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When someone is saying he burns down your house (BoJ in this case), i am pretty sure you don`t forget about your fire insurance.

If the government is publicly claiming they will burn down all houses in yen-street, don't you think these houses will instantly drop in value and will sell for far lower prices than houses in other streets? And don't you agree that insurance for these houses would instantly become ridiculously expensive? My point is that all information currently available about QE should be (more or less) incorporated in the spot exchange rate - otherwise somebody could arb it. Since the Japan QE story became huge news the USD/JPY has moved from 80 to 120, a 50% depreciation. I would say it is pretty likely that the market is _expecting_ future QE in Japan to happen.

 

There are banks lending money, companies issuing bonds, huge pension funds, insurers, and countless other actors that have future in- and outflows in yen. Through asset prices, bond prices, interest rate swaps, futures, forwards, etc. etc. all this stuff is linked to the 'live' exchange rate - i.e. any discrepancy can be arbitraged. Call Goldman Sachs and they will instantly give you a market for the USD/JPY exchange rate in 2025 or something. And you are saying: '**** them - they're wrong and I know better because I am the CoBF armchair expert on Japan macro-economics'. I think that's hubris :) .

 

But these discussions are getting a bit tiresome - let's just say we agree to disagree and get back to valuing Japanese companies instead.

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@writser I don`t know if the Yen will move up or down, and i don`t care either. I will make money when the stocks reach fair value regardless of what the currency does. I just wanted to point out that the currency is a real risk that you can remove very cheaply. And now finally back to valuations :).

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I'm going to keep this discussion alive a bit longer :)

 

Has anyone actually hedged their exposure to the Yen?  Care to enlighten us, ahem, lazier people on how expensive it is and how much effort it takes?

 

The last time I looked into it, it looked like I'd have to roll futures regularly every month or two, which really goes against my "sit there and do nothing" (i.e., be lazy) style.

 

Thanks in advance!

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I'm going to keep this discussion alive a bit longer :)

 

Has anyone actually hedged their exposure to the Yen?  Care to enlighten us, ahem, lazier people on how expensive it is and how much effort it takes?

 

The last time I looked into it, it looked like I'd have to roll futures regularly every month or two, which really goes against my "sit there and do nothing" (i.e., be lazy) style.

 

Thanks in advance!

 

Back when I first looked at Japan a mutual fund manager reached out to me.  He walked me through how to hedge cheaply, it involved buying futures contracts and rolling like you said.  The problem was the futures contracts came in a minimum size of $100k blocks.  I'm not moving $100k worth of Yen around, so I'd end up with this crazy bet on the direction of the currency.

 

There's some way to hedge at IB for a few percent.  This is interesting to me because I've had a lot of push back on the Y3000 Fidelity charges to trade in Japan.  A lot of investors go to IB and pay Y30 to trade, then put on this perpetual hedge for a few percent a year.  They're hedged, but there's a carry associated with that.

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frommi, rukawa - thanks for the contrary posts.  Well-reasoned and much for me to consider.  But:

 

1. With the global slowdown nearly everywhere except the U.S., and U.S. long rates likelier to be higher rather than lower, aren't these enough to want to hedge in most major foreign currencies, not just Japan?

 

2. When do you remove the hedges?  What are the criteria for when it is safe to remove them?  Will your criteria leave you open to the dreaded accusation of "market timer"?

 

To be honest I don't really think I completely understand what I am talking about. And here I am driven more by gut instinct than any real understanding. My instinct is that the Japanese will depreciate their currency. Most of the rest is just hand waving.

 

This is terrifically refreshing candor.  I'll follow you into the confession booth:

 

1. I don't have a single original neuron in my skull regarding this issue.  Hence, my brazen copying/pasting of writser, whose thinking process and preferences (judging by reading all his posts), seems to match my psychology and preferences.

 

2. I'm just rationalizing away the pain.  7 of 8 of my Japanese net-nets are winners, in yen terms, but 0 of 8 in U.S. dollar terms.  But it's only been 4 months.  I don't want to follow Pabrai who abandoned his Japanese net-nets within a year(?).

 

3. I'm rationalizing/justifying my laziness.  writser again:  "But hedging costs money . . . and hedging would be extra work and I am lazy."  (I can't even be original about my sloth.)

 

The temptation to hedge in Japan has been high.  Hedging, like exercise, may be good for you, but I'll rephrase Prof. Robert M. Hutchins of the Univ. of Chicago:  "Whenever I feel the urge to hedge, I lie down until it goes away."

