I spent the last year and a half writing financial content for a broker. I enjoyed the experience immensely and learned a lot in the process. Unfortunately, the contract ended, but I now have 10-12 hours a week that have been returned to me. So, readers of this blog may notice some extra market commentary/analysis being posted here. I hope it is useful.
It’s central bank week, with both the Federal Reserve (Fed) and the Bank of Japan (BOJ) conducting their policy meetings. As expected, the Fed held rates steady at 5.25-5.5% while CPI came in marginally cooler than expected. The Fed was surprisingly hawkish, forecasting just one rate cut in 2024.
Some think the BOJ may actually tighten at their meeting. If they do, it will likely be a minor adjustment. There will certainly be discussion about reducing the purchase of government bonds.
USD/JPY is currently trading close to the ¥157 level. With no major change in the US/Japan interest rate differential, we can expect the yen to remain weak for some time.
US markets hit all-time highs
In the US, the S&P 500 and the NASDAQ hit fresh all-time highs overnight. Apple Inc (AAPL) rose again after jumping +7.3% on 11 June when it unveiled a range of AI-enabled features and software for its devices. Apple overtook Microsoft Corporation (MSFT) to once more become the world’s most valuable company. Apple’s market cap now stands at a staggering $3.27 trillion.
Oracle Corporation (ORCL) surged +13.3% after the cloud technology company announced two new partnerships with OpenAI and Google Cloud while also forecasting strong revenue growth in fiscal 2025. Broadcom Inc (AVGO) jumped +14.6% after hours on strong earnings and a big stock split.
TDK and Hitachi set new highs since listing
Japanese stocks are largely in wait-and-see mode as the BOJ meeting kicks off today. TDK Corp (6762) has set another new high since listing as electronic parts stocks related to Apple are bought up. TDK announced in December that it will manufacture lithium-ion battery cells for iPhones in India.
Hitachi Ltd (6501) also hit a new high since listing of ¥17,340 on 11 June. On 7 June, its subsidiary, Hitachi Energy announced that it will invest $4.5 billion to increase production of power transmission and distribution equipment by 2027. Hitachi shares have cooled a little in the last couple of days, despite the announcement of plans to invest ¥300 billion in generative AI in fiscal 2025.
At lunchtime on 13 June the Nikkei 225 index is up slightly to ¥38,831.
Crypto stocks rise
Bitcoin, being the quickest asset to react to economic data and central bank policy, fell the day before the CPI data release and immediately bounced when the numbers came in soft. At the time of writing BTC is trading at around the $68,000 mark. Crypto stocks fared well with both Microstrategy Inc (MSTR) and Marathon Digital Holdings Inc (MARA) up overnight. Meanwhile, in Japan, Metaplanet Inc (3350) announced the purchase of an additional 23.35 Bitcoin on 11 June. The company now holds 141.07 Bitcoins, acquired at an average price of ¥10,278,391 per coin. Shares are up +494% since Metaplanet announced the adoption of Bitcoin as its core treasury asset on 8 April.
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.
Once more, I find myself short of time to post here. However, it is not due to a lack of things going on in markets these days. So, here I am on a Friday afternoon with a little time to spare to share some observations. Let’s do it quick and dirty!
Macro
We seem to be at the mercy of central banks these days. The number of Fed watchers and Fed experts is growing exponentially, especially among those with high exposure to risk assets who are gasping for a rate cut! Inflation is coming down, but not as fast as Mr. Powell would like. (remember falling inflation still means prices are going up, just not as quickly as they were) You may notice how the US stock market pumps whenever Fed officials say anything vaguely dovish. It also jumps on any weak economic data. Bad news is good news – ie. if the economy is slowing, the Fed is more likely to cut rates and pump our stocks. Weak jobs report = market up. GDP lower than expected = market up. Whatever you think of the Fed’s performance, they have been abundantly clear that they are data dependent. If inflation comes down and/or the economy weakens significantly, cuts are more likely. My guess is not until late this year, maybe next year.
Despite all this, the US market is near all-time highs. Stocks sure do like to climb a wall of worry!
Of course, there is an election coming. Biden has rather brashly said on camera that he thinks rates will come down. Yes, the Fed is independent and not susceptible to political pressure, right? The last time Trump won, the market went up. And you can bet the orange one will be applying heavy pressure for rate cuts if he wins again.
Of course, worsening economic data puts recession firmly on the table. Stocks do not like the R-word. However, recession also means rate cuts and the mere whiff of them may be enough to reignite irrational exuberance across risk assets. It’s going to be interesting…
Japan
The Nikkei is trading over ¥38,000 with bond yields pushing 1% and the yen at ¥157 to the dollar. If you had predicted this a few years ago, nobody would have believed you! I keep seeing articles about ‘the sun rising on a new Japanese bull market’. I don’t know where these writers have been for the last 2 years… I keep getting tempted to take some profits but doing nothing has worked nicely so far. Still, you might want to make sure your seatbelt is securely fastened. Turbulence is no fun, as we learned in recent news about a UK to Singapore flight.
In theory, rate cuts in the US will reduce the interest rate differential between the US/Japan and the yen should strengthen. Again, I don’t think it will be until later this year at the earliest, and maybe well into next year, but there may be some relief for the yen in the near term. Long term looks dark though, ladies and gents. If you got stuck in yen but it’s not your base currency, I would take any chance you get to reverse that. The market doesn’t owe you anything.
Time to get long on electricity generators?
Remember when Bitcoin was boiling the oceans and drinking swimming pools full of water like tequila shots? Crypto is forgiven. There’s a new bad guy in town and ChatGPT is hungry for electricity and in dire need of a drink! I’m pressed for time so you can google yourself, but data centres for AI are consuming mucho power and they get hot while they do it – I literally saw an article this morning about some crazy number of swimming pools needed to cool everything down. If you think demand for power is going anywhere but up, I don’t know what to say to you.
While on the topic of AI, chip giant Nvidia nailed earnings yet again. And raised their guidance to suggest more next quarter. Absolute monster company. Semiconductors, AI, data centres: all going bonkers.
The stock is up +594% over the last 3 years. Expect volatility, sure, but it’s not slowing down yet…
Crypto bull market progress
The Bitcoin halving is behind us. We got a pretty good pullback to $56k from $70k and now we are back at $67k. We didn’t even get to the good part yet. I still think people are underestimating how crazy this cycle will get. Another thing to strap in for!
The Biden admin, spearheaded by Senator Karen (sorry, Warren) has been openly hostile towards the industry ever since Sam Bankman-Fried torched them. These guys could rival the EU in crushing innovation. But then a funny thing happened: Trump came out and said ‘If you like crypto, you better vote for me’. Then he started accepting donations in crypto. Suddenly the crypto vote is leaning heavily towards orange man. And what do you know? We got an Ethereum ETF. Believe me when I say, there was ZERO chance of an ETH ETF getting approved a few weeks ago.
