Does it make sense to continue with the same strategy with this JPY/USD rate?

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sutebayashi
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Re: Does it make sense to continue with the same strategy with this JPY/USD rate?

Post by sutebayashi »

Jumping in late I know but I wanted to say this
alberto wrote: Wed Oct 25, 2023 1:41 am By buying unhedged, you are not only investing in MSCI-World, but also speculating with the JPY/USD, even though it's unintentionally, and that has a huge effect on your investment, as you can see in the chart I shared yesterday.
Yes, it does have a huge effect. But even if you choose hedged, you are still making a converse bet that the yen will do good relative to the foreign currencies.

Currencies are measured relatively. The effect of the hedge is to take out the inherent currency risk, relative to the currency you invested in, yen for us. But why would we choose to measure in terms of the yen? Because we live in Japan? Is this not a home bias?
Why not simply own those foreign assets outright, in the original currency that they are denominated in?

So, rather, I would say that opting for a hedged product can be seen as just as speculative a play as unhedged.

But with one disadvantage - you often pay extra for the hedged version.

Personally I don’t look at my investments purely from a yen perspective. (This year in yen terms my portfolio is well up, but in US dollar terms it’s been a down year so far, only my gold, US stocks assets are up).
Deep Blue wrote: Wed Oct 25, 2023 9:01 am
sutebayashi wrote: Tue Oct 24, 2023 11:50 pm So the dynamic of foreign central banks tightening, while the BoJ continues to loosen, will continue - this is my assumption. And even if the foreign banks become a little less tight, the BOJ will still be pumping new money into the system.
This is not correct though. The Bank of Japan is not loosening monetary policy. It has been tightening (relaxing YCC boundaries)
I think my characterization is orthodox and quite correct.

The BOJ continues to buy tons of bonds regularly. Here’s a headline from yesterday:
https://www.reuters.com/markets/rates-b ... 023-10-24/

So their QE continues. I do not regard a deceleration of the pace of the QE, as monetary tightening. BOJ themselves members are frequently quoted as saying it is too “premature” to switch to a tightening stance, e.g.
https://www.asahi.com/sp/ajw/articles/14994024

I personally would like to see them actually tighten as my future income stream would be worth more, I speculate.
alberto
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Re: Does it make sense to continue with the same strategy with this JPY/USD rate?

Post by alberto »

Deep Blue wrote: Wed Oct 25, 2023 1:25 pm Like I said, follow your beliefs. It would have been a losing proposition to hedge at 110, 120, 130 or 140… but if 150 is your line in the sand and you’re confident it in feel free to put your money where your mouth is and speculate on JPY appreciation.
But the whole point is that I don't want to speculate on JPY, whatever the price is. Yes, at this moment of history in particular, but in general that is my position from now on. Using unhedged funds is really speculating on JPY fluctuation.
Tsumitate Wrestler
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Re: Does it make sense to continue with the same strategy with this JPY/USD rate?

Post by Tsumitate Wrestler »

alberto wrote: Wed Oct 25, 2023 2:17 pm But the whole point is that I don't want to speculate on JPY, whatever the price is. Yes, at this moment of history in particular, but in general that is my position from now on. Using unhedged funds is really speculating on JPY fluctuation.
You have it twisted. Let me try again.

A hedged fund is an index fund + currency forward.

What is a currency forward? - https://www.investopedia.com/terms/c/cu ... orward.asp
a currency forward has little flexibility and represents a binding obligation, which means that the contract buyer or seller cannot walk away if the “locked-in” rate eventually proves to be adverse.
Your are speculating that the yen will appreciate and you are HEDGING against that possibility.
alberto
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Re: Does it make sense to continue with the same strategy with this JPY/USD rate?

Post by alberto »

Tsumitate Wrestler wrote: Wed Oct 25, 2023 1:39 pm
I am not commenting on whether or not it would be a good idea to hedge at 149/150.

Are you prepared for these possibilities?

Downside Risk
1. Yen depreciates and stocks drop. Your investment is very underwater
2. Yen depreciates and stocks are flat. Your investments are underwater.
3. Yen depreciates and stocks rise. Your profits are severely cut.
.............................
Upside
1. Yen appreciates, stocks drop. Flat investment
2. Yen appreciates stocks are flat. FX profit
3. Yen appreciates, stocks appreciate. Large upside.

Also remember the downside is not just the extra fee for forex hedging, but all the money spent on those forward contacts, and all the money kept in cash. That will hurt your returns.