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When someone is saying he burns down your house (BoJ in this case), i am pretty sure you don`t forget about your fire insurance.

If the government is publicly claiming they will burn down all houses in yen-street, don't you think these houses will instantly drop in value and will sell for far lower prices than houses in other streets? And don't you agree that insurance for these houses would instantly become ridiculously expensive? My point is that all information currently available about QE should be (more or less) incorporated in the spot exchange rate - otherwise somebody could arb it. Since the Japan QE story became huge news the USD/JPY has moved from 80 to 120, a 50% depreciation. I would say it is pretty likely that the market is _expecting_ future QE in Japan to happen.

 

There are banks lending money, companies issuing bonds, huge pension funds, insurers, and countless other actors that have future in- and outflows in yen. Through asset prices, bond prices, interest rate swaps, futures, forwards, etc. etc. all this stuff is linked to the 'live' exchange rate - i.e. any discrepancy can be arbitraged. Call Goldman Sachs and they will instantly give you a market for the USD/JPY exchange rate in 2025 or something. And you are saying: '**** them - they're wrong and I know better because I am the CoBF armchair expert on Japan macro-economics'. I think that's hubris :) .

 

But these discussions are getting a bit tiresome - let's just say we agree to disagree and get back to valuing Japanese companies instead.

I don't think it's hubris really. I think it's more of saying: I'm not really sure what will happen but if nothing happens I'll still make a lot on the equity, so I'll push the uncertainty to someone that has a view. In your example, this would most likely not be Goldman. Goldman would take either side of that trade, base the forward price on cost of carry,  and then likely hedge themselves.

 

As we were discussing on other threads, the hedge can't perfect and Fx rates affect the business in other less direct ways.

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I don't think it's hubris really. I think it's more of saying: I'm not really sure what will happen.

 

That would be a valid reason to hedge but I think some of the so-called hedgers are kidding themselves: they say they hedge because they are not sure what will happen but actually they do have a very strong opinion: the yen is overvalued and the BoJ will destroy it. If you truly have no special knowledge why bother hedging? Deflation might be just around the corner, turning your investment in a double whammy.

 

Also, I think it's dangerous to apply hedges arbitrarily, i.e. some people in this thread only hedge yen exposure (and might even time when to start and stop doing so). In such scenarios it is _extremely_ easy to trick yourself into thinking you are 'hedging' while in fact you are making macro bets. Managing money in this way also makes it very attractive to gamble a little bit, i.e.: "I can lock in a nice gain in the currency hedge", "I can't sell my stock now because I'm down on the hedge", "the euro is up so much today, I'm also going to hedge my Fiat exposure", etc. We (I) unfortunately fall easily for such fallacies and that's why I want to avoid these situations. If you want to hedge either you hedge everything or you hedge nothing. Something inbetween is not a hedge.

 

This reminds me of a funny story another forum member once told me about the treasurer of a small corporation. This guy would look at all major currencies every month and decide: "well, this month we are going to hedge the JPY, not hedge the USD, hedge the GBP and not hedge the CAD". And the next month it would be the other way around. Up to some extent I feel that that's what some of you are doing. Which is fine by me - it's just not what I would call a hedge and I think it's very important to make that distinction.

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I am not hedged because I have no knowledge about this stuff.  Honestly if other people hadn't been talking about the yen being in danger it would never even have occurred to me.  I never hedged stocks I bought in singapore or europe for example.  Another reason not to hedge is that I might be so bad at this that I lose money on the stocks and the currency.  After all if I'm being honest I don't really know that much about either one.

 

Still I think there are good arguments for hedging.  I remember that Tweedy Browne paper, and I came away from it with the impression that they were not in favor of hedging.  But the excerpt that theasiareport posted would actually be a good argument for hedging.  Maybe I didn't really understand it.

 

 

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  • 4 weeks later...

I'm going to keep this discussion alive a bit longer :)

 

Has anyone actually hedged their exposure to the Yen?  Care to enlighten us, ahem, lazier people on how expensive it is and how much effort it takes?

 

The last time I looked into it, it looked like I'd have to roll futures regularly every month or two, which really goes against my "sit there and do nothing" (i.e., be lazy) style.

 

Thanks in advance!

I'm still looking into this, but with IB I do not believe it is necessary to roll futures. If you have a margin account, I believe you can buy USD and sell JPY (BUY USD.JPY) by creating an FX order in the "FX Matrix" quote window or  the"FX Trader" tool. Mechanically IB loans you JPY to buy USD.

