In March, I’m moving to Japan for about six months. And I plan on living there again between 2026 and 2030. My wife and her family think we’re doing this to ensure our kids can grow up bilingual. But the truth is a little more awkward…
I expect the Japanese yen to implode in 2024. That’s because Japan is nearing the beginning of the end of its wild experiment in monetary policy. And I’m not exaggerating when I say it’s wild…
Early in 2023, Bloomberg reported the absurd statistic that, ‘central bank ownership of some government debt exceeding the amount outstanding.’ That means the Bank of Japan owns more than 100% of some tranches of Japanese government debt…
The mechanics of this are complex, with trading houses borrowing the bonds from the central bank and then selling them back to the BoJ. But you get the point — the BoJ’s government bond purchases are beyond absurd now. The total holdings amount to more than half of government debt.
Creating money to buy government debt is the path to inflation. In Japan, this effect has been masked by equally powerful forces on the deflationary side, mostly driven by demographics. But lately that has begun to change.
After decades of trying, inflation in Japan is finally ticking above 2%. This may seem minor, but in a country used to deflation and regular pay cuts instead of increases, it is a shock. When I last lived there in 2022, people were already complaining about spiking prices.
Alongside inflation rising, Japan’s currency already crashed in 2022 and 2023, down 30% against the USD.
So far, the BoJ has refused to budge on its wild monetary policy of buying up government bonds. It has intervened to limit the consequences of its policy by capping bond yields and limiting the yen’s plunge. These are the policies of banana republics and monetary miscreants, not the world’s third largest economy, a major exporter and a major source of capital for the world.
In 2024, I expect the consequences of Japan’s monetary policy to accelerate and escalate even further. The question is how, although I think the outcome and therefore the investment play will be similar regardless.
The Bank of Japan could raise interest rates to contain inflation and the currency crash. But this would make the government’s budget untenable, causing a crash in the yen, Japanese bonds and the economy anyway.
If the Bank of Japan continues on its current path of financing the government in the face of inflation and a plunging yen, the pressure on the currency will only grow, causing it to fall even further. Any attempt to constrain this always fails eventually, making it a matter of time. Whether the yen trends down steadily like it did over the past two years, or lurches lower as the central bank loses control of currency pegs, the yen is going lower.
If this isn’t the first time you’ve heard this story, you probably know that shorting Japan is known as the Widowmaker Trade. So many prominent speculators have bet and lost over the years that it has become a joke.
But the last two years have already made yen bears a lot of money. And now the shift we needed to see has been activated. Inflation is breaking out in Japan, forcing the central bank and government to make a choice. There is no easy way out. Either government spending or the value of the currency must be sacrificed.
You might’ve noticed that the Japanese stockmarket is booming, big time. Of course, it’s still nowhere near its highs from the late 1980s. But at least it’s rising.
This should be good news. But stockmarkets can boom for bad reasons too. Inflation being the relevant one.
Stocks in countries experiencing high and hyperinflation tend to boom. In fact, a soaring stockmarket tends to be a good warning that inflation is about to get out of control. It’s a sign people are evading holding money and investments that promise to repay a fixed amount of cash in the future, like bonds. They want to own things that rise with inflation instead. Things like stocks and property. I suspect this fear is behind Japanese stocks, rather than optimism.
Specifically, when I asked Japanese people about inflation in 2021, they told me it felt like ‘the bubble’ in the 80s. But Japanese people have a mistrust of such booms after that one burst. They understand that bubbles are artificially inflated and burst, with inflation and soaring asset prices symptoms of the reckoning to come. They are reluctant investors, trying to protect themselves, not believers in the boom.
The big question is whether I should be borrowing money to buy a house in Japan when we move there. If the yen crashes, but interest rates are kept low by the Bank of Japan, that debt will be inflated away, leaving me owning a house on the cheap…
How can Australian investors benefit? Well, I can highly recommend actually living in Japan and taking advantage of what I believe to be the highest cost-adjusted quality of living in the world, if you avoid the two major cities. If the yen crashes, you can live like a king with access to the best food and service culture in the world.
Indeed, history’s inflationary bursts are full of stories of foreigners living it up while the local population suffers with the chaos. The roaring 20s were especially exciting for Americans and Brits living in Germany and Austria. Expats in Argentina live a high life too. In both cases it was because they have access to valuable foreign currency which can buy you anything in an economy that doesn’t have a stable national currency.
Of course, it’s not a positive story for Japanese people. In fact, I am a bit worried about how things will unfold in Japan. Which is why I haven’t discussed all this with my in-laws or my wife. My father in-law probably agrees with my analysis. In fact, he retired, moved to Barcelona and bought a flat there to hedge his currency risks.
But things are so extreme in Japan that I don’t want to offend anyone by lambasting just how bad their nation’s economic policy is…
Perhaps more importantly for you, Japanese stocks can be expected to soar more than the currency crashes. That’s because a lot of Japanese companies would benefit from a lower exchange rate, and because there is likely to be a stockmarket mania in the early stages of inflation. Again, this will be a flight out of the yen and bonds, not an optimistic boom.
The good news is that we now have a sister company operating out of Japan and I hope to visit their office. Perhaps I’ll be sending you some collaborative work in the months to come on which Japanese stocks to consider and why.
For now, the BetaShares Japan ETF — Currency Hedged [ASX:HJPN] is a good play for Aussie investors to put on their watchlist to consider the prediction I’m making (and staking my own family’s cost of living upon). HJPN invests in Japanese stocks while hedging currency moves, leaving you exposed to the Japanese stockmarket’s moves rather than the yen. That is optimal if the yen crashes and the stockmarket booms as a result, even if the result is imperfect due to unusual currency moves.
In fact, this avenue of investing in Japan is preferable to having my wife open up a brokerage account in Japan, or investing in Japanese stocks directly from Australia, because the yen’s devaluation would undermine those returns. And hedging currency risks yourself is expensive.
No doubt I’ll be spending plenty of time researching and writing to you about the experiment in Japan in coming years, so stay tuned.
Kind Regards,
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Nick Hubble,
Editor, Strategic Intelligence Australia
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