Exchange Rates

More powerful than you could possibly imagine


A friend of mine keeps obsessing about exchange rates, and how they impact his portfolio. At first I didn’t really pay attention to him, but he’s right.

Even if you are not playing in the forex sandpit (I’m not), as long as you have assets denominated in foreign currencies you will have to deal with the consequences of exchange rate movements.

There are three main factors:

  • the currency you earn in
  • the currency you save/invest in
  • the currency you will need in the future

If all three of them are the same currency then congratulations, you don’t have any currency risk and can stop reading this post. Enjoy the rest of your day 😉

Still with us?

​Let’s look at me. I earn money in yen, invest in yen and dollars/pounds, and will probably need yen in the future (I think there is a good chance I will stay here in Japan).

In my case there is a further complication in that I like to take trips abroad and may decide I want to live somewhere else in the future. This means that I will need both yen (for my life in Japan) and other currencies (for my trips abroad and if I decide to move to a different country).

The yen is very strong right now. The pound is weak, and uncertainty about a possible UK exit from the EU is making it weaker still.

I believe the yen will be weaker in the future, and the pound stronger. Because of this it might make sense for me to save/invest in pounds right now.

For me the currency situation is as follows:

Value
Yen goes up
Yen goes down
Invest in yen
Good Result.
​
Score! My money goes further abroad. I can live it up on cruises.
Bad Result.
​Taking trips becomes more difficult. Moving to another country reduces my standard of living.
Invest in foreign currency
Bad Result.
My investments don’t go as far in Japan. I will have to continue working to support myself, but as long as I earn in yen this is not a disaster.
Good Result.
I can still afford trips and having to move to another country. My investments are worth more in Japan so I can afford more things.


The last few years have seen the yen strengthen, so it has felt like our saving and investing has been for nothing. I think this will turn around, but even if it doesn’t it isn’t the end of the world as our income is enough to support us.

Investing in other currencies protects us from the ‘bad scenario’ of wanting to leave Japan and not having enough money (with a weak yen) to do so. For me, that particular scenario is worse than the other bad scenario of living in Japan with less purchasing power from investments.

What do you think? Do you have a plan do deal with currency fluctuations? What do you think will happen in the future?
​

22 Responses

  1. I took advantage of the last time the pound went really weak (around 122 at the time of the financial collapse) sent quite a lot home and bought a property in the UK. Like you I don’t know where I will be when I retire, but at least now when the pound is strong my UK flat will theoretically rise considerably in (yen) value, or any rental income will be worth more. Not much of a plan but at least I have a place to live either here or there! While earning in Japan, I don’t need to access that cash so I sort of look at it as an emergency fund for if the yen tanks in the future!

    1. Wow, now that’s what I call diversification, geographically and across asset classes 🙂
      Sounds like a very sharp move. I really wish I could get into property, as it seems such a good way to invest, but I really don’t have the temperament for it…
      Having said that I am signing for my first mortgage tomorrow!

      1. Congratulations! Getting a place in Japan? It’s not always the best investment to buy here, but I’ve never regretted it. There’s something about having your own home.

      2. Yes, we’re buying the flat we live in. Normally I wouldn’t consider it, but the numbers really work in this case.
        Off to the bank for ‘2.5 hours of paperwork’. No idea how it could possibly take that long, but this is Japan after all 😉

  2. Great site and very timely question for me too. I think a rapid currency inflation is one of the biggest risks to Japanese Yen (or any other single currency) savers and thus I fully believe that diversity is key. However I struggle with the best and cheapest way to obtain this. One way is to invest in foreign or global stock ETFs or funds. Even if the fund is sold and denominated in Yen, the underlying asset will have its own intrinsic value and thus not be affected by movements in the currency. However, I struggle with how to invest in bonds. The usual bogglehead advice is to buy bonds in your home currency but I think for global citizens this is not good advice. So my strategy was to buy government bond ETFs in various markets (US, Canada, Australia, UK, Singapore) but this is complicated and I incur undesirable transaction and exchange fees to keep this portfolio going. Ideally I would love to buy a one-stop global bond fund but I can’t find any decent products listed outside the US (as a non-US citizen I avoid the US market). Would love to hear what other Japan readers do to hedge their currency risk.

      4. Hi Niall
        Depends what kind of bonds are in it, I guess. At first guess, is that the exchange rate affecting the price? It isn’t hedged, so the yen vs. other currencies is going to affect the price (but not the value) of the fund…

      5. To comment on Niall’s question, I think the volatility you are seeing is due primarily to the JPY exchange rate. This fund is not hedged and thus recent strength in the Yen is causing the price of the fund to come down. From my perspective this is a feature, not a bug as I want to reduce my exposure to JPY.

    2. I’ve been trying to get my head round this issue for a while – in order to get currency diversification, is it enough to buy shares in ETFs and funds that are yen-denominated but consist of foreign stock? Or do I need to go whole-hog (paying rather larger fees) and buy the equivalent funds in (e.g.) dollars from foreign markets?

      3. Not entirely sure. I can see the (political) benefits of investing through companies based in different countries, and personally I prefer US stocks to Japanese ones as I find it easier to get information about them, but not sure if there are benefits to buying foreign-listed vs Japanese through the same broker.
        US citizens need to avoid non-US-listed index funds because of the tax consequences.

  3. Am I crazy, or do you mean the opposite? “The last few years have seen the yen strengthen,”
    The yen has been very weak in the past few years and only recently have we seen it gain strength, I suppose to failing Abenomics and the news that the tax hike is being postponed.
    Weak yen = fewer dollars in exchange rate (this is usually bad for ex-pats who plan on traveling or moving or investing back home).
    The past few years 1USD has been about 115 to 125yen. Thats weaker than its been in decade or more. Its looks like is about to flip to below 100 yen soon. I sure hope so. I was about to put nice big chunk into Nisa but will probably send it back to the States now.

  4. If you have significant savings in GBP and EUR that you want to transfer to Japan within the next few years (yep… yours truly), then this Thursday will be nailbiting to say the least. If they vote “leave” then we can kiss goodbye to weak yen / strong pound / strong euro for the foreseeable future. Not to mention a crash in the FTSE which will have a knock-on effect in the Nikkei and US markets. I have a bunch of gold and bonds to help cushion the blow, and a few long call options on the VXX (S&P500 volatility ETN) just in case, but the exchange rates will be the biggest problem for me personally.
    Here’s hoping we will stay in the EU 🙂

  5. Hi Northsaver!
    I also hope the UK stays in, but I’m in the opposite camp. I will have yen to invest in pounds or dollars in the next 2-3 years, so a Brexit/financial mess would help me.
    Still hope they stay in though. If they leave I’m probably going to naturalize here…

  6. Ha, I’m looking at the Yen strengthening and this makes me sad, as a good 85% of my investments is in Dollars, my salary is in dollars (I live in the US currently), and was planning on reaching financial independence in Japan when we move back there next year.
    I’ll have to work a few more years (in Yen) to make it happen.
    I don’t have a good currency diversification strategy, sadly.

    1. Hi SB
      I can imagine how frustrating the current situation must be for you. I guess it boils down to how likely you think it is for the yen to come down in the future: that would determine whether you start changing your dollar reserves into yen now or wait for a more favourable rate (that might not arrive).
      I’d be inclined to come over and work for a bit, just as a safety measure. Which would allow you to start investing locally in yen too.
      Plus we finally hang out and chat in person 🙂