ETH has underperformed this whole cycle. And judging by today’s weak ETF reaction, the PTSD is real. The Bitcoin ETFs blew away expectations in terms of inflows. Watch for ETH doing the same.
There are many ways to play the crypto bull. Metaplanet Inc, a Japanese company no one had ever heard of, (they do hotel development and some web3 stuff) announced on 8 April that they were adopting Bitcoin as their core treasury asset, a la Microstrategy. The stock went from ¥19 to ¥36 on the news. Now it’s at ¥57, having touched ¥120 on 23 May. They’ve got Mark Yusko on the board and Dylan LeClair as Director of Bitcoin strategy.
I’m not saying you should buy this stock. (Disclaimer below!) I’m saying you should put it on your watchlist and forget about it until Bitcoin breaks out past the previous cycle all-time high, goes parabolic and then you can kick yourself for not owning such an obvious play on the bull market. (insert wink emoji here)
Supply and demand
Being dumb but with a high appetite for risk if you can explain something to me in simple terms, I own a copper ETF. (1693) I was hearing for some time that the demand for copper is going to far outstrip supply, so I got some exposure. So far, so good. A lot of clever people are saying the move is overdone and we are going lower, but these are low-time frame traders and from what I can tell, the long-term supply/demand dynamics are unchanged. But what do I know? Regardless, we’re gonna need some popcorn over here, please.
A note here: we are talking about satellite holdings and my long term diversified portfolio is completely unchanged, moisturised, happy in its lane etc etc.
I’m out of time here but lastly, somebody helpfully reminded me that Ben at Retire Japan is offering a 50% discount if you pre-order his 2024 Guide to NISA. I don’t see how you can afford to miss that. Click here!
Until next time!
Disclaimer: This should go without saying, but the information contained in this blog is not investment advice, or an incentive to invest, and should not be considered as such. This is for information only.
With the weather warming up, I’m starting to get the itch to get back out on the golf course. I know people who don’t play the game struggle to see what is so interesting about golf, but I can tell you there is a lot more to it than just chasing a little white ball around the countryside. Golf may be a competitive sport professionally, and many amateurs like to put a bit of money on the line against their mates. However, anyone who has played the game knows that it’s never you against the other player. It’s all about the battle between you and the golf course. Or, more accurately, the battle between you and that space between your ears. If you focus on what the other guy is doing, you are always going to lose. Knowing who the real opponent is is the key to improvement.
The same can be said for investing. If you’re a trader, you are playing a zero-sum game. Every time you win, someone on the other side of the trade loses. However, it’s not like this for investors. It’s not a competition between you and other people. What everyone else is doing is irrelevant. You need to master yourself, and more importantly, you have to know what it is you are competing against.
People tend to think they are trying to beat the market but that is really not the case. The market just is. It doesn’t even know you exist. It’s the sum of all the information available driven by the impulse of human emotion. You cannot conquer this beast. The market just tells you the price of things, no matter how crazy it may seem.
Know your enemy
If you are going to be successful at investing, you better know what you are up against. What exactly is it you are trying to beat? Think about that for a minute. Why is it that you have to expend all this time and energy trying to run your own personal hedge fund? Why do you have to pay some ‘expert’ to guide you through this lifelong struggle? Why can’t you just put your money in the bank and get on with more important things?
The standard answer to these questions can be summed up in one word: inflation. But what does that mean? Well, here’s the definition: inflation is the rise in the cost of goods and services over time. It sounds almost innocent, doesn’t it? The price of things just goes up a little over time, so you should invest to keep pace with it. No big deal right? Any half-decent financial planner can help you put a plan in place to handle that.
The truth is a little more sinister. That 2-3% inflation number that governments and central banks report to you every month is heavily manipulated to begin with. But it doesn’t even come close to measuring the size of the monster that is actually eating up your spending power. The final boss, the thing you are really playing against is much more significant than a natural rise in the price of stuff over time.
What the hell is that you ask? Well, in the old days, when coins were made out of gold and silver, debasement was the act of mixing base metals with the precious metals, therefore reducing the amount of the ‘good stuff’ in money. By using less gold and silver in the coins, the issuer lowered the value of the currency.
These days, debasement takes place when a government prints money, increasing the money supply without a corresponding increase in output. Debasement gifts more money to governments for spending and bailing out their banker friends, and the result for citizens is inflation.
Can you think of a country where that may be happening?
Gold was long considered money, and still is by many people. A good way to judge if your currency is being debased is to take a look at how it is performing against gold.
Gold vs JPY
Hmmmm, maybe printing all that money in order to escape deflation has more than achieved the expected result…
And before we rag too hard on the Bank of Japan, here’s the US dollar. And yes, the chart goes back to 1832 – can you spot where the currency came off the gold standard?
Gold vs USD
If that doesn’t make you mad, I don’t know what will. It certainly answers the question of why we have to spend so much time learning to invest.
You are probably understanding that investing is not a choice here. If you don’t learn how to do it, your spending power is toast. Do you think these governments are going to stop?
If anything, debasement is picking up the pace. The world’s economies took on too much debt and are not producing nearly enough to pay it back. The only way out of this hole is to inflate the currency which means that you and me get screwed.
Oh, and if you want to see what monetary debasement looks like when combined with climate change, take a look at cocoa these days:
Cocoa vs USD
Better stock up on Easter eggs folks!
Yes, all Fiat currency
I know I said let’s not rag on Japan, but let’s rag on Japan, shall we? Finance Minister Suzuki has been out every day this week expressing his ‘concern’ over ‘excessive’ moves in the currency. After printing to infinity, he even had the nerve to blame the weakness in the yen on, wait for it, ‘speculators’!
It’s straight-up gaslighting and I’m ‘speculating’ that with debt to GDP at 263%, they are going to continue to incinerate the yen. Don’t get me wrong, this isn’t Turkey – the liras of this world are on their death bed and there isn’t long left to say your goodbyes. Japan has a highly developed and productive economy so the currency isn’t going to implode tomorrow, but have no doubt, it is going to die a slow and painful death and that pain will be felt by you if you don’t protect yourself.
The US dollar is the global reserve currency. This doesn’t free the US from the endgame of its own excessive money printing. It just means it will be the last man standing. All currencies will go down against the dollar. The dollar will go down after the demise of everything else.
No double bogeys!
Back to the golf analogy – I don’t know who said it but there’s a quote that goes something like: ‘A bogey is one bad shot. A double bogey is one bad shot followed by a stupid shot.’
If getting yourself into a position where you have money in yen that you one day want to spend in another currency was your mistake, it’s time to make sure your next shot isn’t a stupid one.
