Grade.

Japan’s replacement rate, which is the percentage of pre-retirement income that retirees can expect to receive, is just 37%. Given Japan’s high life expectancy, this is likely to result in the raising of the state pension age. This means that not only are those nenkin (pension) contributions going to be inadequate by the time you finish working, but you are likely to have to wait longer to get them back.

As a visitor to this blog, you are probably already well aware that the Japan state pension is not something you can rely on to cover retirement income needs, and that you really need to be saving and investing by yourself if you don’t want to be struggling to make ends meet later in life.

Here are a few things you can do to supplement your retirement savings:

  1. Consider contributing to iDeCo. iDeco is a tax-advantaged private pension you can use to boost your retirement savings. (eligibility is covered in the link above but generally it is open to anyone who pays into the Japan National Pension Scheme)
  2. Start a NISA. NISA is also a tax-advantaged savings account which is open to all residents of Japan over the age of 20.
  3. Open a brokerage account and start investing in stocks / ETFs. (update coming soon on available accounts)
  4. Start an offshore regular savings plan or overseas platform account.

As always the key thing is to develop a plan. Think about the income you want to have in retirement and work backwards to figure out how much you need to be saving and investing now in order to get there.

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.

Where to invest ¥100,000 today

yen-2177672_640

It’s been a while! I hope everyone is doing ok in these difficult times. The state of emergency in Japan has been lifted and people are cautiously getting back to something like normal life. Looking at news from around the world it seems we are lucky to be living in a country that has weathered the Covid-19 storm so well, and I’m certainly looking forward to getting out and about a bit more in the coming weeks.

I note that Japan residents are starting to receive the paperwork  for the ¥100,000 government cash assistance scheme. If you are not sure how to make your claim, here is a useful thread telling you how to complete the paperwork.

For some people, this money is clearly needed to replace income lost during the corona virus crisis and ensuing state of emergency shutdown.

However, if you are lucky enough not to need this money to cover expenses, and are thinking of putting it to work, below are a few ideas as to how you could invest it today. Please note I am trying to make these interesting “satellite” type ideas. It is of course perfectly acceptable to simply add this money to your core asset allocation – it’s just not as fun!

Cash is king – ok I know I said “invest”, but now is not such of a bad time to be holding cash. After a steep drop in March, stock markets have rebounded remarkably well, but this does not disguise the fact that the economic damage from Covid-19 is significant. The US unemployment numbers really don’t fit with where the S&P 500 is right now, and with America and Europe trying to reopen even before they have got through the first wave, there’s a chance of further extended lockdowns and more market panic to come. Keeping cash for now and investing when fear takes over is not a bad strategy.

Precious metals – Gold is well known as a safe haven in times of market turmoil, but there is a growing buzz about the gold to silver ratio, which suggests that silver is a compelling buy at the moment. In short, the amount of silver it takes to buy an ounce of gold is near an all-time high, which suggests it should revert to the mean over time. This article does a good job of explaining why silver could make a good investment right now. As for how to buy it, if you are not looking to take delivery of the physical metal you can simply buy a silver ETF via your brokerage account. iShares SLV is perhaps the best known silver ETF.

gold-to-silver-ratio-2020-05-28-macrotrends
Source: https://www.macrotrends.net/1441/gold-to-silver-ratio

Cryptocurrency – Following the halving on May 11th BTC has traded between $8,500 and $10,000, despite a negative Goldman Sachs client briefing on the digital currency. The Grayscale Bitcoin Trust is said to have purchased a third of all newly mined Bitcoin in the last 3 months at a total of $29.9 million, and this retail investor demand is combined with heavyweight trader Paul Tudor Jones declaring himself a holder of BTC. This would be a high risk place to put your ¥100,000, but you are at least guaranteed an exciting ride.

Biotech – I mentioned this in a recent post on satellite holdings. With the race for a Covid-19 vaccine hotting up, Biotech / Pharma / Healthcare are obvious areas of interest. Also with more and more countries heading toward the Japan aging population model, it makes a lot of sense as a long term buy and hold. Picking winners is not easy in this space so it’s probably best to look at ETFs.

I hope these ideas help. I would love to hear if you are investing your stimulus money elsewhere. Of course this money is being given out to stimulate the economy, so you are doing a good thing if you simply go out and spend it in your local community. Covid-19 is likely far from over so please stay safe as you get back to work!

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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