Investing in a time of strong stock markets and a weak yen
In the real world, progress is seldom linear.
You are more likely to see forward movement, the odd lurch backwards, and lots of sideways drifting.
I have seen this in exercise, creative endeavors, business, relationships, learning, and of course investing.
People think the ‘one step back’ part is bad, but often it is the step back that allows us to figure out the way forward or to get enough momentum for a big leap.
In investing, you make your money when the stock market falls (assuming you are investing regularly for the long term) because that allows you to buy things cheaper.
The dilemma for Japan-based investors
Right now investors in Japan face a dilemma. We have a situation where stock markets are strong and the yen is weak.
People who already own world stock funds have seen the value of their holdings in yen explode. It was exhilarating (and a little worrying).
But for people starting out in 2024, or thinking about what to buy going forward, the situation is less than ideal.
Buying a world stock fund now means using a weak yen to buy a fund made up of assets in other countries, priced in different currencies. That means you are getting much less for your yen than you would have if the yen were stronger. This is true regardless of the currency the fund is denominated in.
If the yen gets stronger in the future, the yen price of the fund will fall.
This has led some people to reconsider their investing strategy. Instead of buying world stock funds, they are instead looking at Japanese funds and companies, or even considering just holding yen and hoping the currency strengthens soon.
The danger
The main danger for people who own a lot of world funds at the moment is that a stock market crash could well be accompanied by a stronger yen. This would lead to the price of their investments falling because of the stock market going lower, and then falling further still as the strengthening yen meant those investments were worth less in yen terms.
A double whammy.
My wife and I have most of our investments in world stock funds. Mentally I am preparing myself for the price of those investment to fall by 60-70% in a worst case scenario.
I certainly would not want to have to sell things at that point!
This is why a healthy emergency fund and the flexibility to reduce spending is so important.
I believe that kind of scenario would be temporary, so it would just be a case of waiting it out.
Why not go to cash and wait for the yen to appreciate/stocks to fall?
This seems like the logical thing to do, but we don’t know if or when either of those things will happen.
The yen could continue to weaken. No one expected it to reach 160 yen to the dollar, but we saw that this week. Could it go to 170? 200? 250?
I don’t know how likely those are, but clearly they are possible.
If you held yen and it fell to 250 you would be in a pretty terrible position, especially as domestic inflation would likely continue to accelerate as imports got more expensive. Your yen would lose a lot of its purchasing power.
Similarly the stock market could continue to go up. Let’s imagine it doubled from where it is now before crashing 30%.
If you had been holding cash waiting for a correction you would end up buying shares at a higher price than they are today, even after the crash.
On the other hand, we might see these things happen much sooner.
But we don’t know, and it would be foolish to assume that things will ‘go back to normal’ in the future.
So what should investors in Japan do in the current situation?
Well, they should definitely think very carefully. What is their existing investment plan? Does the current situation require them to change it?
People with a lot of world funds who are closer to retirement may want to consider selling some of them now to increase their cash balance.
People currently investing every month might want to consider investing some of their money in Japanese companies or the Japanese stock market if they are worried about exchange rate risk.
People who have several decades to invest can probably ignore things and just stick to their regular monthly investments. The currency and stock market fluctuations will likely not make much difference over a 30 or 40 year period.
What am I doing?
My wife and I have sold some of our funds and increased our cash position. The incredible growth in yen terms of our investments this year was both exciting and slightly stressful. We are likely to transition away from work in the next few years, so having a war chest of several years’ worth of living expenses seems very attractive.
However, we are still maxing out our NISA and iDeCo investments each month, investing in the same funds (mainly the eMaxis Slim All-Country fund).
The extra cash should make it easier for us to deal with a big fall in the value of our portfolio (because we wouldn’t be forced to sell things to pay for living expenses), and maybe even allow us to invest at a much lower price if we do see a crash/yen appreciation.
How about you? What is your take on the current situation? Have you changed your investing plan because of the weak yen?
I planned to use my USD (from dividends) to buy more US aristocrats stocks on my NISA account.
But the yen is so weak that it would eat a huge portion of my NISA allowance.
Would you recommend to not buy US stocks with USD too with NISA allowance and concentrate on JP stocks and mutual funds?
My goal is to fire with dividend stocks.
I don’t recommend anything! If you are happy with your current plan do you think you need to change it? You could sustitute US dividend paying stocks for Japanese dividend paying stocks if you want to.
If you want to live off dividends it should not make any difference where those dividends come from, surely? The key is to be comfortable with your plan.
I see! I’m just afraid to waste the NISA allowance because it’s being deducted in Japanese yens in the end…
I think I’ll wait a few more months and eventually go for Japanese stocks to limit the weight of the bad rate..
Using the USD in a tokutei account feel less painful but I may be wrong😅
Minimum 8 years from retirement, 6 until costs have fallen/funds become available for drawdown and I’ll be in a far better position net-wise. Saving cash instead of NISA for the next year or so, see how things go. Will continue maximizing out our iDeCos. Got 1,500 Apple stock as well I’m not sure what to do with. I’d think about selling if it was a bit higher, but then I’d be back to the same problem about holding in Yen, investing in the J stock market or buying into All Country.
No one knows how the currency and stock markets pan out in the coming year. With US market having rich valuations, there is a possibility of profit taking. Japan and china markets are still cheap. Regardless, invest in quality companies or index funds. As no one is sure of stock market expectations, it makes sense to create an equal weighted portfolio with a allocation to investment grade bonds as well
We built our emergency fund to three years which now sits in a high interest account and remains untouched. Invested in us based etf’s and my home country growth stocks for now, will switch to dividends when I retire. Owning the home signifies the retirement date. The weak yen means we bought the retirement fund here before we had to, benefiting.