Even if you are planning to stay in Japan and spend your yen here, sitting in cash will devour your spending power. So how do you fight currency debasement? You have to own assets. Assets, like food and other goods, are ‘stuff’. A currency that is being debased goes down against stuff. The Nikkei 225 is not at ¥40,000 by accident. The denominator is going down against shares in companies. Japan’s average land prices rose by 2.3% last year. The denominator is going down against land. I look at my stocks app and a Japanese gold ETF is up over 3% today. It seems like people are getting the message. (great thread about that from Weston Nakamura here)
Harden up your assets
If you’ve been reading my blog for a while, you will be familiar with how I like to structure investments: a ‘core’ diversified portfolio that holds a broad range of assets combined with ‘satellite’ holdings of tactical assets that fit current market conditions. The satellite holdings you want to beef up in order to stave off currency debasement are ‘hard assets’. By this, we mean tangible assets or assets that have a fundamental value. Real estate is a good example. Commodities, especially gold, are another.
You don’t have to buy houses, office buildings and bars of gold to achieve this. You can own Real Estate Investment Trusts (REITs) for a small amount of money. You can own a gold ETF. Is the real thing better? Sure, but we don’t have to be purists about it. The currency is going down against gold ETFs – problem solved.
You’re going to talk about Bitcoin again, aren’t you?
Nah, I’ll just post a chart.
Rock hard supply-capped digital asset vs currency debasement
Happy Easter everyone!
Put this blog post in a tweet
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.
Happy New Year everybody! I hope you all enjoyed a peaceful winter holiday and are back, raring to go and make big things happen.
For some reason, I had a feeling that this was going to be a challenging year and it didn’t really get off to the best start in Japan. For those interested, I was googling around yesterday trying to figure out the best way to donate to disaster relief on the Noto Peninsula. I found this page run by Ishikawa Prefecture. You can download a form here to request a receipt for your donation for tax purposes. Donations qualify for the donation deduction and there is a useful FAQ on the tax treatment of donations here.
So yeah, earthquakes, runway collisions, fires and we’re only a third of the way through January!
From a personal finance and investing perspective, there is some exciting stuff going on though. The New NISA has launched. I logged into my SBI account and it was pretty simple to get started. I have already set up the ‘tsumitate’ allocation and started buying some stocks for the ‘growth’ allocation. Clearly, everyone else is doing the same thing as the Nikkei is pumping so far this year!
I posted a couple of interesting takes on Japan on ‘X’ yesterday: an optimistic look at the year ahead from Jesper Koll and a much darker look at the demographic issues facing Japan from author Nire Shūhei. It always pays to look at both sides.
So how to invest in the year ahead? If you have been reading this blog over time, you will know that I divide investments up into core and satellite allocations. The core is a diversified portfolio weighted heavily to your base currency that just gets rebalanced once a year. This would typically account for around 70-80% of your investments and the idea is to keep adding to it as much as you can. If it’s a bit dull and boring, you are probably doing it right!
The other 20-30% can be allocated to satellite holdings, which may be a little more racy and exhibit a higher risk-return profile. If this part isn’t fun, then you are probably doing it wrong!
Satellite holdings will change over time depending on the economic environment we are in. So how are things looking?
Some thoughts
On the one hand, things look pretty much like they did for most of last year. The Fed funds rate is 5.5%. People who are obviously long risk assets have been trumpeting the start of rate cuts as early as March, but Mr Powell doesn’t look like he’s in much of a hurry to me. Although the Bank of Japan has adjusted its yield curve control policy and allowed long-term interest rates to rise a little, it is still continuing with its negative interest rate policy. There has been a significant amount of speculation, from both within and outside Japan, about when the BOJ will ‘normalise’ rates – I do love this term, like there is a way to return to normal with government debt to GDP at 264%! Gulp…
Despite noises being made about an exit from negative rate policy, it’s notable how quickly these ideas get put on the shelf. Comments I have heard recently include: ‘The earthquake will make it harder to normalise rates’. Probably true, but any excuse to avoid the inevitable. The Labour Ministry’s November report showed that real wages have declined for the past 20 months in a row, so there’s no sign of the mystical ‘virtuous cycle’ of wages outpacing price rises that would signal a move from the central bank.
It’s not going to happen, is it?
So if you’re waiting for the yen to get back to something sensible against the US dollar, good luck! Markets can remain irrational longer than you can remain solvent enough to go on a nice holiday abroad…
Japanese stocks, for the most part, are loving the weak yen. Any company with significant exports and profits abroad will see those profits magnified when converted back to yen. If you’re wondering why your Toyota shares are doing so well, there you are.
What kind of market is this?
Some time ago, I read the book Reminisces of a Stock Operator by Edwin Lefèvre. It’s considered somewhat of a bible by many investors. While there are some interesting tales of hi-jinks and high leverage, there was only really one key thing I got out of the book, but that one thing has stuck with me: Traders and investors should always know if we are in a bull market or a bear market.
It’s always the simple things that have the most impact, right? The protagonist in the book is a stock trader and his big-picture strategy is very simple: If he is in a bull market, he trades with a long bias. If he is in a bear market, he trades with a short bias. If you don’t know what kind of market you are in, you have no business trading, he says. The author coined the phrase ‘bulls and bears make money; pigs get slaughtered’.
Now, if you are a long-term investor, you don’t have to be concerned with trying to short-sell. You are more than likely to get into trouble. Simply replace the terms ‘long’ and ‘short’ with ‘risk-on’ and ‘risk-off’. Again, I am talking about satellite holdings here. You don’t have to overthink the core part of your portfolio.
Bull or bear?
The Nikkei 225 index gained around 28% last year. After such a positive start to the year, it is widely expected to keep on trucking. It’s pretty clear we are currently in a bull market. If you live in Japan and have a need for JPY base currency, then Japanese stocks are a good place to be.
The only question is what could go wrong? What could bring an end to the bull market?
I think the main short-term danger is a recession in the US. Although the financial press continues to focus on the ‘soft landing’ narrative, history tells us that rate-tightening cycles rarely have a happy ending. Depending on the depth of the recession, US stocks could fall anywhere between 20-50%. I don’t see how Japan just keeps sailing on if that happens, no matter how much better value stocks here may be. If you have already loaded up your investments for the year, I don’t think that’s a bad thing but be prepared to navigate some choppy seas. So it may not be a reason to go risk-off, but be prepared for some volatility.
The BOJ is another matter. If they actually did try to raise rates we would probably experience more than a minor squall. My expectation is they daren’t even try but let’s keep an eye on them. At year-end, I was watching a news feature where they interviewed Japanese business leaders and asked them their views on the stock market for 2024. When asked what they thought was the biggest danger to the Nikkei bull market, the majority of them said ‘the election of Donald Trump’. Interesting…my feeling is these guys need to look a little closer to home.
I’m not even going to get into geopolitics. Lots of risk there, but what are you gonna do?
Outside of Japan, US markets are making all-time highs. However, when you look under the hood, the good cheer is really driven by one group of stocks, known as the Magnificent Seven. If this is a new term to you, the stocks are Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla. The size of this group is truly staggering – last time I looked, the combined market cap was around $11.7 trillion. That’s about equivalent to the entire stock markets of Japan, the UK and Canada combined! This group returned around 107% in 2023.
