International Investments in Yen?

by | Feb 5, 2007 | Archives

International investments in yen have been one of the most profitable investments of the last 15 years. Those who have borrowed Japanese yen and invested in just about anything have gained! Now the yen is at a cross roads.

International investments have done well because yen interest rates have been so low that the money for leveraging good investments has been almost free.

Recently the yen took a nose dive making extra tidy profit for readers who held international investments with borrowed yen. However Jyske Bank recently sent an analysis that suggests the yen could become stronger. The bank’s analysis said:

International Investments Analysis

“Nikkei hits six-year high. The yen has gained across the board as speculation intensified that G7 finance chiefs might discuss yen weakness at next week’s meeting, a move that could prompt broad buying in the Japanese currency. Several European officials have said they intend to address the issue, while U.S. Treasury Secretary Henry Paulson said on Wednesday he was watching the yen ‘very, very carefully’ but it appeared to be moving with fundamentals.

“Earlier on Thursday, Japan ‘s top financial diplomat, Hiroshi Watanabe, said some G7 members may mention the yen but added he didn’t see a panic unwind of yen carry trades.”

So I did some international investments research to see what other experts say.

Noriel Roubini warns that international investments in the yen could skyrocket up and says: “The Yen has been weak and has kept on depreciating sharply for the last few months relative to the US dollar. Still mixed and weak economic data are coming out of Japan and short term interest rates there are still 0.25% while they were closer to 5.5% in the US ; so the yen is weak and weakening. Massive amounts of carry trades using the yen – and the swiss franc – as the funding currency have been going on for months now leading to sharp increases in leveraged positions by investors who have been shorting the yen to play the carry trade bet.

“Then, the yen starts to appreciate again – by a sharp 9% in one month – when a small emerging market economy defaults ( Ecuador soon?) and a large hedge fund goes belly up (another Amaranth?). Then, suddenly one piece of good news comes out of Japan (a growth pickup?) and in a matter of 72 hours the yen appreciates by 12%. Then a major global macro hedge fund loses $2 billion dollars in 48 hours on the yen unraveling and decides to close shop; another one loses billions too and decides to restructure its operations. Carry trades unravel rapidly, margin calls are triggered, levered positions go belly up and the entire financial system goes into a seizure. Then the Fed is forced to cut the Fed Funds rate in between meetings by 75bps (in spite of still good US GDP growth) in order to avoid a financial meltdown, a collapse of US financial markets and a global recession. And now everyone is starting to worry about a shock that would lead to the unraveling of the yen carry trades.”

This suggests that the yen could skyrocket up. This could be a disaster for those who hold international investments leveraged by yen loans.

However a Stratfor Global Intelligence brief on international investments says: “If the yen is forced to behave like a real currency, Japanese exporters — the only part of the Japanese economy that is doing well — will take a very hard hit and eviscerate growth and land Japan right back where it was before the 2006 recovery.

“And despite the growth of the past year, Japan remains as vulnerable to its past malaise as ever. Tokyo proved unable during the recent recovery to whittle away at its debt mountain at all, so national debt — leaving out local and pension-related debt — still totals more than 150 percent of gross national product (GDP). The massive resources that such debt servicing requires is only part of the reason Japan has not been able to recover. The economy remains addicted to state spending and so Japan ‘s budget deficit still runs in excess of 6 percent of GDP, making it the biggest spendthrift in the developed world.

“Like the other four Japanese economic recoveries of the past 15 years, this one is about to end as Japan once again teeters on the brink of a deflation-assisted recession.”

If this is the case the yen would not rise much as the Japanese economy remains weak and it could drop even more.

I pondered this as Merri and took our evening dusk stroll through the village. What a charming way to end the day, passing the gas lamps and children playing in the streets. People make an occasion of stopping on the sidewalk to chat. Cool air and a festival-like atmosphere.

On our return to El Meson I sat at my desk thinking of ways to deal with such a quandary, when the moon began to rise. I stepped onto our balcony here at the hotel and took this shot. This reminded me of the impact of the stars and planets and the moon on us, the earth and all around us.

This thought about the moon may help us sort out what the yen may do. You can find out why and continue this message at

Until then I hope you yen for good investing!


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