 

You pay interest on the JPY loan based on a tiered spread to JPY LIBOR S/N (https://www.interactivebrokers.com/en/index.php?f=interest&p=schedule2). Currently the rate one would pay is between 1.54% and 0.54%, depending on the size of the loan. Usually you would also earn interest on the resulting USD purchased (for balances above 10K), but the formula they use (Fed Funds - 0.50%) currently results in no interest on USD balances even if over the 10K threshold.

 

So 1.54% annualized plus the FX trade commission is the cost. This could get a little expensive, particularly if it takes multiple years for the trades to work out. Has anyone looked into the futures route? Maybe it's cheaper that way.

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I'm going to keep this discussion alive a bit longer :)

 

Has anyone actually hedged their exposure to the Yen?  Care to enlighten us, ahem, lazier people on how expensive it is and how much effort it takes?

 

The last time I looked into it, it looked like I'd have to roll futures regularly every month or two, which really goes against my "sit there and do nothing" (i.e., be lazy) style.

 

Thanks in advance!

I'm still looking into this, but with IB I do not believe it is necessary to roll futures. If you have a margin account, I believe you can buy USD and sell JPY (BUY USD.JPY) by creating an FX order in the "FX Matrix" quote window or  the"FX Trader" tool. Mechanically IB loans you JPY to buy USD.

 

You pay interest on the JPY loan based on a tiered spread to JPY LIBOR S/N (https://www.interactivebrokers.com/en/index.php?f=interest&p=schedule2). Currently the rate one would pay is between 1.54% and 0.54%, depending on the size of the loan. Usually you would also earn interest on the resulting USD purchased (for balances above 10K), but the formula they use (Fed Funds - 0.50%) currently results in no interest on USD balances even if over the 10K threshold.

 

So 1.54% annualized plus the FX trade commission is the cost. This could get a little expensive, particularly if it takes multiple years for the trades to work out. Has anyone looked into the futures route? Maybe it's cheaper that way.

 

Thanks wknecht.  1.0%+ annually is a little expensive for my blood.

 

I briefly looked at rolling futures, but it looked like there was going to be a lot of effort involved because the futures I saw only went out a few months at max.  Someone else on this board said there were longer term futures available, but I couldn't find them (I didn't look very hard though).

 

I'm in the same camp as you, I'd love hear about how someone in real life executed a hedge.  If anyone knows how to do this, and has actually done this, please speak up!  TIA!

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I'm going to keep this discussion alive a bit longer :)

 

Has anyone actually hedged their exposure to the Yen?  Care to enlighten us, ahem, lazier people on how expensive it is and how much effort it takes?

 

The last time I looked into it, it looked like I'd have to roll futures reigularly every month or two, which really goes against my "sit there and do nothing" (i.e., be lazy) style.

 

Thanks in advance!

I'm still looking into this, but with IB I do not believe it is necessary to roll futures. If you have a margin account, I believe you can buy USD and sell JPY (BUY USD.JPY) by creating an FX order in the "FX Matrix" quote window or  the"FX Trader" tool. Mechanically IB loans you JPY to buy USD.

 

You pay interest on the JPY loan based on a tiered spread to JPY LIBOR S/N (https://www.interactivebrokers.com/en/index.php?f=interest&p=schedule2). Currently the rate one would pay is between 1.54% and 0.54%, depending on the size of the loan. Usually you would also earn interest on the resulting USD purchased (for balances above 10K), but the formula they use (Fed Funds - 0.50%) currently results in no interest on USD balances even if over the 10K threshold.

 

So 1.54% annualized plus the FX trade commission is the cost. This could get a little expensive, particularly if it takes multiple years for the trades to work out. Has anyone looked into the futures route? Maybe it's cheaper that way.

 

Thanks wknecht.  1.0%+ annually is a little expensive for my blood.

 

I briefly looked at rolling futures, but it looked like there was going to be a lot of effort involved because the futures I saw only went out a few months at max.  Someone else on this board said there were longer term futures available, but I couldn't find them (I didn't look very hard though).

 

I'm in the same camp as you, I'd love hear about how someone in real life executed a hedge.  If anyone knows how to do this, and has actually done this, please speak up!  TIA!

 

 

I use IB for all my foreign trading.

I'm a little surprised to see that people believe there are annual costs of over 1 percent to hold yen.  I believe that one of the strengths of Ib is the currency stuff.

I do not have any current Japanese holdings (although I've bought yen in the past).  However I have other non-us based holdings in IB (Canadian , euro) and I've reviewed the statements.