So this bull market is clearly a Magnificent Seven bull market, and the narrative driving it is AI. If you own any kind of global stock fund, go and check their top ten holdings. I’ll bet you that these seven stocks feature prominently.
This group of stocks are a must-own. If you feel you don’t own enough of them, a US recession and corresponding sell-off in the stock market could present a nice opportunity.
Emerging markets could be worth a whole new post, but here’s the tldr: everyone is buying India, not China.
US government bonds got clobbered through this rate hike cycle. If you bought them after the clobbering, you will probably do well as rates eventually subside.
I’m from the UK, so I usually keep an eye on the market over there, but wow, that does not look to me like a place I would want to allocate capital unless I was actually moving back there. Everything about it screams bear…
The biggest bull of all
Of course, the heavyweight champion of satellite holdings is my personal favourite. Yes, the Bitcoin-led crypto bull market is upon us. I already wrote the post on that, it’s right here. You know what to do.
Or do you? I saw a great tweet by Tuur Demeester earlier, in which he said that many people will adopt crypto reluctantly. ‘Hate buying’ he calls it. He also points out how the SEC just ‘hate approved’ the spot Bitcoin ETFs. So why are people going to buy something they hate in the end?
The answer, perhaps, lies in the ongoing debasement of Fiat money, which has accelerated considerably since the 2008 financial crisis. Raoul Pal talks about this a lot and has some great charts. You think your stocks are going up, but really it’s just the purchasing power of your money going down, and you are barely breaking even. People are gradually waking up to this. And there are not many assets that are likely to outperform this money debasement over time. Gold is not getting there. Tech stocks will probably do it, and crypto will likely do it too. Maybe you’re not ready yet, but one day you will be, and you might hate it, but you will probably buy it in the end. Better to rip off the band-aid now perhaps?
On that note, I wish you a happy and prosperous 2024!
Disclaimer: This should go without saying, but the information contained in this blog is not investment advice, or an incentive to invest, and should not be considered as such. This is for information only.
How’s everybody doing? This is a follow-up to my Nikkei ¥40,000? Thinking outside the box piece, which I just happened to post exactly 2 months ago. It’s interesting to see how things have developed since then and then look forward to the last quarter of the year. Yes, I know, it’s almost October. Where did those nine months go???
Remember Monex guy? Two months ago he said the Nikkei 225 was likely to trade in a range of ¥31,000 to ¥33,000 for a while. Gotta give my man credit there, it’s done exactly that. His expectation was that if we can break above that range, we’re heading for ¥40,000. What do you think about that?
If there’s one thing I’ve noticed recently, there’s been a subtle narrative change around the Japan stock market rally. In the first half of the year, it was exactly that – Japanese stocks were broadly rising and outperforming most other developed markets. What has changed, is that the narrative in the news now is more focussed on a Japanese value/dividend stock rally.
So what happened? Well, first, the Bank of Japan has allowed long-term yields to rise up to 0.70% and beyond and then, on 9 September, BOJ Governor Kazuo Ueda said that the lifting of the central bank’s negative interest rate policy will become an option if wages and prices rise. He even said they might have enough data to make a call on that by the end of the year. Despite the talk of interest rates rising, with inflation at over 3%, Japanese investors are realising that sitting in cash is a losing trade. With bonds still offering negative real rates, the money has been pouring into dividend-generating stocks. There’s also a possibility that the revamping of NISA for 2024 has got investors more excited about getting involved in the stock market.
I know it lacks class to say I told you so, but sometimes you need to toot your own horn. This is stuff I figured out some time ago. On 14 September, Nikkei News Plus 9 did a feature on the Nikkei 225 High Dividend Yield Stock 50 Index. There is an ETF that tracks this index and I have owned it since spring 2022 and I covered it in posts in March and October. Here’s what it looks like year to date:
Not bad at all. Ok, enough self-congratulation, there is still a lot to think about here. The big question is, how is this going to play out over the remainder of the year? The fact that financial news programs are starting to fixate on the value/dividend stock narrative is good news if you hold these stocks. Just since the feature on the Nikkei program last week there has been a notable bump in the dividend ETF along with bank stocks, shipping companies, trading companies and steelmakers, which News Plus 9 showcased as examples. So this is now a hot trade which could run for a while, particularly as the talk of exiting negative interest rates heats up. Pick a banking stock and take a look at its performance year-to-date and particularly over the last few weeks!
When a sector gets hot and retail crowds in, it’s often a sign that we are nearing a top. The mania phase can last longer than you expect, but it can also blow off in a hurry. If I didn’t own these stocks already, I don’t think I would be jumping in now. As I mentioned in the July post, these are tactical positions for me, so I am keen to lock in some profit, while also remaining invested to catch any further upside. I have sold incrementally over the past 2 months and reduced my holdings by about 30%. Of course, with hindsight, I feel pretty silly selling anything. I could have just waited and sold higher. But that’s the way it goes – you have to make decisions based on the information you have in real time. So I took some profit, but left two thirds still invested. So far, so good.
So is the Nikkei going to ¥40,000 this cycle? I would be happy to be wrong on this one, but my bet is no. Higher rates, or at least the talk of higher rates, are bad for growth stocks but can be good for value as we are seeing. You would need both to be going up to hit the ¥40,000 mark.
I am still of the view that any attempt at normalising rates in Japan will lead to chaos and a hasty reversal. However, as we are seeing now, even talk of an increase is enough to change market dynamics. And if last night’s Nikkei News Plus 9 program is anything to go by, there is a lot of talk going on! They were feverishly covering how some net banks are raising their rates for fixed deposits to a hefty 0.70%!
From the BOJ’s perspective, a lot of this talk on rates is just that. There’s even a term for central bankers talking up a strategy in order to get the reaction they want from markets – jawboning. It doesn’t change the corner they have painted themselves into. It’s not looking good for the yen folks…
Of course, a lot also depends on the US. Last night’s Fed decision to leave rates unchanged and the plan to hike once more this year was as expected. As they always do in this situation, the Fed is talking up a soft landing. History is not on their side on that one. As the effects of this hiking cycle gradually feed through to the underlying economy, the smart money is still betting on recession. Markets are too interconnected for Japan to keep sailing on if that’s where we are headed.
So no ¥40,000 in the near future, but there could be some more upside for value/dividend stocks. Early next year may get interesting if the BOJ tries to translate some of this talk into action. I plan to have a ready supply of dry powder to allocate if we do take a dive. That’s my view, which I will look extremely foolish for putting in writing if we see ¥40k by Christmas! But if you’re going to invest tactically, you’ve got to have an opinion. Perhaps I should buy a Monex hat to eat if I am wrong…
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.
I have been meaning to write this update for a while. In particular, because people keep finding an article I wrote about the ‘New NISA – Coming in 2024’ and telling me it is out of date, which it most certainly is! You see, that was the old new NISA plan and since then there is a new new NISA plan, which is even bigger and better. Clear? Apologies for the confusion and for my tardiness in updating – the old article will be consigned to the fires of internet hell just as soon as I get this one written and posted.