Good luck
Let's please quantify those insights you gave. In the chart below, you can see the hedged MSCI-World ETF in green, the same unhedged MSCI-World ETF in brown (both Japanese and in JPY), and the original Ishares MSCI-World ETF in USD in orange. All of them without dividends for fair comparison. If you buy the hedged ETF, you are buying the MSCI-World exactly like you would buy it in USD (since it's mostly US stocks), eliminating the currencly fluctuations. You mention the money spent on hedging, but the difference over the biggest JPY/USD volatility in decades is a mere 3% in 5 years (the maintainance fee is only 0.187%, very reasonable for a hedged ETF I think), compared to 50% difference with the unhedged ETF. Yes, in this case that was a profit, but I don't want that totally-uncontrolled HUGE volatility. It's a profit this time, and it could well be a loss in the future. I don't want to speculate with JPY/USD conversion rate, literally devouring my original investment, I want to speculate with the stocks of MSCI World only, not with the currency. Is my position well understood? I'm afraid we're not understanding each other here.
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Tkydon
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Re: Does it make sense to continue with the same strategy with this JPY/USD rate?

Post by Tkydon »

alberto wrote: Wed Oct 25, 2023 12:54 pm
Tkydon wrote: Wed Oct 25, 2023 10:16 am
Thank you for this list. I also did this survey some time ago, and I concluded that the one I shared before was the best, in terms of fees and in terms of replicating a standard World index.


Tsumitate Wrestler wrote: Wed Oct 25, 2023 9:47 am A hedged fund does not protect you from volatility. It helps hedge against losses that might occur if the yen appreciates. It's a bet....in one direction only.
I don't think that's correct. Look at the chart I shared yesterday in this same thread. The unhedged ETF is now about 50% higher than the hedged one. If it goes in one direction, it can go in the other as well.


Tsumitate Wrestler wrote: Wed Oct 25, 2023 10:22 am If you own a world fund, you own multi-currency exposure adjusted to the current global market. You cannot ask for more diversity. The fact that the fund is denominated in yen is ultimately irrelevant.
I don't think that's correct either. If you own a world fund, like the most common MSCI-World or similar, then you are mostly buying USD with your JPY, and only in a small part buying other currencies. I don't think that's diversity, that's speculating in the FOREX based solely on JPY, so depending on how JPY goes, everything else will go in the opposite way. If your sallary is in JPY and you live in Japan, you don't need any currency "diversity" investing in FOREX. By investing in foreign stocks you are already getting diversity in a positive-sum game if you do it well. By just unhedging your World fund, you're just surfing the currencies.


Deep Blue wrote: Wed Oct 25, 2023 10:03 am Like I've said in other threads, I do feel its really not ideal to have all ones eggs in a single currency basket. If we get hung up on only JPY based returns, or only USD based returns or whatever we're going to constrain our investment options and lock ourselves in to the strength or weakness of a single currency over the long term.
Well, now your words sound different than your previous message, where you said that hedging was taking an active view and speculating. If you think you can get an additional profit by speculating in FOREX, then it may be OK to use unhedged funds, but for me that's more speculative than avoiding the appreciation/depreciation of JPY. If your sallary is in JPY and your spendings are in JPY, going out to buy/sell USD or other currencies (with unhedged funds) with your JPY is investing in FOREX, and not even that, but just accepting what the JPY/USD does in every moment.
Hedge Ari ヘッジ有 - Means the Exchange Rate is Hedged so that the instrument moves (hopefully exactly) opposite to the Exchange Rate, so that the result is (hopefully exactly) the movement in the underlying in the Base Currency.

If you invest in the S&P, and the S&P goes up 20% in USD, but the Yen Strengthens 30%, then:
In an Unhedged Fund, you would lose 10% in Yen Terms due to the adverse movement of the Yen reducing the Yen Value of the Dollars, even though the value has gone up in Dollar terms.
On the other hand, if in a Hedged Fund, the Yen Hedge will move in the opposite direction to the Exchange Rate so that the S&P 20% increase in USD will be reflected directly in the Yen value of the Fund which will also go up 20%, removing any and all movement of the currency from the performance of the Fund or ETF.
This has nothing to do with Currency Volatility. The Yen Hedge removes all exchange rate volatility. Volatility is only relevant to the institution providing the Hedge.

I wrote somewhere else:

If the Underlying Instrument goes Up and the Yen Weakens, the gain in USD terms will be amplified in Yen terms.

If the Underlying Instrument goes Down and the Yen Strengthens, the loss in USD terms will be amplified in Yen Terms.

If the Underlying Instrument goes Up and the Yen Strengthens, or the Underlying Instrument goes Down and the Yen Weakens, the gain or loss will depend on the relative movements of the Underlying Price vs. the Exchange Rate. First the gain or loss will be attenuated and then reversed, as in the case above, where the S&P goes up in USD terms, but results in a loss in Yen Terms, or as was the case last year, the S&P went down drastically in USD terms, but resulted in flat performance, even to a profit in Yen Terms due to the opposite weakening of the Yen.
This was great in the direction from 120 to 150, but may not be so good if the exchange rate ever goes back from 150 to 120...
:
:
This Guide to Japanese Taxes, English and Japanese Tai-Yaku 対訳, is now a little dated:

https://zaik.jp/books/472-4

The Publisher is not planning to publish an update for '23 Tax Season.
TBS

Re: Does it make sense to continue with the same strategy with this JPY/USD rate?

