RetireJapan

Hello everyone,

Before diving in, I want to clarify that I’m not asking for specific investment advice—just looking for general feedback to ensure there aren’t any major holes in my current thinking. With that said, I’d appreciate your insights on my plan.

This is actually my first time making investments of this kind, and I’m planning to start using both the General NISA and Tsumitate NISA this year. With the yen at a 34-year low against the USD, I’m considering front-loading my NISA investments by initially focusing on Japanese stocks. The idea is to avoid potential losses from dollar-denominated assets if the yen strengthens in the future. Since I live in Japan and have yen-based expenses, I want to minimize currency-related risks.

The plan is to start with a heavier allocation to Japanese equities, then gradually shift my NISA investments into US or global indices over the next few years if the yen moves back toward its historical average. This phased approach aims to make the most of the current exchange rate situation while still keeping long-term diversification in mind.

I’d appreciate your thoughts on the following:

Feasibility of the Strategy: Does this approach make sense given the current exchange rate environment and the new NISA framework?

Timing Considerations: Are there potential risks associated with shifting from Japanese equities to a more diversified portfolio as the yen strengthens?

Alternative Strategies: Are there other ways within the NISA framework to manage currency risk while aiming for long-term growth?

Thanks in advance for any feedback! I’m looking forward to hearing your thoughts.

Welcome! Your plan seems reasonable given your assumptions.

Are you planning to stay in Japan or to leave at some point?

I have learned that I have no ability whatsoever to predict currency fluctuations, so I personally would not do this. Just invest in the portfolio you want from the start.

What are you going to do if the yen stays at this level or weakens further in the future?

Yeah, if you think you can market time currency movements then this makes sense.

Personally, I think you are right and the yen should strengthen. But then I thought this at 120, 130, 140, 150 and 160 (to the USD). So I have absolutely no skill in this and I just invest in index trackers rather than try to be clever about it.

If you commit to Y100,000 per month for the Tsumitate portion of NISA from the beginning of the year, you will be committed to contribute the maximum Y1.2M by the end of the year (12 months), so you will have no available capacity.
If you start now at Y100,000 per month, you will have excess capacity this year, but not in subsequent years.
If you commit the minimum payment every month, you will have excess capacity every year that you can contribute as (a) 'Bonus' contributions(s).

RetireJapan wrote: ↑Sat Oct 12, 2024 1:44 am Welcome! Your plan seems reasonable given your assumptions.

Are you planning to stay in Japan or to leave at some point?

I have learned that I have no ability whatsoever to predict currency fluctuations, so I personally would not do this. Just invest in the portfolio you want from the start.

What are you going to do if the yen stays at this level or weakens further in the future?

I am definitely here for the long haul. I got Japanese citizenship from this year, have a Japanese wife and two children, so I'm locked in

If the yen stays at this level or weakens further in the future, I might add some diversification by doing the "all world" indices. At least that way it's a weak yen against all different currencies that could be weak or strong, unlike the dollar which seems to be strong now. I currently have a 7-year plan to max out my lifetime NISA, so my hope is that the yen swings in the other direction. I have hope this will happen because the government has been signaling that interest rates will eventually rise.

Since I would be leaving my NISA untouched for at least 20 years, I am not confident that the yen will be so weak so far down the road (based on historical movements), and I am worried any bigger gains will be more than offset by currency fluctuations. As I would like to invest in some Japanese stocks anyway, I figure I can front-load that portion now and cross my fingers for the pendulum to start swinging the other way.

For long term investments, I think it is better to ignore the currency rates and just buy the things you want, tsumitate style, and expect that over your purchasing years, you’ll get an average currency rate, and the returns on the underlying investments will come to the fore and outweigh currency fluctuation effects.

Another thing I would suggest is that, if you buy Japanese stocks heavily now, expecting to weight more towards foreign assets if the yen strengthens, what might happen to the value of your Japanese stocks if the yen does strengthen? The big dip back at the beginning of August may be a reminder that yen strength is typically a headwind for Japanese stocks. So if we do see yen strength, you might be sitting on a knocked down portfolio of Japanese stocks.

(Personally I hope for a stronger yen too so that my work income is worth more on the world market, but I’m not positive on the yen’s prospects - just so you know my personal bias.)

Chuhai_strong wrote: ↑Sat Oct 12, 2024 9:44 pm I currently have a 7-year plan to max out my lifetime NISA, so my hope is that the yen swings in the other direction. I have hope this will happen because the government has been signaling that interest rates will eventually rise.

Do we think that Japanese interest rates might rise so much as to be equal or higher than interest rates elsewhere?