If you’ve read this blog before, you may be aware that I care very little about product. By that I mean, if you are buying a box to hold things, I don’t care if you get the blue box, the pink box or the rainbow box. It’s just a box, after all! There are a number of NISA products out there offered by online brokerages and banks. I hear even the Japan Post Bank is getting in on the act. My preference would be for the online brokerage accounts, but that’s mainly because I am terminally online and want to minimise time spent ever talking to staff at the bank! If the post office works for you, have at it!
What does get me excited is what you put in the box. That’s where things get interesting. I already wrote a post on How to choose investments for your NISA, so please check that out as a compliment to this post.
So, down to the nitty-gritty. How does the new NISA work? My NISA is with SBI, and they wrote a little guide with some ‘helpful’ graphics – see here. Google translate works ok on the main body of text but the graphics remain in Japanese. I’m really linking to this so you don’t rely entirely on this post to remain correct. Keep an eye on official sources in case something changes before launch.
In short:
You can invest up to ¥3.6 million per year – ¥1.2 million has to be invested in mutual funds, and the remaining ¥2.4 million can be invested freely. That means ETFs and direct stocks are on the menu.
The investment term is unlimited – so ¥3.6 million a year for 5 years = ¥18 million. This is the fastest you can fill it up, but you can actually take as long as you want to reach the ¥18 million limit.
The holding term is forever – there is no limit on how long you can hold the assets in the NISA. As long as you don’t sell, dividends will be paid tax-free and there will be no capital gains tax when you do eventually sell.
All in all, it’s a pretty good deal! I plan to be maxing out my allocation for each of the five years before making any investments into taxable accounts.
If you have an existing NISA, you will not be able to make any new contributions to it after the end of 2023, but you can choose to keep the money invested until the end of the term. For example, if you started a regular NISA this year and invested ¥1.2 million, you can leave that money invested, tax-free, for another four years. Any new contributions will go into the new NISA. If you have a Tsumitate NISA with 15 years remaining, you can choose to leave the money contributed up until the end of 2023 in there for 15 years. Again, from 2024 any new contributions will go to the new NISA.
Investment Strategy
I encourage you to give some thought as to how to allocate the investments in the new NISA. Again, the post I mentioned earlier may help.
There is one trade-off I am particularly focussed on here: growth vs. income. Your forever NISA investment will benefit from not being charged the 20% tax on capital gains or dividends. So which should you try to maximise? The short answer here is probably a combination of both, but let’s do some thinking about it:
For the ¥1.2 million per year that has to be invested in mutual funds, I don’t think it will be possible to generate income. Mutual funds generally re-invest dividends, so they are part of the investment return, but unless they have a distribution share class, they don’t pay dividends out. If anyone finds a mutual fund, available for NISA, that actually pays out dividends, please do chime in – I would be very interested to hear about it. For now, I’m going to assume that such funds are not available. In that case, for the ¥6 million (¥1.2 mill x 5 years) that you invest in mutual funds, it would make sense to go for growth. I will be looking for high-growth-focused funds for this part of the allocation. (note that growth stocks generally pay no/low dividends as any earnings the company makes are reinvested to spur further growth)
For the remaining ¥2.4 million a year, that’s ¥12 million, I am tempted to strongly focus on dividend-paying stocks and/or dividend stock ETFs. If you can generate a 4% dividend return on ¥12 mill, that gives you a tax-free ¥480,000 per year in income alone. And, of course, these stocks will probably also grow in value over time if you are patient. Now, nobody is retiring on ¥480,000 a year but over 25 years, for example, that’s ¥12 mill in your pocket. Not bad, huh?
Of course, there’s a pretty good argument for investing the ¥12 mill into a fund that reinvests the dividends so you get the compounding effect over the term of the NISA. I have no objection to that. I just like the idea of collecting my ¥480k tax-free every year and either spending it or reinvesting it myself.
Also, after a discussion with Ben at Retire Japan, I discovered that under the new NISA rules, you can sell assets and then re-use the tax-exempt amount to invest in a different asset, which is a huge improvement on the current system. Thanks, Ben for pointing that out! See this FAQ on the FSA website.
So those are my thoughts. I would love to hear from anyone who looks at the NISA opportunity differently. Drop me a line or come and tell me I’m wrong on X. (yes, we have to call it that now…)
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.
After all the doom and gloom of 2022, 2023 has been a pleasant surprise for some brave investors. It looks like stocks actually did bottom in October last year and if you own US big tech and Japanese stocks you’re enjoying a bumper year!
And now comes the big question? When do I sell?
In case you forgot, the idea of investing is to buy low, sell high and beat inflation in your base currency. Sounds simple doesn’t it? Personally, I’m pretty good at the first part. Fear is easy to spot. Granted, it takes some guts to run towards the carnage when everyone else is running away, but I have successfully conditioned myself to embrace the pain in markets and buy stuff when it’s on sale.
In my experience, the selling part is harder than you think it will be. Because it’s generally time to sell when people are euphoric and euphoria is kind of addictive. It’s even harder to sell when things are simply good – they could always get better right? And you don’t want to leave money on the table.
I was watching the Nikkei News Plus 9 program on BS TV last night and a very serious-looking guy from Monex Securities was talking about Japanese stocks. I think he is the chief strategist at Monex and he identified what looks a lot like a double top in the Nikkei 225 chart. Ok, I had noticed that too. He explained that he thinks that means the index will likely trade in a range of approximately ¥31,000 to ¥33,000 for a while. I wish I had a video of it – he described the range as a box, and at one point he handed the presenter an actual cardboard box with Nikkei 225 written on it and asked him to look inside. The presenter rummaged around and came out holding four crisp ¥10,000 notes. Yes, the Monex guy explained, once the Nikkei breaks out of the box, it’s going to ¥40,000! Wahey!
Forgive my cynicism, but I immediately began wondering if it might not be time to get the hell out of Japanese stocks! There wasn’t a lot of explanation going on about how the index goes from the box to ¥40,000. I’m no technical analyst, but it sounded a lot like hopium to me. Still, the guy is the chief strategist at Monex so I assume some research went into this.
The US market is looking interesting too. The S&P 500 is up +18% so far this year. Fantastic! However, dig around a little and you find that it’s actually only seven stocks that have driven those returns. Those stocks are, of course, big tech and the narrative that’s driving them, in case you’ve been living under a rock, is AI. Feeling euphoric yet?
So it’s possible that things are a little overdone. All bets are on the Fed hiking rates again at month-end and leaving them there for at least the rest of the year. History does not bode well for a soft landing from an extended period of irresponsibly loose monetary policy followed by a burst of inflation and a breathtakingly fast tightening cycle. This generally does not end well. There is a lot of talk of the stock rally broadening out but it’s early days and if the tech companies sell off, the last one out the door can probably turn the lights off for a while.
