Yen keeps going from strength to strength!

[ChapInTokyo]

Well what does up must come down. I wouldn’t be surprised if the yen goes to 160 yen to the dollar in the next few weeks, at least until the BoJ starts increasing their rates in Feb/Mar 2025...

[sutebayashi]

The BOJ did start increasing their policy rate already this year. If they hike once more next spring it’ll likely have already been factored in by then, in my estimation.

Currencies can move in one direction for a long time, so I think it’s better to wait until it’s obvious that the yen weakness has reversed before changing one’s investment course. The unfortunate thing is that it’ll be a long way off its lows by the time one can state that, but the reverse is that yen weakness versus the dollar may run on. The BOJ alone can’t control it.

[Tkydon]

The other thing to do would be to invest in Foreign Exchange Hedged Funds - 為替ヘッジ有 to eliminate the Exchange Rate Risk...

[Tsumitate Wrestler]

The other thing to do would be to invest in Foreign Exchange Hedged Funds - 為替ヘッジ有 to eliminate the Exchange Rate Risk...

Just to clarify, these funds do not eliminate exchange rate risk. Yen hedged ETFs, hedge against a strengthening yen. It's hedging only in one direction.

The cost of currency forwarding contracts included in the ETFs cut into long term growth, just as fees due.

The general consensus among passive investor communities is to not hedge equities medium to long term, but to consider hedging international bonds.

(But hedging foreign bonds twould have gone quite poorly for Japanese investors over the last decade or so).

[TokyoWart]

@Tsumitate Wrestler

I don't understand this statement:

Just to clarify, these funds do not eliminate exchange rate risk. Yen hedged ETFs, hedge against a strengthening yen. It's hedging only in one direction.

I agree with your other points about currency hedging adding to costs and not being perfect but I believe the hedge will work in both directions because the futures contracts that increase in value when the currency moves in one direction also fall in value when they currency moves in the opposite direction. That is also consistent with how currency hedging is decribed here (which also generally cautions against hedging):

Currency-Hedged ETFs generally use forward contracts to eliminate currency risks. The asset manager will take a forward contract for the value of the assets of the ETF.
With these contracts, if the hedged currency gains value, the forward contracts will gain value. This gain will negate the lost value in the investments themselves. On the contrary, if your currency loses value, the forward contracts will also lose value, negating the increase in the value of the investments.

https://thepoorswiss.com/currency-hedging-portfolio/

but my experience on this topic is mostly confined to Google searches because I have deliberately avoided currency hedged investment products. Can you explain what you meant?

[ChapInTokyo]

The BOJ did start increasing their policy rate already this year. If they hike once more next spring it’ll likely have already been factored in by then, in my estimation.

Currencies can move in one direction for a long time, so I think it’s better to wait until it’s obvious that the yen weakness has reversed before changing one’s investment course. The unfortunate thing is that it’ll be a long way off its lows by the time one can state that, but the reverse is that yen weakness versus the dollar may run on. The BOJ alone can’t control it.

I agree with you that it's difficult to predict which way the exchange rates will move. The interest rate cuts in the US are by no means guaranteed (if Trump's policies lead to higher inflation in the US, the FOMC might go for higher interest rates), and the BoJ would likely have second thoughts about the timing of their interest rate increases depending on what policies Trump unleashes on the world.

Having said that, I need to rethink my investment course as far as my NISA allocation is concerned because my 楽天インデックスバランスファンド（均等型） which is a VT+BNDW wrap fund with a yen currency hedge on the bond part will probably not perform at all well while the USD-JPY rate is so weak, and while the hedging costs for the BNDW part remains so high. I might continue to buy this fund in the latter part of the year if the yen strengthens and the gap in the short term interest rates between the US and Japan narrows, but for now I think I should add high dividend Japanese stocks to my NISA growth account...

[ChapInTokyo]

The other thing to do would be to invest in Foreign Exchange Hedged Funds - 為替ヘッジ有 to eliminate the Exchange Rate Risk...

TIL that the cost of hedging becomes awfully high when the US interest rates are as high as they are compared to the Japanese interest rates as they are currently.

Made me think twice about my usual liking for currency hedging my bond allocations…

Currency hedging cost chart (Daiwa Asset Management)
https://www.daiwa-am.co.jp/specialrepor ... 216_02.pdf

[sutebayashi]

Made me think twice about my usual liking for currency hedging my bond allocations…

Yeah, it’s not cheap to be short dollars / long yen these days. (I made some decent money being on the other side of that last year, and my 2025 plan is similar as of today)

At least for the Tsumitate part, if one is to take a long term view then I don’t think the currency fluctuations will matter much, unless there is a situation where the yen persistently strengthens month after month for years and years, over one’s investment horizon.

[Ax6isB]

FYI - Wolf Richter writes on Japan and the BOJ about every 3 months and he just posted. He digs into the balance sheet if you’re interested in seeing some of the details and trends. The comments in the posts can also be insightful as well.

https://wolfstreet.com/2025/01/07/bank- ... 15-months/

In Trump’s first term he bashed the dollar and repeatedly got into arguments with the Fed. While he may run deficits, I think you can also count on his administration devaluing the USD. Not sure how this plays out with the JPY. Every time I think I understand the theories about what affects a currency, I get proven wrong.

[ChapInTokyo]

FYI - Wolf Richter writes on Japan and the BOJ about every 3 months and he just posted. He digs into the balance sheet if you’re interested in seeing some of the details and trends. The comments in the posts can also be insightful as well.

https://wolfstreet.com/2025/01/07/bank- ... 15-months/

In Trump’s first term he bashed the dollar and repeatedly got into arguments with the Fed. While he may run deficits, I think you can also count on his administration devaluing the USD. Not sure how this plays out with the JPY. Every time I think I understand the theories about what affects a currency, I get proven wrong.

The comments were very insightful as you noted. Thanks for the link!

I think that Trump's administration will probably devalue the USD as well. Something along the lines of the Plaza Accord might very well be what his administration has in mind.