The Biggest Market Trend You Haven't Heard Of
Everyone should be closely watching the Japanese yen...
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My fiancé and I are going to Japan later this year.
And Jerome Powell, of all people, has made it surprisingly affordable.
The yen has nosedived against the dollar in 2024, reaching its lowest in over 35 years. This has made our trip cheaper than we ever hoped.
However, the implications of this dramatic currency shift extend far beyond our travel plans…
…and it could significantly impact your investment portfolio this year.
Why the Yen's Tumbling
The root cause of the yen's fall is market expectations around U.S. interest rates.
At the year's start, the forecast was for up to seven rate cuts. However, following a spate of unexpectedly high inflation reports, expectations have plummeted to just one or two cuts.
As I wrote to my 850+ Patreon Portfolio members last week, I am not overly concerned about this since the overall trajectory for U.S. rates remains downward, which is generally positive.
Yet, those holding assets tied to the yen might need a strategy pivot, given the widening interest rate differential with the U.S.
Interest Rate Dynamics Explained Simply
The “spread” between the US dollar and Japanese yen is wide because interest rates are now much higher in the US than in Japan.
Think of it like this: imagine you have two banks, one in the U.S. and the other in Japan. Now, if the U.S. bank offers to pay you more money to keep your savings with them, compared to the Japanese bank, where would you want to put your money? You’d probably choose the U.S. bank because you get more in return, right?
This is similar to what’s happening with the U.S. dollar and the Japanese yen.
The U.S. has higher interest rates compared to Japan. Because of these higher rates, more people and businesses want to save their money in U.S. dollars rather than Japanese yen. This increased demand for dollars makes the dollar stronger compared to the yen.
And the current gap is stark: U.S. ten-year Treasury notes yield 4.7%, vastly outpacing Japan's 0.9%. This disparity drives the dollar up and the yen down, stretching your dollar further in Japan, much like a discount for spending U.S. currency.
That's why, even though the prices in Japan haven't changed much, it now costs us less dollars to buy the same things in Japan—like when my fiancé and I go there later this year. It's like getting a discount just because we're spending dollars!
But this dynamic will also help certain investments… and hurt others.
The Winners and Losers of the Depreciating Yen
Other than Americans looking to travel to Japan, there are other clear winners from this new dynamic.
The first is Japanese exporters. These companies make more money when they convert their overseas earnings back into yen. A weaker yen means they get more yen for every dollar, euro, or other currencies they earn abroad. This boosts their profits without them having to increase sales or cut costs.
Big names like Toyota and Sony could see significant gains from this exchange rate shift, making their stocks potentially more attractive.
On the flip side, companies in Japan that rely heavily on importing raw materials or products from abroad will face higher costs. These increased expenses can squeeze their profit margins unless they can pass these costs onto their customers through higher prices.
I plan to capitalize on these trends in my personal portfolio and will be detailing my strategy to our Patreon members this Tuesday. If you're curious about the specifics, consider joining over 850 others who are already benefitting from these insights.
The Bigger Picture
Understanding these dynamics - however esoteric they may seem - can help you align your investment strategy to not only protect your assets but also capitalize on the movements in the currency markets.
For those of us with skin in the game or planning a sushi run to Tokyo—like me and my fiancée later this year—here’s what you need to know: A weak yen could be a windfall for Japanese exporters but a headache for your investments there, especially if you're converting those yen back to dollars.
And here’s a twist: if the Fed surprises us all with more rate cuts than the two we're expecting, that could narrow the gap between U.S. and Japanese interest rates, giving the yen a much-needed lift.
So, if you're eyeing investments in Japan or budgeting for a trip, keep a close watch on those central bank chess moves.
And I’ll keep you updated on my end.
Stay safe out there,
Robert