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

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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.

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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.

 

Online Coaching – Perfect Timing

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I hope everyone is safe and well in these difficult times. One thing you are probably doing is spending a lot more time at home. And with that comes a lot more time online, particularly using internet communication tools like Skype and Zoom.

You may have noticed that I offer personal finance coaching. This also includes online coaching, which was initially meant for people living outside the Kanto area, but is fast becoming the norm in these times of social distancing.

Now would be a great time to get your finances in order and take advantage of one of the best opportunities to invest you will see in years. Below is the 25 year chart of the S&P 500. You can see quite clearly the benefit of investing during severe market downturns in 2000 and 2008. Why not make use of the extra bandwidth you have and put some money to work for you?

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Source: https://tradingeconomics.com/

Among other things, I can help you figure out:

  • How much you have available to invest and how much you should be keeping in cash for emergencies.
  • What currency is best for you.
  • What kind of account would be right for you.
  • How to allocate when you get the account.
  • How to maintain your investments over the long run.

More information, including rates, is available here. If you would like to book a coaching session, or you have some questions before getting started, please get in touch with me via the Contact Form.

2020 Investment Outlook

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And just like that, another year is gone! After a long wait for the 2019 Rugby World Cup to get started in Japan, the six-week tournament went by in a flash. And now here we are looking forward to the Olympics. I hope 2019 was a rewarding year for you.

When it came to markets, it was one of the best years for risk assets since the Global Financial Crisis with the S&P finishing +30.7%, MSCI Europe +27.1%, MSCI UK (despite Brexit) +16.4%, Japan Topix +18.1%, MSCI Emerging markets +18.4%. Crude oil was +22.7% for the year and Gold +18.3%. This appetite for risk meant that safe haven government bonds were subdued, while US High Yield and Emerging Market bonds returned +14.3% and +12.6% respectively. Bitcoin once again refused to die and posted an impressive return of +95% for the year.

Looking forward to this year “Don’t expect a replay of 2019” seems to be a recurring message, particularly when it comes to equities. Once again Bloomberg have compiled a thorough Wall Street round up for people who have the time:

For those who like to keep it simple, here is a list of key themes to look out for:

  • The end of the bull cycle is getting nearer, but it is still not here yet…
  • Equity and bond market valuations are significantly higher than they were a year ago.
  • Central banks are likely to continue pursuing ultra-loose monetary policy.
  • Smart investors remain invested but are staying alert and perhaps reducing risk.
  • The recent escalation between the US and Iran highlights the potential for sudden geopolitical shocks.
  • There is still potential upside for gold if/when things get rough.
  • Don’t let the US election distract you too much. Politics are not necessarily a good indicator of market returns.
  • Trade is again likely to dominate headlines and unsettle markets from time to time.
  • The Bitcoin halving occurring in May is likely to dominate crypto talk – here’s a detailed and rather bullish post on that for those interested.

At risk of repeating myself year after year, planning and strategy don’t need to be complicated:

  • Have a plan! Read this post if you don’t have one.
  • Stick to your guns. Don’t let the noise divert you from your commitment to saving and investing. (the Japan market made most of its returns in the last third of 2019. If you weren’t buying in the first two thirds then you missed it)
  • Diversify and rebalance – particularly if you are heavily invested in stocks and coming off a good year.
  • Max out tax advantaged investments such as NISA.
  • Look for Japan stocks that are likely to benefit from the Olympic buzz (see what happened to The Hub stock price around Rugby World Cup time)
  • Keep an eye on what the bank of Japan are buying – see post here.

With that I wish you all the best for 2020 and hope you enjoy the Tokyo Olympics!

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 ETFs for 2020

 

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Cheers everybody! I’ll have what they’re having!

Happy New Year! I wish you all health, wealth and happiness for 2020. Most of us are settled back into work now, and some of you may even be planning your investment strategy for the year to come. Perhaps you are considering how to allocate your NISA contributions, or just wondering how things will play out over the next 12 months? There is a lot of investment chatter around the Olympics of course, but it’s also interesting to note what Japan’s central bank is doing.

I saw the above chart on a tweet from Zerohedge towards year-end. It has been widely publicised that the Bank of Japan have been big buyers of Japan Exchange Traded Funds over the last three years, but what exactly are they buying? And if you were buying Japan stocks at this time, would that influence your choices?

It turns out that the BOJ don’t simply buy only the Nikkei or Topix indices. As part of their overall public policy, the BOJ send a message by focussing on stocks of companies that actively engage in capital and human resources investment. (see here) In order to encourage companies to invest in their people and long-term assets, the BOJ is willing to invest some 300 billion yen per year. (their actual purchases can be tracked here so you can keep an eye on whether they are still buying)

A big issue the BOJ face is that they are constrained to not purchase more than half of the market value of any one ETF. The rest should be held by private investors. There are only a handful of ETFs that fit the definition of capital / human resources investment ETFs and, as the Japanese public have been slow to wake up to the idea of investing in this area, it is hard for the BOJ to find anything big enough to allocate the whole 300 billion yen to.

What that means is, that if you invest in one of these ETF’s, you are effectively giving the central bank the ability to “match” your investment. Every ¥10,000 the public invest adds ¥10,000 to the capacity the Bank of Japan have to buy that same fund. That’s a pretty heavy hitter you’ll be investing alongside!

The following ETFs look like they would fit the investment criteria:

1479:JP Daiwa ETF MSCI Japan Human and Physical Investment Index

1484:JP One ETF JPX/S&P CAPEX & Human Capital Index

1480:JP Next Funds Nomura Enterprise Value Allocation Index

It’s also interesting to note what happens with the money that can’t be invested due to lack of capacity: It is allocated to a JPX-Nikkei 400 ETF. It turns out that companies in this index have been quick to wake up to the prospect of big investment from the BOJ and have been making an effort to increase capital and human resources investment, which then acts as a stimulus to the real economy.

So if you are a buyer of Japan stocks today, and I’m not saying you should or shouldn’t be, but if you were, wouldn’t you want to have some of what the BOJ are having?

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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