 

When you guys are talking about "hedging the yen" it gets a little confusing. I think a more simple way to think about it is, what is the currency of the stock that you want to buy. Here's an

example.  You want to buy a Japanese stock and you are in the us and don't have yen (but you have a positive cash balance of usd)

If you click "buy" on IB for that stock you will own the stock.  However, you only have usd in your account but you needed yen to buy the stock.  So at this point Ib will indicate that you have a positive cash balance in usd (exact same as before) and you have a negative yen cash balance - the exact amount that it cost to purchase your yen denominated stock.

Assuming you do nothing further, you are basically "short yen".  You are borrowing yen from Ib and that's why you will pay an annual margin cost for this.  Let's call it 1 percent (not sure exactly).

However you can simplify this.  By converting some of your (as yet unspent) usd balance into the appropriate number of yen, you can wipe out this margin balance. Basically you would just "buy yen" in the exact amount of your deficit. You would have to look at the usd.jpy market and back out how many usd you would want to sell at that price to exactly equal the amount of yen you want to buy. This is the only annoying part.

At this point once you've done the trade you should be left with

1) some usd balance (whatever you didn't have to convert)

2) a position in a Japanese stock

3) nothing else (no yen position)

You would not have to pay any recurring interest, ever.

 

That's the way I understand it. You would never need to get involved with futures

So, all in, the costs really would be the one-time commissions (stock, currency) which are both low. Then of course the bid/ask spread for the stock and currency (usd/yen is tight).

 

I have done this with Canadian and euro stocks.

I do not believe there is annual interest (if you have a zero or positive cash balance)  My understanding is its as simple as buying the appropriate currency one time.

 

Please correct me if you have evidence to the contrary -  I could be wrong in which case I would certainly want to evaluate my portfolio.

 

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I'm going to keep this discussion alive a bit longer :)

 

Has anyone actually hedged their exposure to the Yen?  Care to enlighten us, ahem, lazier people on how expensive it is and how much effort it takes?

 

The last time I looked into it, it looked like I'd have to roll futures reigularly every month or two, which really goes against my "sit there and do nothing" (i.e., be lazy) style.

 

Thanks in advance!

I'm still looking into this, but with IB I do not believe it is necessary to roll futures. If you have a margin account, I believe you can buy USD and sell JPY (BUY USD.JPY) by creating an FX order in the "FX Matrix" quote window or  the"FX Trader" tool. Mechanically IB loans you JPY to buy USD.

 

You pay interest on the JPY loan based on a tiered spread to JPY LIBOR S/N (https://www.interactivebrokers.com/en/index.php?f=interest&p=schedule2). Currently the rate one would pay is between 1.54% and 0.54%, depending on the size of the loan. Usually you would also earn interest on the resulting USD purchased (for balances above 10K), but the formula they use (Fed Funds - 0.50%) currently results in no interest on USD balances even if over the 10K threshold.

 

So 1.54% annualized plus the FX trade commission is the cost. This could get a little expensive, particularly if it takes multiple years for the trades to work out. Has anyone looked into the futures route? Maybe it's cheaper that way.

 

Thanks wknecht.  1.0%+ annually is a little expensive for my blood.

 

I briefly looked at rolling futures, but it looked like there was going to be a lot of effort involved because the futures I saw only went out a few months at max.  Someone else on this board said there were longer term futures available, but I couldn't find them (I didn't look very hard though).

 

I'm in the same camp as you, I'd love hear about how someone in real life executed a hedge.  If anyone knows how to do this, and has actually done this, please speak up!  TIA!

 

 

I use IB for all my foreign trading.

I'm a little surprised to see that people believe there are annual costs of over 1 percent to hold yen.  I believe that one of the strengths of Ib is the currency stuff.

I do not have any current Japanese holdings (although I've bought yen in the past).  However I have other non-us based holdings in IB (Canadian , euro) and I've reviewed the statements.

 

When you guys are talking about "hedging the yen" it gets a little confusing. I think a more simple way to think about it is, what is the currency of the stock that you want to buy. Here's an

example.  You want to buy a Japanese stock and you are in the us and don't have yen (but you have a positive cash balance of usd)

If you click "buy" on IB for that stock you will own the stock.  However, you only have usd in your account but you needed yen to buy the stock.  So at this point Ib will indicate that you have a positive cash balance in usd (exact same as before) and you have a negative yen cash balance - the exact amount that it cost to purchase your yen denominated stock.

Assuming you do nothing further, you are basically "short yen".  You are borrowing yen from Ib and that's why you will pay an annual margin cost for this.  Let's call it 1 percent (not sure exactly).