So is it time to sell? If so, how much and how do you do it?
First of all, let’s take a breath and remember that we need to consider core and satellite holdings separately. The core being the 70-80% of a portfolio that is broadly diversified, and satellite being the 20-30% we may have in something a little sexier. We’re not talking about simply dumping all of our investments because the market might go down.
I have already written about how to buy low and sell high in your core allocation here. In short, you establish a strategic asset allocation that meets your risk profile and then rebalance it once per year. The rebalance, in effect, sells part of holdings that have gone up in value and reallocates to the holdings that have gone down. That’s it, no further action required!
Satellite holdings are generally invested in assets that add a little more spice to your overall portfolio. They sometimes have a higher risk/return profile and may change over time depending on market conditions and what is hot.
So let’s say, for example, you’re living in Japan and you have a core portfolio invested in an internationally diversified range of assets that is matched to your risk profile and base currency. However, over the last year or so the weak yen has prevented you from investing more outside Japan. Meanwhile, the rise in inflation meant that sitting in JPY cash was a dumb idea and so you’ve been allocating to a range of dividend-paying Japanese stocks to make sure you preserve your spending power. And low and behold, somebody lit a fire beneath the Japanese equity market and your boring Japanese boomer stocks are mostly up between 20% and 50%!
The man at Monex says the Nikkei is going to ¥40,000 and, much as you are intrigued by that idea, you are not sure you share his confidence!
What do you do?
Quite the dilemma, albeit a nice one to have. So what do the options look like?
Sell the lot – the gains are way more than the dividends you are going to earn over the next 12 months, so take a break and come back when things are cheaper again.
Sell part of your holdings – you’ll be happy you took some profit, but if the Monex guy is right, ka-ching!
Roll the dice and keep it all – there’s ¥40,000 in that box!
Of course, there is no correct answer and it depends on your personal situation, risk profile blah blah blah. For the record, I’m in the option 2 camp. I’ve been selling incrementally and I try to sell on green days. If nothing crazy happens I’m looking to gradually cut my holdings in about half. That said, in the process of accumulating Japanese stocks I have found some that I think are keep-forever-type companies.
I still think the Bank of Japan is going nowhere fast on adjusting rates and if inflation comes down, there will be less pressure on them to take action. But if that pressure builds and it looks like they might blink, I go option 1 in a hurry.
US big tech I’m not so concerned about. Everyone should own some of that for the long term, and if you are buying index funds you probably own more than you realise!
So prepare for a hard landing while hoping for a soft one. And learn from the experience as you go.
Today marks 26 years since I landed in Japan. There’s a lot to be thankful for!
And if the Nikkei hits ¥40k I will get a box and take a photo with it.
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.
Japanese stocks have broken out, with both the TOPIX and the Nikkei 225 at levels not seen since August 1990. The inbound tourism revival is in full swing and foreign investors, including the great Warren Buffett, are pouring in. So is it too late to get involved?
After a volatile year for stocks in 2022 and a big drop in the yen, it feels like there is a lot of money sitting on the sidelines. And while ‘scared money don’t make money’, Japanese stocks have been quietly putting together a world-beating two quarters. Here is a selection of year-to-date performance numbers:
Nikkei 225 +19.1%, Toyota +7.5%, Honda +30.6%, Fast Retailing +26.7%, ANA Holdings +12.8%, Keisei Electric Railway +44.6%, Kyoto Hotel Ltd +9.25%, Panasonic +32.8%, JFE Holdings +17%, Marubeni Corp +31.4%, Hub Co Ltd +28% (yeah boiiii!), Japan Tobacco +16.6%, Takeda Pharmaceutical +10.8%, Yaskawa Electric +38.2%.
You get the picture. Japanese stocks are on a tear and not many people saw it coming. Not so the eternal Japan Optimist, Jesper Koll. I had to smile at the title of his recent post ‘We’re all bullish Japan now…’ I’ve seen countless bullish articles on Japanese stocks this last week – suddenly everyone is jumping on the train.
Jesper has of course been riding this train for some time and does a great job in his post of identifying the reasons for the surge in Japanese risk assets. If there’s one lesson that we all should learn from the past few years, it’s that liquidity drives markets. And as developed markets go, Japan is the last remaining source of cheap money. As the US and European central banks raise rates to fight off inflation, the Bank of Japan has, predictably, kept things very easy. There was a slight blip as a new governor took over at the BOJ and a host of people, who should know better, speculated that he would be forced into tightening monetary policy and blowing up the bond market just to fit their narrative. Ueda-san quickly put such rumours to rest and confirmed that policy will remain easy for the foreseeable future.
Jesper rightly points out other factors in the rise of risk assets in Japan: inflationary fiscal policy, a refreshing wave of pro-shareholder regulation, the expansion of NISA, increased business investment and a rising corporate metabolism. To that, we can add a few sector-specific catalysts: the weak yen providing a tailwind for exporters, Chinas’s economic reopening boosting commodities and shipping-related business, and the inbound tourism revival pushing up travel-related stocks.
However, none of this means much without that steady stream of delicious liquidity; mmmm zero interest rates and yield curve control are still on the menu!
A lot has been made of Berkshire Hathaway’s investments in Japan’s big five trading companies. And without wanting to diminish the fact that one of the world’s greatest living investors is buying in Japan, a lot of the coverage ignores the blindingly obvious: Warren pigged out at the last cheap money buffet in the world! He issued debt in yen at around 1% to buy quality companies that pay 4% income. It’s an exquisite arbitrage, but hardly a ringing endorsement of corporate Japan. If interest rates remain high in the US and low in Japan, you can bet he will be back. That man can’t turn a good deal down!
So, the big question is, if you don’t have much exposure to Japanese stocks already, is it too late? Once more it’s fascinating, and somewhat alarming, to see almost total consensus from commentators: the market is going to keep going up! I’m not one to fight the trend, but when everyone thinks one thing is going to happen it’s usually time to open your eyes to the exact opposite scenario…
Quoting Jesper himself here: ‘after more than thirty years, a positive break-out above the historic “Bubble Peak” of 40,000 on the NIKKEI stock index is finally becoming a realistic prospect over the next 15-18 months.’
So let’s be cautiously optimistic here, while keeping in mind the second part of Jesper’s post, what could go wrong? If you’re serious about owning Japanese stocks, I urge you to read the post yourself, but clearly, the number one thing that could derail this rally is inflation refusing to die down as expected, forcing the BOJ to take action on yield curve control and interest rates. My personal take on this is that any attempt to ‘normalise’ rates will be met with chaos and a hasty U-turn, but the damage will get done very quickly amongst the chaos. There’s obviously an argument here for long-term investors to ride out the storm and wait for the rebound, but I would prefer not to ride into that storm with too much JP stock exposure myself.
So if you own JP stocks already, enjoy the ride, but keep an eye on those inflation numbers and an ear to any rumblings from the BOJ. If you are planning on getting in now, then you are probably not too late but you don’t have a lot of cushion on the downside, so act accordingly.