Post by TBS »

Recommended video on this topic: https://www.youtube.com/watch?v=K3flJjh00gA
Should You Currency Hedge Your (Equities) Portfolio?

Ben Felix is neutral on the choice to hedge foreign equities or not in that video.

But these additional factors tip the balance against hedging for us in Japan in my view:

- Hedging costs more: the difference in fund fee between eMAXIS slim All Country and NEXT FUNDS 2514 is 0.05753% vs 0.187%. In addition there is the additional hidden cost of the hedges in NEXT FUNDS 2514, which is not included in that 0.187% figure.
- The hedged products proposed so far are all ETFs. In Japan these are tax inefficient as they pay out dividends rather than reinvesting internally. You lose out long term from not being able to reinvest the tax withheld from ETF dividend payments. Whereas for mutual funds all the taxes are paid at the end, so there is the opportunity benefit of being able to keep money away from the NTA and invested in the market for as long as possible.
- ETFs cannot be bought in iDECO or tsumitate NISA (including tNISA portion of shin-NISA).
- NEXT FUNDS 2514 is a developed world fund excluding Japan. So it introduces complications to portfolio management not present with an all world fund, including calculating correct weights of other funds to buy and re-balancing periodically. The latter also may involve further tax inefficiencies.
- All of us are foreigners in Japan, which makes us uniquely different from Japanese Japan-based investors. Despite what many of us believe now about staying in Japan forever, there is a small but real chance that many of us will return to our home countries later in life or move elsewhere abroad. Unhedged products offer better currency diversification, and that theoretically that will help protect you if in fact have non-Yen income needs in retirement.

Credit to other posters who have been making similar points.
Last edited by TBS on Wed Oct 25, 2023 10:58 pm, edited 1 time in total.
TBS

Re: Does it make sense to continue with the same strategy with this JPY/USD rate?

Post by TBS »

alberto wrote: Mon Oct 23, 2023 4:57 am Yes, but you could answer the same thing to the question about what the index fund you're currently buying will do in the future. However, your action about it is to invest on it, and that's because actually you believe that it will go up. That was my question: what you believe. The only difference I see is that you choose acting in the 1st case (investing because you believe it will go up), but you choose not acting in the 2nd case (keep buying USD with JPY despite you believe the JPY will strengthen, ...if that's the case, and that's why I made the case that now we're in the weakest point in 30 years, and we are here to invest for the long term).
These two are incomparable. Equities grow exponentially over the long term, but major currencies tend to show no strong upwards or downwards diverging trend.

There is no equivalence here - just because it is wise to invest long term in equities because you believe that they will go up, doesn't imply you also should make a choice to go hedged/unhedged (particularly based on the current FX rate... which is a form of active market timing).

The fundamentals underlying what equities and FX rates do long term completely different.
Tsumitate Wrestler
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Re: Does it make sense to continue with the same strategy with this JPY/USD rate?

Post by Tsumitate Wrestler »

alberto wrote: Wed Oct 25, 2023 2:46 pm
If you buy the hedged ETF, you are buying the MSCI-World exactly like you would buy it in USD (since it's mostly US stocks), eliminating the currencly fluctuations. You
This is incorrect. That's not how it works.
alberto wrote: Wed Oct 25, 2023 2:46 pm You mention the money spent on hedging, but the difference over the biggest JPY/USD volatility in decades is a mere 3% in 5 years (the maintainance fee is only 0.187%, very reasonable for a hedged ETF I think).
The costs of currency hedging are not reflected in the fee.

Did you look at the fund constituents? It literally lists all the forwarding contracts. You are buying those, instead of stock.....

.............

Our concern here is not that you want to buy a hedged ETF, but that you truly don't know what it is, how it works, or the risks.
TokyoWart
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Re: Does it make sense to continue with the same strategy with this JPY/USD rate?

Post by TokyoWart »

alberto wrote: Wed Oct 25, 2023 1:41 am If we are buying MSCI-World, that means we are buying foreign currency (mostly USD) with JPY, so you can say "I cannot know what will happen with the exchange rate", but in the end you have to make a choice: unhedged or hedged. The previous statement does not imply unhedged. Actually, if you really want to isolate your investment from the exchange rates, hedged would be the choice. By buying unhedged, you are not only investing in MSCI-World, but also speculating with the JPY/USD, even though it's unintentionally, and that has a huge effect on your investment, as you can see in the chart I shared yesterday.
For a stock fund investment I would not (in fact never have) choose a currency hedged fund. Hedging is expensive (it is lowering your return) and there are ways in which a currency falling in value can boost that country's domestic stocks when it is an exporting country like Japan.
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Re: Does it make sense to continue with the same strategy with this JPY/USD rate?

Post by TokyoWart »

Tsumitate Wrestler wrote: Wed Oct 25, 2023 2:33 pm
Your are speculating that the yen will appreciate and you are HEDGING against that possibility.
Exactly
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