Since I would be leaving my NISA untouched for at least 20 years, I am not confident that the yen will be so weak so far down the road (based on historical movements),

A lot might happen in 20 years, so it’s anyone’s guess.

But here in Japan nothing much might happen too. More of the same?

I am worried any bigger gains will be more than offset by currency fluctuations.

I have seen some of evidence in books and the like that over a long enough time period, currency fluctuations don’t matter to performance.

Perhaps your concern is really that the yen might be 120 yen next year and you’d be looking at unrealized losses due to currency? It’s possible, but as you said, you want the money 20 years from now. Those underlying investments will keep paying dividends and hopefully grow, even if the currency did work against you.

cross my fingers for the pendulum to start swinging the other way.

You might get lucky, but you might not, too.

I think it’s best to decide what you want to own (for me it’s 40% developed market stocks, 25-30% emerging market stocks, 20% foreign bonds, 5% foreign REITs, 5-6% commodities (mostly gold), plus extras), and then steadily buy your preferred allocation each month. If you take things a little day - aim for 10 years instead of 7 - you could retain more capacity to pile into something should a big change in the markets occur.

Thanks for your comments and insights.

For long term investments, I think it is better to ignore the currency rates and just buy the things you want, tsumitate style, and expect that over your purchasing years, you’ll get an average currency rate, and the returns on the underlying investments will come to the fore and outweigh currency fluctuation effects.

For the tsumitate, I am less concerned about it. I was more referring to the general NISA, the one with the 240 man annual cap. I plan to do two big lump sum payments one in the coming days, and another in January when the cap is reset. Since this is quite a lot all at once, the once in two generations weak yen is a little more concerning. For the tsumitate, I will probably put just most of it in the all world mutual funds because of the reason you mentioned.

Another thing I would suggest is that, if you buy Japanese stocks heavily now, expecting to weight more towards foreign assets if the yen strengthens, what might happen to the value of your Japanese stocks if the yen does strengthen? The big dip back at the beginning of August may be a reminder that yen strength is typically a headwind for Japanese stocks. So if we do see yen strength, you might be sitting on a knocked down portfolio of Japanese stocks.

That's a good point. It's probably the strongest reason to give me pause. On balance though I am still unsure. One middle approach I was thinking is if I do invest in foreign assets, to focus more on the all world mutual funds since those will inevitably have currencies which at any given time with be a mix of strong and weak, whereas currently the dollar is strong and the yen is weak, so it feels like a double whammy in a sense.

Do we think that Japanese interest rates might rise so much as to be equal or higher than interest rates elsewhere?

I don't really understand how it works, so please correct me if I'm wrong, but I was under the impression that when the Japanese government pushes for an interest rate increase, this leads to a stronger yen. I don't really understand how it all connects to interest rates elsewhere.

A lot might happen in 20 years, so it’s anyone’s guess.

It's true, anything could happen. But looking at the back and forth of the yen over the last several decades, it's reasonable to think it's more likely to move at least in the direction of the median than further out than it's been in many decades (all else being equal!). Since nothing is certain, we can only really operate on probabilities.

Perhaps your concern is really that the yen might be 120 yen next year and you’d be looking at unrealized losses due to currency? It’s possible, but as you said, you want the money 20 years from now. Those underlying investments will keep paying dividends and hopefully grow, even if the currency did work against you.

Oh yes, exactly, something like that. What I think I'd like to emphasize is that I would like to have diversification including domestic stock regardless, even if they yen was strong now. Ideally, I'd like to have a mix of all world, S&P 500, and some Japanese stocks, in relative balance. If I were to front-load Japanese stock now, then I would invest solely in the other two as soon as the yen moved in a favorable direction (again, we can't be sure it will, but after a year or two if nothing changes, I would then just bite the bullet and then just invest in those anyway).

Anyway, thanks for your advice. I you have any follow-up based on these clarifications, please do tell

Chuhai_strong wrote: ↑Tue Oct 15, 2024 1:17 am
Ideally, I'd like to have a mix of all world, S&P 500, and some Japanese stocks, in relative balance. If I were to front-load Japanese stock now, then I would invest solely in the other two as soon as the yen moved in a favorable direction (again, we can't be sure it will, but after a year or two if nothing changes, I would then just bite the bullet and then just invest in those anyway).

You do understand that the all-world includes S&P500 and Japanese stocks, don't you?
This 'strategy' is just adding a tilt of a certain percentage to Japan and the US markets. Which is fine if you want to do that.

No-one knows what the yen or the dollar will do, or the Japan market or the US market. Attempting to predict these movements just seems like random guessing to me. Again, fine if you understand it and that is what you want to do.

(disclaimer: I own individual US and Japanese stocks. Some are up, some are down. I don't have any special skill in stock-picking, I have learned.)