RetireJapan

alberto wrote: ↑Mon Oct 23, 2023 1:16 pm
you can find a survey in this forum from a few months ago in which the big majority believed that the JPY would not even go beyond 130 JPY. We are now in 150 JPY. Does it make sense to keep buying at this price?

One thing that says is that the majority around here could not correctly predict the future.

Another aspect to it is that I think that poll started before the FOMC tightened up their monetary policy at rapid pace.

We could run another poll now and one thing for sure is that things will occur in the future that will render (or reveal) those guesses as useless (but it’s still fun to guess anyway!)

What I assume as the common position is that for SP500, it will eventually go up in the long term, and for developed-world currencies, they will fluctuate over some average zone in the long term.

Here it depends on the definition of long term. We’ve only had about 50 years of the current currency regime. So the usd/yen started around 360, went as low as 75, and now we’re back to 150.

On a shorter time frame yes indeed the yen is weak now.

But I think this is not random movements; there are fundamental reasons behind this.

It’s why I am not seeing the yen in a favorable light right now - not until something changes to make the yen look better relatively.

Thank you for your answer. In general, I used to ignore the exchange rate too, and always considered Forex like a random market. But what's happening with JPY lately has made me investigate this issue, and I've reached the conclussion that keeping investing in USD from Japan can be a suicide that is easily avoidable, and I wondered if there were more people with the same thoughts, or maybe with different thoughts to learn where I'm wrong.

The chart below shows the difference between investing in a MSCI-World ETF from Japan without caring about exchange rate (unhedged, in orange) and the same index but now caring about it (hedged, in green). The difference is just HUGE, so I think ignoring this is just wrong. Until now, the traditional unhedged strategy went well, but for new purchases, if you have to choose between those 2 and look at the JPY/USD chart, what would you choose?? This was my initial question.
By the way, I plotted the MSCI-World in USD too, and it was just the same as the green line, as one could expect, so even in the long term, the cost of hedging is not so significant. All of them without dividends for a fair comparison.

Nobody knows the future of foreign exchange markets.

Time in the markets > timing the markets.

If you want to gamble, go ahead - you have a 50/50 shot at being right in a zero-sum game. You might be right - mean reversion is a powerful force in many markets.. however equally some things are structurally fucked and can keep getting cheaper relative to other assets.

I'd agree that guessing where the dollar/yen rate is going is just that--guessing.

OTOH, rate hikes are done or all but done in the US, and the bond market there is unstable (not reacting as it would historically when rate hikes were almost done). So if I were to guess about anything, it'd be that there's a chance that the dollar will weaken.

Whether and how the yen will react to that is unknown--whether it will stay the same as now, weaken more, or turn stronger.

Rate hikes might be done but is the term premium finished expanding? Biden is spending a lot of money he doesn't have and the Federal Revenue is not done running down the trillions of dollars they locked away during the QE period.

If longer maturity UST's head to 6% and up where would the yen be?

Hmm, maybe that's why I've been reading that the bond market is acting funny?

Okay, all bets are off. Back to your usually scheduled program.

(Ignore if you don’t care for speculation)

Here’s what I’m thinking.

- The FOMC may or may not be done hiking rates, but even if they do as the markets are predicting and cut rates a bit next year, there is going to be nice attractive interest rates on US dollars.

- Versus the yen, for which zero interest rates continue to apply, and also the BOJ continues to purchase more JGBs (whereas the FOMC has stopped equivalent US debt purchases), and creating tens of trillions more yen each year in the process.

I can imagine the yen might jump back up to 140 or something in the next couple of months, but given the above, I still want to have US dollars - until there is evidence or hints that this dynamic will significantly change.

But I don’t see any signs of a big policy change happening, on either side, yet.

The wild card is the unknowns that could change or override the situation, but I’m not going to roll the dice on something that would favour the yen occurring, until I see it.

Full disclosure - right now I have a very small (and unleveraged) long dollar position on, but I am wary of intervention. If the authorities do a big intervention I will start building up a sizeable (for me) long position again. If they don’t, I will start buying again at some opportune time after the rate settles above 150. (Also, this is separate from my investments, which are long-term and on autopilot…)

sutebayashi wrote: ↑Tue Oct 24, 2023 10:39 amBut I don’t see any signs of a big policy change happening, on either side, yet.

It is widely expected the BoJ will end NIRP and abandon YCC.

It might happen next week. It might happen after the results of the next wage negotiations in April. It might happen in between or after.... FWIW Kishida summoned Akio Toyoda to meet him on this very subject today....

I think assuming BoJ won't change policy is far too optimistic...... Just the timing is uncertain.

Deep Blue wrote: ↑Tue Oct 24, 2023 1:33 pm I think assuming BoJ won't change policy is far too optimistic...... Just the timing is uncertain.

Policy change yes - indeed they have already made policy changes under Ueda.

But even if they scrap YCC, and NIRP, will they still maintain a loose monetary policy posture? I think they absolutely will.

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.

Thinking back to the carry trade bubble of the noughties, the big difference I see between now and then is that the BoJ is super loose now.

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.