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

Posted: Mon Oct 30, 2023 10:21 am
by northSaver
I agree that what Alberto wrote and Deep Blue quoted is not nonsense at all. The long term trend of an equity index is up, and the long-term trend of a currency pair is unknown. Seems true to me.

Based on this, it's not unreasonable to desire a fund that invests in foreign equities but avoids the currency movements, if such a thing exists. There are hedged ETFs available in Japan that manage this to a certain extent, but they aren't perfect as others have mentioned. For instance, they have hidden hedging costs that drag on performance, and they aren't tax efficient in NISA due to distributed dividends.

I don't think it makes much sense to hold one of these funds for a long period (e.g. 30 years), and I think Alberto agrees with this. But in the short term it does make sense IF you have an opinion about the direction of USD.JPY. This then raises additional problems of when to sell the hedged fund and replace it with an unhedged one. After a certain time? When it hits a certain rate? But if you're prepared to accept these problems and costs and believe that they are better than taking a potentially large loss due to a falling USD.JPY, then... why not? Go for it, I say, and good luck.

I don't think there's much else that can be said on the matter. It's been an interesting discussion and I've learnt some things about hedged funds, so thank you all. And I think it's perfectly OK for Alberto to have the last word as he's the one who started it :)

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

Posted: Mon Oct 30, 2023 1:14 pm
by alberto
Thank you for your very good summary, I have nothing to add ;) And thank you everyone for the discussion!

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

Posted: Fri Apr 26, 2024 3:02 pm
by Deep Blue
Deep Blue wrote: Tue Oct 24, 2023 1:33 pm
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.
And so it came to pass.

Just re-reading this thread. The yen is now substantially weaker than when @alberto was fretting about it being too weak.

Any updated thoughts?

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

Posted: Sat Apr 27, 2024 1:58 am
by eyeswideshut
With the Yen at 158 I think I speak for us all when I say that this is a miserable situation and I hope the trend reverses soon.

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

Posted: Sat Apr 27, 2024 2:27 am
by Deep Blue
I’m fairly agnostic about it as the majority of my assets and a decent portion of my income is outside of Japan. I wish I had not bought yen currency at 130 and 140 though! At least I managed to avoid repeating the mistake at 150.

But I can see the pain for the majority of people in Japan with a yen salary and assets mainly in Japan.

This is the sort of situation I had in my when I pushed back against everyone who advocates avoiding foreign bonds because of the exchange rate risk. Keeping all your eggs in a yen basket is more risky IMHO.

The long term prospects for the yen are not great when you consider the deficit, debt and demographics. Best to spread the risk around.

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

Posted: Sat Apr 27, 2024 11:35 am
by sutebayashi
sutebayashi wrote: Tue Oct 24, 2023 11:50 pm
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.
I find myself with thoughts much the same as 6 months ago, and I’m again having a long dollar / yen position from 146.60 earlier this year. I reduced it by a third in recent days thinking the MoF might decide to do a big useless intervention, but that hasn’t come to pass yet.

I had a target on my dollar / yen position of 155, but extended it to a bit short of 160. I see it’s already at 158 now so I might be extending it to 164ish, if my target isn’t hit before I get around to it.

Policy wise, i feel the situation it looks much like my thoughts in this thread six months ago. The foreign central banks have tightened, and not even loosened much yet, while the BOJ continues to state that they are loose, although they have rolled back the extreme parts of the Kuroda regime. The government currency talk is that they won’t tolerate speculation, but the drop in the yen still looks very much in line with fundamentals to me.

I hope to see some policy change that can turn this around.

But if there isn’t we’ll be back here fretting even more come Autumn.

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

Posted: Sun Apr 28, 2024 5:01 am
by Tkydon

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

Posted: Sun Apr 28, 2024 2:14 pm
by Tkydon
Tsumitate Wrestler wrote: Wed Oct 25, 2023 1:39 pm 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
I think you have that backwards:

Downside Risk
When USDJPY goes Down, it is the Dollar that Depreciates / Weakens, and Yen Appreciates / Strengthens against the Dollar

Upside
When USDJPY goes Up, it is the Dollar that Appreciates / Strengthens, and Yen Depreciates / Weakens against the Dollar


The scenario is also different if you bought Dollars in the past at lower rates (with stronger Yen) and are holding (you potentially go back to where you started), vs. if you buy now at these very high rates (with weak Yen) (you make a paper loss and might have to wait a long time for it to come back..

There are actually 6 possible outcomes in each of the above:

Downside
3-1 Yen appreciates less than stocks rise. Your profits are severely cut.
3-2 Yen appreciates more than stocks rise. Your profits turn into losses
3-3 Yen appreciates the same amount as stocks rise. Flat investment


Upside
1-1. Yen depreciates more than stocks drop. Your losses turn into profits (Lots of people wondering why they have to pay Japanese Capital Gains Tax when the underlying is in the Red right now...)
1-2. Yen depreciates less than stocks drop. Your losses are reduced, but not flat.
1-3. Yen depreciates the same amount as stocks drop. Flat investment

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

Posted: Sun Apr 28, 2024 2:58 pm
by Tkydon
sutebayashi wrote: Wed Oct 25, 2023 2:07 pm
...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?
Why do people hedge?

They hedge because they want to know the price of something in the future.

If you buy a product with a Forex Hedge, you guarantee the Forex Price in the future, will be (nearly) the same as the forex price today, removing the potential downside if your base currency strengthens against the other currency, forgoing any upside due to if your base currency weakens, and only leaving you exposed to the Market Risk.

If you buy a product without a Forex Hedge, you have the additional risk and potential downside in the future if your base currency strengthens against the other currency, exposing you fully to both Forex Risk and Market Risk... Some people are not happy with that (Virtually everyone only ever talks about the Market Risk, and seems to ignore the Forex Risk - even many professionals !!)

You don't have to buy one or the other. If you bought half and half (or other split), you would be exposed to 100% of the Market Risk, but only 50% of the Forex Risk.

Some people use USD as their Base Currency.
Some people use JPY as their Base Currency.

They will be on opposite sides:
If USD is their Base Currency, they would want to Hedge when the Yen is Strong and the Dollar is Weak - I know many are in this camp.
If JPY is their Base Currency, they would want to Hedge when the Dollar is Strong and the Yen is Weak - I and many are in this camp.
In the middle, both would be happy to be totally unhedged and fully exposed to both risks - we will all be in this camp sometime...

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

Posted: Sun Apr 28, 2024 3:06 pm
by Deep Blue
Hedging is not free.