Disclaimer: This should go without saying, but the information contained in this blog is not investment advice, or an incentive to invest, and should not be considered as such. This is for information only.
If there is one thing I have learned in all of my years of financial planning, it is this: people are way more focused on product than on what to invest in within the product. People will spend hours comparing investment accounts to find the one with the best tax advantages, lowest fees, and most comfortable user interface. Then once they decide, they just chuck all their money into the first global stock fund they find on the list. Somebody once said, “people will spend more time deciding on a pair of jeans than on what to invest their retirement fund in.” What follows is far from the definitive guide to investing in NISA, but it should provide some angles to consider it from.
Before that, I have a simple security tip for you. A friend of mine realised recently that someone was trying to change the email address on one of his financial accounts. They knew his email, and had figured out that he had an account with this particular institution, and were trying to get the institution to change his email address so they could get access. Scary, huh! Luckily my friend caught it in time, and rather than responding to emails/chat messages, he set an appointment to talk to a representative. (don’t get phished!) That representative gave him a great security tip: make an email address that no one (except maybe your immediate family) knows about, and only use it for your financial accounts. I thought that was pretty good advice and am implementing it myself. It may be a bit of a pain, but not as painful as having one of your accounts drained – this particularly goes for crypto accounts!
Ok, back to NISA. Obviously, I can’t give blanket advice that works for everyone. The investments you choose will depend on your base currency, attitude to risk and timeframe. Another big factor to consider is that NISA itself is changing from next year, which perhaps affects your strategy for this year. Given the above, I will try to provide a general guide with some helpful ideas:
Yes, this again…Currency may seem irrelevant in a Japan-based account such as NISA, but I would argue that you have to at least think a little about when and where you will spend the money. If you are living and working in Japan, I would assume you at least have some need for yen as a base currency. However, if you plan to move or return home in five or ten years’ time, should you really be building assets in yen? I can’t speak to all of the NISA products out there, but my SBI account allows me to buy US-listed stocks and ETFs through their international site, and you can buy these for your NISA account too. Now, given that NISA is not a good fit for US citizens, why would you buy USD assets? Well take a look at my previous article on the yen and think if you really want to build all of your assets in yen. Yes, when you cash out you will have to cash out to your Japan yen account once, but you can then quickly convert to the currency of your choice. You can also buy yen-denominated funds / ETFs that invest in global assets, so even if the investment is priced in yen your underlying exposure is to other currencies.
So, if you are going to spend the money in Japan, should you only buy Japan-based assets? That would depend on your overall asset allocation and whether you have some exposure to overseas assets through other investments. Compared to the rest of the world combined, Japan is not such a big market and it would seem like a risk in itself to only have Japan exposure, but I would still aim to keep a reasonable amount in yen, just in case it’s 80 yen to the dollar when you want to sell the assets and spend the money. Personally, I already have global exposure, so am mostly buying JPY assets in my NISA account.
Managing risk
Knowing your own tolerance for risk is important. No one wants to be lying awake at night worrying about their investments. The only thing I go on about more than base currency is diversification. The problem with Japan-based accounts is it is hard to diversify well if you are investing in yen. Japanese government bonds? No yield and more risk than anyone at the BOJ wants to admit, hmmm. I think REITs offer an opportunity for diversification and a quasi-bond type profile. Also, diversification across styles can help: don’t just buy a Nikkei 225 tracker – look at high dividend stock ETFs, look at value ETFs and growth ETFs. You can also buy individual stocks if there are companies you know well, or that fit your risk profile. Warren Buffet is buying Japanese trading companies. Maybe he knows a thing or two? Also, perhaps put 5-10% in a gold ETF.
What about the new NISA?
You may have heard that NISA is changing in 2024. From next year you will be able to allocate up to ¥3.6 mill per year. You have to put ¥1.2 mill in mutual funds, but you are free to allocate the remainder as you wish. The maximum total contribution limit is ¥18 mill, but you can leave this invested tax-free for life!
This has led me to decide that for this year’s contributions, I am going to focus more on dividend-paying stocks for my NISA and I will re-evaluate when the rules change next year.
Tax-free growth or tax-free dividends?
Here’s an interesting way to look at things. If you only have a limited allocation that is free from tax on capital gains or dividends, which do you try to maximise? Do you go for all-out growth and try to increase the value of your investments as much as possible over time, and take those gains tax-free? Or do you focus on more stable, dividend-generating stocks and REITs, whereby you get a more predictable annual yield with no tax on the dividends?
This again depends on your attitude to risk and how your other investments are allocated. Already have a broadly diversified portfolio elsewhere and NISA is a relatively small part of your overall allocation? Why not go for growth and try to shoot the lights out? On the other hand, if NISA is an important part of your long-term plan, perhaps you should take a more balanced, diversified approach and try to maximise dividends?
How do you actually go about allocating the money in your NISA? Do you dump it all in during January? Or do you allocate a little every month? If you are investing monthly you are taking a lot of the timing risk out of the allocation process, so you can lean more heavily into higher-growth stocks. This works great for Tsumitate NISA. If they go down, you buy more next month. If you are allocating in one go, you might try to diversify a little more.
Do your own research
I was considering putting a list of interesting funds, ETFs, and stocks at the end of this post for people to do some reading/research on, but I don’t want to be seen as recommending particular investments over others. Plus, that’s what my paid coaching sessions are for! The fact is, it doesn’t matter so much which global stock fund you choose. It’s more important that your overall allocation fits your personal situation, time frame and medium to longer-term goals. Putting in the work will lead to a better understanding over time. Don’t be afraid of making mistakes, but do spend a little more time deciding your investments than you would over buying a pair of jeans!
Disclaimer: This should go without saying, but the information contained in this blog is not investment advice, or an incentive to invest, and should not be considered as such. This is for information only.
First of all, Happy New Year! I hope you all had a fantastic holiday season. Keeping with the spirit of the last three years, we have not been anywhere! Ok, we did have a couple of mini-holidays here in Japan and a peaceful family Christmas and New Year at home, so no complaints!
2023 is shaping up to be interesting in many ways. I have taken on a freelance financial writer project that has diverted some time away from writing here. I will link to that at some point, once I am settled into the routine. It’s an interesting project and I am really enjoying the new challenge. However, if there’s one thing that writing to order and to deadlines has taught me, it is to be grateful for the freedom I have to write whatever I want here, hence the somewhat irreverent title of my first post of the year!
So how screwed is the yen???
Well, before we jump into that, let’s take a quick look back over 2022. As per my previous post, the lesson for us all is that liquidity drives markets, and in 2022 Jerome Powell was the first central banker to start draining liquidity. Throughout the year he continued to raise interest rates in order to fight inflation and, in doing so, pretty much killed the bull market in risk assets. Literally adding fuel to the fire, Vladimir Putin invaded Ukraine and fanned the flames of inflation, particularly in the energy sector. The S&P 500 index ended the year -19.4%, the NASDAQ -33.1%. European stocks were down around -13%. And not only equities suffered: US bonds, the so-called safe haven asset, were down around -13%. Even well-diversified portfolios were down somewhere between 15-20% on the year. The only big gains were in energy stocks, with that index up over 60%.