However you can simplify this.  By converting some of your (as yet unspent) usd balance into the appropriate number of yen, you can wipe out this margin balance. Basically you would just "buy yen" in the exact amount of your deficit. You would have to look at the usd.jpy market and back out how many usd you would want to sell at that price to exactly equal the amount of yen you want to buy. This is the only annoying part.

At this point once you've done the trade you should be left with

1) some usd balance (whatever you didn't have to convert)

2) a position in a Japanese stock

3) nothing else (no yen position)

You would not have to pay any recurring interest, ever.

 

That's the way I understand it. You would never need to get involved with futures

So, all in, the costs really would be the one-time commissions (stock, currency) which are both low. Then of course the bid/ask spread for the stock and currency (usd/yen is tight).

 

I have done this with Canadian and euro stocks.

I do not believe there is annual interest (if you have a zero or positive cash balance)  My understanding is its as simple as buying the appropriate currency one time.

 

Please correct me if you have evidence to the contrary -  I could be wrong in which case I would certainly want to evaluate my portfolio.

 

Not quite sure I follow here.  So at the end you're left with your non-converted USD holding and a Japanese stock position that's denominated in Yen that you purchased at once.  This is the same as Fidelity or E*Trade, it's unhedged.  You purchased at a single price and if the currency appreciates/depreciates your holding does as well as viewed in USD.  You still own the same amount of the company in Yen.

 

Hedging is different.  I'm guessing the margin you're talking about is a contra-balance or something.

 

Let's take this through logically.

 

Unhedged:

 

You have $1000 and want to purchase a Japanese stock for ¥700.  To ease our example lets say USD/Yen is 1:1 so at the purchase you have $300 and ¥700.

 

In USD you still have $1000, and in Yen you have ¥700.  So let's say the currency moves against you so that it's now 1:2

 

You still have $300 and ¥700, but in total in USD you now have $650.  It's because that Yen depreciated by half, if you sold and converted back into USD it would take twice as much Yen to purchase USD as it did before.

 

Hedged

 

Same scenario as above.  Yen depreciates 50%.  So you have a $650 position, but IB has this 1% margin hedge instrument that's now worth $350.

 

So you have:

$300 USD

¥700 worth $350

$350 position from IB

=$1k total

 

Hedging is always popular when the dollar is riding high.  Back in 2010 I didn't see many discussions of hedging USD, just the opposite, those unhedged where riding a wave.  For example Canadians on this board have done extremely well with their USD holdings as the dollar has appreciated.  Currencies cut both ways.

 

The counter-point to hedging is that it's a separate investment bet, it's a bet on the direction of a currency.  If one thought a currency would appreciate why hedge?  So it's an implicit call on what one thinks the currency will do.

 

Here's another point, no currency is fixed.  So the currency one owns as their 'home' currency is floating as well, but those floating movements are only viewed related to another currency.  Nothing is fixed, although many (most?) Americans can't fathom that the USD isn't the absolute best currency that's every existed.

 

I run my portfolio unhedged, why?  I don't have a good track record of predicting what economies and currencies will do.  I'd say I'm probably 0/100 for economic predictions.  Things I thought would happen never did, others that I thought wouldn't happen did.  But I can pick undervalued companies, so I stick with that and let economics work out for themselves.

 

If I could invest with 20/20 hindsight I would have hedged this year, but in some past years I wouldn't have hedged so I could have had foreign gains.  You really just don't know.

 

This was long, hopefully helpful.  I'd say to check your assumptions.  Not sure how IB reports, but Fidelity reports both foreign values and USD values.

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I'm going to keep this discussion alive a bit longer :)

 

Has anyone actually hedged their exposure to the Yen?  Care to enlighten us, ahem, lazier people on how expensive it is and how much effort it takes?

 

The last time I looked into it, it looked like I'd have to roll futures reigularly every month or two, which really goes against my "sit there and do nothing" (i.e., be lazy) style.

 

Thanks in advance!

I'm still looking into this, but with IB I do not believe it is necessary to roll futures. If you have a margin account, I believe you can buy USD and sell JPY (BUY USD.JPY) by creating an FX order in the "FX Matrix" quote window or  the"FX Trader" tool. Mechanically IB loans you JPY to buy USD.

 

You pay interest on the JPY loan based on a tiered spread to JPY LIBOR S/N (https://www.interactivebrokers.com/en/index.php?f=interest&p=schedule2). Currently the rate one would pay is between 1.54% and 0.54%, depending on the size of the loan. Usually you would also earn interest on the resulting USD purchased (for balances above 10K), but the formula they use (Fed Funds - 0.50%) currently results in no interest on USD balances even if over the 10K threshold.

