Did the new coronavirus accelerate the yen depreciation! Wasn’t it “yen buying during emergencies”? The reason I buy foreign stocks even with a weak yen

This week there were big movements in the currency market.Dollar/Yen rapidly weakened to the 112 yen level at one pointand turned into a depreciation of the yen.

Is the Yen Depreciation Accelerating Due to the Novel Coronavirus? Wasn’t it “Yen Buying in Times of Crisis”!?

One possible reason isthe impact of the novel coronavirusnot only on the Diamond Princess but also in Japan, where community transmission has become clear, drawing strong scrutiny from foreign countries.

Until now“Yen buying in times of crisis”was commonly observed whenever something happened, causing the yen to strengthen. For example, after the Great East Japan Earthquake, the yen briefly strengthened to the 70s level.

However,this conventional wisdom is crumbling. Even in current “crisis” situations, the yen has been weakening.

In the first place, even NHK news used to explain with phrases like “demand for the safe-haven currency yen is rising…,” describing “yen buying in times of crisis,” but this is incorrect. Japan’s government finances are poor, so it cannot become a “safe haven.”If people truly sought safety, they would buy the strongest currency, the dollar.

The cause of yen appreciation in crises was the “yen carry trade.” In the past, the yen had lower interest rates than other currencies. Borrowing in the low-yen and converting to dollars to invest allowed, at least in the short term, the spread to be exploited.In this case, there was demand to sell the yen, leading to yen depreciation.

Meanwhile, when risk-off moves surged in financial markets, selling held securities would require repaying borrowed yen, thusthe opposite demand, “yen buying,” would arise. This is how “yen buying in times of crisis” occurred.

However, the situation is changing by the minute. Now, worldwide central banks have lowered interest rates, narrowing the gap between Japan and other countries. Therefore,the “yen carry trade” has disappeared.

Consequently, when Japan’s economic situation is viewed with concern, speculation on further monetary easing by the BOJ rises afterward.Monetary easing tends to weaken the yen, so selling yen with that expectation may have occurred.

Even as the phenomenon changes, the essence does not

I have long felt uncomfortable with the expression “yen as a safe currency.” A currency of such a financially weak country cannot be a safe haven. Whenever I hear this term on the news, I feel as if something is stuck in my teeth.

When I investigated to dispel the discomfort, I arrived at the hypothesis that it was due to the yen carry trade. That explanation is far more persuasive.

What is happening now provides ample support for this hypothesis. In other words,now that the yen carry trade has vanished, there is no longer any crisis-era yen buying.

Simply looking at movement in the exchange rate alone“the old rules no longer apply!”and jumping to conclusions is not wise. If you think through the underlying mechanisms yourself, you’ll find thatthe essential part has not changed.

That is why, when assessing things, it is important not only to observe the phenomena but to seek the underlying essenceand keep that in mind. Doing so will help you stay calm and steady in daily life, not be swayed by headlines.

Reasons to Buy Foreign Stocks Even When the Yen Falls

I also trade foreign stocks. Just yesterday I bought U.S. stocks (ADRs), at a time when the yen was weak. Since I bought with yen, some may view it as a bad timing to buy dollars at a high rate.

However,I hardly pay attention to exchange-rate fluctuations. I can say I ignore them almost completely.

One reason isthe exchange rate movements are completely unpredictable. Unlike stock performance, foreign exchange is influenced by a variety of economic events. The favorable level changes with social conditions at the time.A few years ago, less than 1 dollar = 100 yen was commonplace. It makes little sense to fuss over a one-yen difference in that context.

Another reason I hold foreign stocks iscurrency diversification. Since most of my wealth, including human assets, is in Japanese yen, holding foreign assets is an important diversification strategy. In that light, if I can buy dollar-denominated assets, that itself is profitable, and if stock prices fall in dollar terms, I will buy more without considering the exchange rate.

Once you buy foreign stocks, their value increases and dividends add to your foreign assets naturally. Since diversification is key,you do not need to convert back to yen unless there is a strong necessity; you can keep them in foreign currencies.

And above all,I believe the yen will weaken in the long term. Short-term moves are unpredictable, but in the long runthe currencies of strong economies rise and those of weak economies fall, which is certain.

Foreign stocks may feel unfamiliar, but there are many appealing names. Rather than be swayed by noise, if you grasp the essence, you can hold them for the long term without distraction, which is a merit. There are more excellent companies outside Japan that are worth holding.

It is not a matter of which is better between Japanese stocks and foreign stocks. Each has its good and bad points. By focusing on the positives and diversifying by buying both, you can build a more robust asset-management framework.