A shift in yen fundamentals may alter the Multicurrency sandwich now. Do not miss this message!
Dear International Friend,
Nearly a decade ago the interest rate of the Japanese yen dropped below 3% and led to one of the longest, most successful investment patterns of this century. We have been able to borrow yen at rates as low as 1.625% and reinvest the loan in investments that yield up to 25%, sometimes making over 100% per annum. Because of Japan’s great economic weakness there was little risk of the yen strengthening (The Japanese needed a weak yen to make exporting Japanese products easier.) This wonderful tactic may be about to change dramatically. Here’s why.
In 1968 I took my first flight ever from Portland to Hong Kong and the first touchdown was in Tokyo. I spent several hours in the transit lounge and though more than thirty years have past, several memories are still clear. One was how the restaurant in the lounge showed each of their meals in a plastic model. Beneath the model was the price in yen and a conversion into US dollars at a little over 400 yen per dollar.
Since that time I have watched the yen rise in value from this low of 400 to a high of 79 yen per dollar. Over this entire period, there have been many rises and falls, but there has also been a regular trend line with the yen slowly strengthening versus the US dollar. This pattern put the yen's value today at about 120. A variety of factors affect the daily, weekly and even monthly value of the yen, but for long term if I see the yen above 120, I feel it is too strong. If the yen is below 120, it is too weak. And slowly over a period of time I would have expected the yen to gradually rise. Unless everything has changed as it may have.
This simple measure has helped me earn extra income time and time again. My best recommendation was borrowing yen at 108 (the yen was too strong) and unloading when it fell to 146 (it was too weak). But long periods of strength or weakness can elapse between returns to the long term trend. Years may pass when the yen is too weak or too strong.
After the yen softened to 146 (at which time I recommended readers to take their forex profit) the yen has remained in the 120 range for over a year. Now it is falling again and has dropped to 125 yen per dollar as I write.There are indications that the US and Japanese government, who previously fought devaluation, will now let this happen.
This week’s (Dec 1-7 2001) copy of The Economist has an excellent article “The yen, Let it Fall?” says:
“OVER the past week the yen has begun to slip, after hints that the American government may at last be willing to tolerate a fall in its value against the dollar. A depreciation has always been ruled out by the Bank of Japan. “No matter how much water is poured on a dead plant, it simply will not grow,” said the central bank's governor, Masaru Hayami, a few months ago. Monetary policy, he has argued, can do no more to revive the economy until a dysfunctional banking system is cleaned up, and businesses are restructured.
A December 6th Financial Times article says; “Japan's government has exhausted conventional policy tools to tackle the downturn. Interest rates are already virtually zero. Fiscal spending is constrained by debt levels that are 130% of gross domestic product. And, though the government of Junichiro Koizumi is promoting restructuring, this seems likely to dampen – not boost – growth in the short term.
This has left some economists and politicians concluding that Japan must now turn to unconventional measures. Last month, a senior official in Washington hinted that the US would tolerate Japan buying foreign currency bonds to drive down its currency in order to boost growth – and fight deflation.
The Japanese government now has so much debt that credit rating firms have dropped its sovereign risk rating twice from aaa to aa+ down to aa and it may be decided that a weaker yen is the only answer.
Investors who currently have a Multicurrency sandwich position such as recommended in the several messages below are in a sweet position – see – https://www.garyascott.com/investing/406/ and https://www.garyascott.com/reports/174/ and https://www.garyascott.com/investing/383/
The question now is how long will the yen fall and how low will it go.Right now is a good time to borrow yen. Chances are it will fall further, but if not, the likelihood of it rising beyond the 120 range are low. Your chances for forex profits are greater than for forex losses. If you have already borrowed yen, this is good news. You have probably already gained a small forex profit and may gain more. Watch this website for my thinking on when to take profits will come.
If the yen suddenly falls a lot further, be careful not to jump in at the bottom. The lower the yen goes, the greater the risk it will become oversold and bounce back.
Finally we must ask if this is a long or short trend? Has the long term rise of the yen versus the dollar ended? Have fundamental factors shifted so the dollar will now be the stronger currency?
Keep and eye on yen interest rates. Look at trade balances. Look at Japan’s productivity versus the U.S. Look at politics, economics, stock market trends and all the factors that can affect the short term value of the yen. But in the long run, let the 120 mark remain a general guide……for now.
If the yen is stronger than 120 and other factors suggest borrowing the yen (such as low interest rates), then borrow. If the yen drops below 130, borrowers beware!
Like all general rules, never trust them explicitly. Keep an eye on really big social moves that might cause the rule to weaken. Will Japan sort out its economic mess? Greater productivity in Japan in the 1970s and 1980s helped the yen strengthen. Another such burst of Japanese improvement could help make the 120 marker 115 or 110. On the other hand, all the changes we have reviewed might mean that a 140 yen per dollar becomes the norm for years to come.
Thomas Fischer of Jyske Bank will have an entire session on currencies and the Multicurrency Sandwich at our upcoming January 25-27 course in Quito. He will also show how to borrow low interest loans to buy Ecuadorian property!
See my Multicurrency Sandwich course.
Until next message, good global business and investing!