 

So 1.54% annualized plus the FX trade commission is the cost. This could get a little expensive, particularly if it takes multiple years for the trades to work out. Has anyone looked into the futures route? Maybe it's cheaper that way.

 

Thanks wknecht.  1.0%+ annually is a little expensive for my blood.

 

I briefly looked at rolling futures, but it looked like there was going to be a lot of effort involved because the futures I saw only went out a few months at max.  Someone else on this board said there were longer term futures available, but I couldn't find them (I didn't look very hard though).

 

I'm in the same camp as you, I'd love hear about how someone in real life executed a hedge.  If anyone knows how to do this, and has actually done this, please speak up!  TIA!

 

 

I use IB for all my foreign trading.

I'm a little surprised to see that people believe there are annual costs of over 1 percent to hold yen.  I believe that one of the strengths of Ib is the currency stuff.

I do not have any current Japanese holdings (although I've bought yen in the past).  However I have other non-us based holdings in IB (Canadian , euro) and I've reviewed the statements.

 

When you guys are talking about "hedging the yen" it gets a little confusing. I think a more simple way to think about it is, what is the currency of the stock that you want to buy. Here's an

example.  You want to buy a Japanese stock and you are in the us and don't have yen (but you have a positive cash balance of usd)

If you click "buy" on IB for that stock you will own the stock.  However, you only have usd in your account but you needed yen to buy the stock.  So at this point Ib will indicate that you have a positive cash balance in usd (exact same as before) and you have a negative yen cash balance - the exact amount that it cost to purchase your yen denominated stock.

Assuming you do nothing further, you are basically "short yen".  You are borrowing yen from Ib and that's why you will pay an annual margin cost for this.  Let's call it 1 percent (not sure exactly).

However you can simplify this.  By converting some of your (as yet unspent) usd balance into the appropriate number of yen, you can wipe out this margin balance. Basically you would just "buy yen" in the exact amount of your deficit. You would have to look at the usd.jpy market and back out how many usd you would want to sell at that price to exactly equal the amount of yen you want to buy. This is the only annoying part.

At this point once you've done the trade you should be left with

1) some usd balance (whatever you didn't have to convert)

2) a position in a Japanese stock

3) nothing else (no yen position)

You would not have to pay any recurring interest, ever.

 

That's the way I understand it. You would never need to get involved with futures

So, all in, the costs really would be the one-time commissions (stock, currency) which are both low. Then of course the bid/ask spread for the stock and currency (usd/yen is tight).

 

I have done this with Canadian and euro stocks.

I do not believe there is annual interest (if you have a zero or positive cash balance)  My understanding is its as simple as buying the appropriate currency one time.

 

Please correct me if you have evidence to the contrary -  I could be wrong in which case I would certainly want to evaluate my portfolio.

The situation that I was describing where one pays 1.5% annually is basically what you describe in your first "short yen" case. Assuming the price of the stock hasn't changed, in this case you are less exposed to a decrease in JPY because if JPY decreases, you lose money in USD on your asset and make money on the liability. In your second case where you close out the loan by buying JPY, if JPY decreases, you lose money in USD on your asset without any offsetting gain.

 

Above I'm just rehashing to address the specific point you raised. In this and other threads there's been a bit more theoretical discussion of why hedging (the first case where you are short JPY) is more complicated (for example, because JPY impacts the business itself).

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The counter-point to hedging is that it's a separate investment bet, it's a bet on the direction of a currency.  If one thought a currency would appreciate why hedge?  So it's an implicit call on what one thinks the currency will do.

 

I am in the opposite camp here and of the opinion that when you don`t hedge you make an explicit bet that the currency stays stable or that your currency losses and gains will be equal over the long run. That may be true or not, but you can`t be sure.

 

To illustrate the current hedge at IB:

It looks like this when i buy something:

 

CurrencyCash StockBalance
Yen-100000 1000000
USD1000 01000

 

So at the moment i buy something i have no exposure in Yen. Of course the margin balance has the cost to borrow yen which is 0.5% - 1.5% dependend on the size.

 

When my stock picks reach full value it looks like this:

 

CurrencyCash StockBalance
Yen-100000 200000100000
USD1000 02000

 

So now i have exposure to the Yen! But that is ok because thats only the part where i made money, not the principal. I still profit when the Yen goes against me but my stocks reach full value.

