RetireJapan

Very basic question here:

If I use yen to buy units of a mutual fund that invests in US Treasuries with no currency hedging, and if that fund pays out in yen when I cash in my units, surely I would benefit if the dollar has appreciated while I owned that mutual fund?

ToushiTime wrote: ↑Mon Mar 06, 2023 5:09 am Very basic question here:

If I use yen to buy units of a mutual fund that invests in US Treasuries with no currency hedging, and if that fund pays out in yen when I cash in my units, surely I would benefit if the dollar has appreciated while I owned that mutual fund?

Yes! It's also possible to have a gain only in currency terms when the underlying have not appreciated or, have even depreciated in real terms.

Yes, and the opposite is also true.

The possible scenarios are as follows:

1. If the Unit Price goes up and the Yen Weakens, the weakening Yen amplifies the gain.
2. If the Unit Price stays the same and the Yen Weakens, the weakening Yen produces the gain.
3. If the Unit Price goes down and the Yen Weakens, the weakening Yen attenuates the loss;
a) If the Unit Price change is less than the Yen change, then the investment will still produce a gain in Yen terms
b) If the Unit Price change is greater than the Yen change, then the investment will produce a loss in Yen terms, but not as great in the underlying instrument, effectively a Hedge of the underlying instrument.

4. If the Unit Price goes up and the Yen Strengthens, the strengthening Yen attenuates the gain;
a) If the Unit Price change is greater than the Yen change, then the investment will still produce a gain in Yen terms.
b) If the Unit Price change is less than the Yen change, then the investment will produce a loss in Yen terms.
5. If the Unit Price stays the same and the Yen Strengthens, the strengthening Yen produces a loss.
6. If the Unit Price goes down and the Yen Strengthens, the strengthening Yen amplifies the loss.

On the other hand, a Currency Hedged Instrument (for a slight cost) moves exactly opposite to the currency change, meaning the Instrument Price Change is (nearly) 100% the Price change in the underlying instrument.

OK, thanks. I just wanted to verify that.

Sorry, another noob question:

As long as I pay in yen, and cash out in yen, does this apply to all other Japanese-based mutual funds that invest in US equities and bonds etc.

I assume these mutual funds will convert the value of my holding (in dollars) into yen on the day I cash in.

If the fund is domiciled in Japan, they do all the conversion for you, for better or for worse.

Tkydon wrote: ↑Mon Mar 06, 2023 5:43 am On the other hand, a Currency Hedged Instrument (for a slight cost) moves exactly opposite to the currency change, meaning the Instrument Price Change is (nearly) 100% the Price change in the underlying instrument.

The implication of this is that it makes your USD-based investment behave more like a JPY-based one. Which you can get more simply and cheaply by increasing your allocation to Japanese assets, rather than buying hedged foreign investments.

Useful write-up on Bogleheads https://www.bogleheads.org/wiki/Currenc ... _investors

adamu wrote: ↑Mon Mar 06, 2023 11:39 am

Tkydon wrote: ↑Mon Mar 06, 2023 5:43 am On the other hand, a Currency Hedged Instrument (for a slight cost) moves exactly opposite to the currency change, meaning the Instrument Price Change is (nearly) 100% the Price change in the underlying instrument.

The implication of this is that it makes your USD-based investment behave more like a JPY-based one. Which you can get more simply and cheaply by increasing your allocation to Japanese assets, rather than buying hedged foreign investments.

Useful write-up on Bogleheads https://www.bogleheads.org/wiki/Currenc ... _investors

It makes your Japan-based Global Mutual Fund or ETF investment denominated in Yen behave exactly like a the underlying Foreign Assets denominated in the native currency despite what happens to the exchange rate, and completely removes the JPY Forex Risk.

If the S&P goes up 20% so does the Forex Hedged JPY Denominated S&P Index Fund, and if it goes down 20% so does the Forex Hedged JPY Denominated S&P Index Fund, despite what happens to the exchange rate.

When the Yen was strong, you probably wanted to be in Non-Hedged Global Funds to take advantage of the amplification of the gain provided by the exchange rate of a (possible) weakening Yen in the future.

On the other hand, if you do not think that the weak and weakening Yen will continue in to the future...
When the Yen is weak, you may want to be in Hedged Global Funds to protect you from the Forex Risk of a (possible) Strengthening Yen in the future, despite what happens to the exchange rate.

do you want to bet that the weak and weakening Yen will continue in to the future?

Does one want to go with the trend, or be a contrarian?

A prefer to be a trend follower myself, and haven’t seen any evidence yet that the trend is substantially going to reverse, although it is something to be alert to (with my speculators cap on mostly).

Personally I would love to see a strong yen policy picked up again by the authorities, but I’m not betting on that.

Tkydon wrote: ↑Mon Mar 06, 2023 12:20 pm
On the other hand, do you want to bet that the weak and weakening Yen will continue in to the future?
When the Yen was weak, you probably wanted to be in Hedged Global Funds to protect you from the Forex Risk of a (possible) Strengthening Yen in the future, despite what happens to the exchange rate.

Or how about not betting at all?
I can't control yen-dollar rates.

Make a plan and stick to it, and all that...