So how about Japan? Well, the Nikkei 225 index was down -9.4% on the year, but I can tell you from personal experience that if you picked the right stocks you actually made money last year. So not bad right? The danger, however, lurked in the fixed-income and currency markets. The strong US dollar crushed everything in its path, with the yen coming off perhaps the worst of the developed market currencies, although the pound and the euro suffered too.
During 2022, after years of zero to negative yields, inflationary pressure caused Japanese Government Bond (JGB) yields to rise by 0.25%. That may not sound like much, but it had a huge effect on the price of JGBs. Remember, as yields rise, bond prices fall. As a result, the Bank of Japan had to repeatedly come out and reaffirm their commitment to Yield Curve Control. (YCC) In short, they had to do more quantitative easing, which meant printing more money and buying more bonds, which also translates to more yen going into the market and a weaker currency.
Keeping it simple – they had to devalue the yen to save the bond market. Why? Because the owners of those bonds are Japanese banks, pensions and insurance companies. Not the kind of institutions you want falling over. Things got so bad that, by the end of September, the BOJ had to come out and artificially support the yen.
Here’s where it becomes a problem: The programs you would have to enact to save the yen are the exact opposite of the programs you would have to do to save the bonds. To save the currency you have to raise rates. To save the bond market you need lower rates.
Then, at the end of the year, the BOJ made the surprise move of widening the band for their Japanese Government Bond Yield Curve Control from 0.25% to 0.5%. When they did that, the yen started to strengthen. However, if you allow interest rates to rise, what happens to bond prices? Down they go!
And herein lies the crux of the matter: you can save both the currency and the bond market for a short period of time, but ultimately, over a longer period of time, you have to choose one. Now, governments always say that they won’t sacrifice the currency, and then they always do. The reason is simple: the currency benefits the citizens the most, to the detriment of the government, and the bond market benefits the government the most, to the detriment of the citizens. Which do you think the government will choose to save?
Also if you save the currency, you will effectively collapse the banking system, which isn’t going to be pretty. And more importantly, as the government, if you sacrifice the bond market, you can’t raise money anymore. You essentially cut off your income. What government is going to do that?
So how screwed is the yen???
I try to avoid being sensationalist about this kind of stuff. People have been predicting the collapse of the Japanese economy for decades now and it still kept muddling through. The thing that has changed is that it was muddling through in a low inflation environment, which allowed the BOJ to keep rates low. If you are hoping that the value of your yen will hold up, you better hope that inflation calms down pretty soon! The thing that shocked me about the interview with Brent was not the fact that he thinks the yen is screwed – I always thought it would be at some point down the line – it’s that he thinks it is already screwed now and it gets really ugly from here. The ECB and the Bank of England are in a similar position, but Japan is so much further down the road. In terms of monetary policy, Japan is not just the canary in the coal mine. It’s the whole damn coal mine!
I wrote a post back in April 2022 called The Weak Yen Dilemma, where I basically noted that over time things tend to revert back to the mean, and that is what would eventually happen for the yen. In the realm of ‘nobody knows’, that is still a possibility but I am starting to think that from a financial planning/investing perspective we need to consider the big question: What if it doesn’t?
What if the yen is screwed?
I am not an intellectual and have no interest in a debate about the fate of the yen. As a financial planner and investor, I deal in probabilities. So I think it’s important to consider what we can do in case the yen is actually in trouble.
If you have been reading this blog for a while, you will know that I am the guy who never shuts up about base currency. I’m sure it’s annoying but here’s the thing: you can have the perfect tax-advantaged, low-fee account with the best asset allocation, but if you are in the wrong currency you are shooting yourself in the foot and by the time you realise it, it may be too late. If you found yourself last year saying “I want to do x but the yen is too weak” then you know what I mean. Base currency is not the currency you are earning in, it’s the currency you plan to spend the money in. So let’s take a look at what people living in Japan with different base currencies can actually do to prepare:
JPY Base Currency
If you live in Japan, earn yen and plan to spend it here until you die, you have the least to think about. The main thing you need to concern yourself with is beating inflation in yen terms. However, are you really 100% yen base currency? Might your kids want to study abroad? Do you plan to travel overseas regularly to visit family or for other reasons? If you think that Brent might be right, do you want to maybe allocate a portion of your investments to USD so you can take advantage of the eventual collapse of JPY?
USD Base Currency
If your BC is the global reserve currency and you have all your money languishing in yen, it’s time to start putting in some serious thought. You probably experienced severe pain last year watching the yen slide to ¥150. You’re probably waiting for it to get back to something reasonable, like say ¥110, before you convert your yen to dollars. Right? But what if it doesn’t get there? Maybe ¥130 is the best deal you’re going to get? I’m not saying you should panic and convert everything today, but you need to consider the probabilities. Maybe you should start converting a little every month, or every quarter? Again, I’m really not the alarmist type, and maybe things will gradually get back to normal. But what if they don’t?
GBP/Euro Base Currency
The good news for you guys is that the UK and Europe are just as screwed as Japan! Japan might go down first, but you are the next dominoes in line. So you may find that there is less of a differential between GBP/JPY and EUR/JPY than there is with dollar vs. yen. All the same, if you are not planning to spend the money in Japan, you should be saving and investing in your base currency. And maybe, given the situation we are describing here, you should consider owning some dollars too in case there is something to this milkshake theory?
Other Base Currency
Please forgive me for lumping everyone else together but there is only so much time that can be spent on one post. If you are from a country considered an emerging market, you are probably already well-experienced with currency fluctuations. Saving in your base currency is a great idea, but you should perhaps consider USD as an option too as it offers more stability. If you are going to retire somewhere like Australia or New Zealand then again, the local currency plus maybe a dash of USD seems like the way to go.
Outlook for Japan Investments in 2023
I will likely get into this in more detail in future posts. I’m thinking, given it is January, of writing a post on strategies for investing in NISA. But for the time being, here are some things to consider: Bonds are a no-go in my opinion. Stay away from them. Equities are likely to struggle just due to the general economic climate and the spectre of recession, but there are some stocks paying nice dividends out there that are probably a better option than cash. However, if the BOJ really does enter a tightening cycle, which has been unthinkable for longer than I care to remember, I would be pretty concerned about Japanese stocks. Remember that liquidity drives markets! Inflation, troublesome as it is, may provide a tailwind for property values.
I hope that provides some food for thought. Wishing you all the best for 2023 and let’s hope that the yen isn’t actually screwed!
Disclaimer: This should go without saying, but the information contained in this blog is not investment advice, or an incentive to invest, and should not be considered as such. This is for information only.
Smart Money Asia 