 

 

That is the part that i don`t like, but that is highly unlikely:

 

CurrencyCash StockBalance
Yen-100000 0-100000
USD1000 0-1000

 

In case the currency goes against me and at the same time my stock picks go to zero i can lose more money than i invested or even get a margin call. The last part is what annoys me the most, but at the moment i live with it by having more cash in the account than necessary.

 

I do this because i enjoy looking at macro from time to time and it is so obvious to me that the yen has to depreciate over time, as long as the central bank policy in the US/Japan stay the same. I can understand when somebody doesn`t want to do this extra work, but than its questionable if foreign investing is worth the additional risk.

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I now see what was being referred to.

I (perhaps mistakenly) got the sense that there was some concern that even doing unhedged trades in Ib would result in an annual carry cost (which I believe it does not so long as you are willing to do a currency trade in addition to the stock trade). Sounds like fidelity and Etrade do it all in one transaction which is certainly simpler so long as you are getting a fair exchange rate.

 

I personally don't hedge - I also don't have a strong conviction of currency moves, and 1.5 percent is a high price to pay so it requires some motivation.

Secondly, such as high percentage of my assets are in usd that it seems like a welcome diversification to have some foreign exposure.

 

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It seems that when a country is in a debt trap, like japan, there is serious currency risk. The most likely way out is the central bank financing the government, which will hurt the yen. Just looking at the data here should make you at least a little bit uncomfortable. You also then have to wonder why these net nets seem to exist in such large numbers.

 

Just seems like you have to apply some sort of probability tree to it. And it seems more likely then elsewhere in the western world that their currency will be devalued. Anything from a little bit of devaluation to hyperinflation. Having an opinion on this macro stuff is not so much a matter of thinking binary, like either you think it will happen or it won't. And if you think it really will happen you hedge, if you think it will not happen you dont hedge. You just have to look at the odds. And the odds dont look good for the yen in this case. So you have to figure out some discount to apply to the cash stash, and their future cash flows. In that case it seems 1.5% could be quite cheap?

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Has there ever been a country where the inhabitants are rich (Japan has the second largest amount of wealth in the world) and the country went broke?  I do not think so.  If worse came to worse the Japanese government could impose a wealth tax, problem solved.  The countries that have problems have little accumulated wealth to support their currencies in addition to large amounts of debt.  The yen is supported not only by the government and central bank but all the privately owned assets in Japan owned by individuals and companies.  If you look at the balance sheets of many of the Japanese firms you will see alot of accumulated wealth and the amount is growing.

 

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Has there ever been a country where the inhabitants are rich (Japan has the second largest amount of wealth in the world) and the country went broke?  I do not think so.  If worse came to worse the Japanese government could impose a wealth tax, problem solved.  The countries that have problems have little accumulated wealth to support their currencies in addition to large amounts of debt.  The yen is supported not only by the government and central bank but all the privately owned assets in Japan owned by individuals and companies.  If you look at the balance sheets of many of the Japanese firms you will see alot of accumulated wealth and the amount is growing.

 

Packer 

The only way out of the debt trap would be to rob it's citizens. Is that really going to fly? Or they would have to privatize airports and roads... I would get seriously pissed if I saw my government spend money irresponsibly and then robs my money to pay it off. At least after WW2 there were good reasons. Either way, you will see a flight from the yen as more people and corporations will try to store wealth offshore?

 

At some point the japanese will stop borrowing to the Japanese government. Outside investors demand a higher yield, and they are running out of people to borrow from inside the country. Large institutions are selling more then buying etc. The Central bank cannot directly finance the government (only buy on the open market), so at some point you will see a serious devaluation in the yen to cut down on their massive debt load when they have to borrow abroad and pay >1% interest. That is when a quickly larger and larger % of tax revenue will be spent on interest.

 

Even in a best case scenario, you will see some yen devaluation purely because of the fear that will kick in at some point. And a best case scenario seems to be that at some point the government will rob it's citizens and privatize stuff that should not be privatized... Also selling government assets to the public usually does not happen at the best valuations. And the government debt load already exceeds their assets. I think there is over 300 trillion yen of liquid assets on corporate balance sheets. So if you tax half of that, that is 150 trillion yen. Vs debt not held by government of about 800 trillion yen.

 

This has not happened before, because in the past the country was usually saved by a lot of new young people entering the work force. Families all having 2-3 children. Like in the first half of the 20th century. Now that situation is reversed.

 

Also if they impose a wealth tax, guess who is going to have to help paying... Companies with large amounts of cash. Finally a lot of that wealth is tied up in non liquid assets? And if that would happen, how will valuations of japanese stocks not be hurt?

 

And even if they temporarily tax their own citizens to death to reduce the debt load, they will still have not enough tax revenue for their expenditures even without massive interest payments. So the economy will most likely be seriously hurt, whatever happens.

 

Anyway, all v pessimistic, and I hope Im wrong. But the argument against Japan just seems too convicing to even bother, unless the discount is that much larger then other countries.

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Has there ever been a country where the inhabitants are rich (Japan has the second largest amount of wealth in the world) and the country went broke?  I do not think so.  If worse came to worse the Japanese government could impose a wealth tax, problem solved.  The countries that have problems have little accumulated wealth to support their currencies in addition to large amounts of debt.  The yen is supported not only by the government and central bank but all the privately owned assets in Japan owned by individuals and companies.  If you look at the balance sheets of many of the Japanese firms you will see alot of accumulated wealth and the amount is growing.

 

Packer 

 

I agree with you, but currencies are driven by supply and demand. On the one hand there is tightening in the US and on the other there is the BoJ in full throttle on the money press. These forces are what drives the currency and nothing else matters at the moment.

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I do think the dollar will get stronger until QE4 which will in essence be a competitive devaluation.  No one wants to hold the rock (stable currency).  In the 1930s, holding the rock is what made the depression last so long and now even Switzerland doesn't want to hold it. 

 

Also, I think the same thing that happened in the US will happen in Japan and Europe; alot of the QE will end back up as a central bank deposit and the only assets that will benefit will be financial assets (stocks and bonds). 

 

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What will happen when they run out of borrowers inside Japan? Since so many savings are cashed in now and savings are declining?

 

There are about 600 trillion  yen of liquid assets among consumers and corporations. 700 trillion in total government assets (counting roads and things that could realistically not be sold, government owned corporations are only 60 trillion total). Vs total debt of over 1 quadrillion. But those private and corporated stashes of liquid assets are already taxed. Can they really tax them like 50%? Like that won't cause social unrest...  Current account balance will barely cover it of only 1 trillion yen. And there is no way they can inflate themselves out of this mess and close the budget gap without some serious devaluation. Thinking inflation of several % will not at least cause some panick among all those older citizens who have been used to no inflation in the last 2 decades would be naive.

 

If you think you will see the same situation as in the US, you will be likely wrong imho. The US did not have the same demographic and debt problem combined this badly.

 

So the two outcomes: Liquid assets, corporate cash stashes will be either hurt by taxes, or by devaluation. Or maybe a third scenario where you will be fine. But which seems at best somewhat likely. The Japanese government would have to somehow double taxes with a shrinking number of people in the work force in that scenario, and with massive debt loads everywhere. Increasing taxes will decrease GDP as well. And profit margins of Japanese corporations are razor thin. Or they will somehow cut pensions, and then the older population goes back in the work force, there is no social unrest and somehow that raises GDP and tax income? And that would lift profit margins, which will lift tax revenue.

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"It seems that when a country is in a debt trap, like japan, there is serious currency risk. The most likely way out is the central bank financing the government, which will hurt the yen. Just looking at the data here should make you at least a little bit uncomfortable. You also then have to wonder why these net nets seem to exist in such large numbers."

 

I'm no expert on the matter so sorry for butting in.

 

In national economic policy the holy sin is having debt in foreign currency while having assets in the national currency. That is how nations get into debt traps (I'm Icelandic so I should know from experience). Japan is the textbook opposite, with almost no foreign debt and a high percentage of national wealth in foreign assets.

 

If Japan is in such a debt trap and the yen so vulnerable, how come the BoJ and other CBs were forced to sell yen to stem the appreciation of the yen after Fukushima?

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I am not from Japan but this is based on my understanding from a few good Japanese friends:

 

What most people tend to forget is that culturally and traditionally, Japanese is one of the most patriotic, united, and rather unique nation. Take it to an extreme, a 'sepukku' (stomach-cutting) is deemed as a very honourable act. In fact, if I am not mistaken, Japan has one of the highest suicidal rate in the world. The society, as a whole, does not view suicidal as a failure - but the other way, as long as you are doing the society a greater good; and responsible for yourself - a suicidal could be viewed as a honourable act. This mindset is deeply wired in their mind; and embedded in their culture, for the last few hundred/ thousands years.

 

If the people are ready to sacrifice their lives for the country/society, what do you think will happen when the day comes and the Government asks the people to write-down the debt (or tax 50% etc)?

Will there really be any social unrest ? 

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