<h3><span class="strongInContent">The weaker the yen, the higher the price&#8230;What you need to know about the relationship between &#8220;exchange rates&#8221; and &#8220;index funds</span></h3>
<p>While domestic and foreign stocks have been soft, the price movements of index funds such as &#8220;S&amp;P500&#8221; and &#8220;Orcan,&#8221; which are very popular in NISA, have remained strong. <span class="strongInContent">The main reason for this is the ongoing depreciation of the yen in the foreign exchange market. In the case of &#8220;no currency hedging,&#8221; prices rise as the yen weakens.</span> However, when the <span class="strongInContent">yen appreciates, the price will fall. So, what is the actual impact of the yen&#8217;s appreciation on prices?</span> 　An expert explains how the NAV of an overseas index fund works.</p>
<figure id="attachment_372542" class="wp-caption alignnone" style="width: 640px;" aria-describedby="caption-attachment-372542"><a href="#" data-ident_hash="e308db7b"><img src="https://res.cloudinary.com/fridaydigital/image/private/t_article_image/wpmedia/2024/05/3131e13e3ae37da89ed99f2bac3f770c.jpg" alt=""></a><figcaption id="caption-attachment-372542" class="wp-caption-text">How much will it fall when the yen appreciates?</figcaption></figure>
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<h3><span class="strongInContent"> In the wake of the stock market slump</span><span class="strongInContent"> The &#8220;Nikkei</span><span class="strongInContent"> S&amp;P500</span><span class="strongInContent"> and &#8220;Orkan&#8221; are doing very well.</span></h3>
<p>After peaking in late March, the U.S. stock market turned downward and has been in an adjustment phase. The Nikkei Stock Average, which also peaked at 41,000 yen in late March, has also been in a slump. Texts such as &#8220;This is the first trial since the start of the new NISA&#8221; have appeared on the Internet news and social networking services, but not many people seem to be feeling the pain.</p>
<p>This is because index funds such as &#8220;S&amp;P500&#8221; and &#8220;Orcan,&#8221; which are overwhelmingly popular in the NISA, are moving near their highs (Orcan is the common name for Mitsubishi UFJ Asset Management&#8217;s &#8220;eMAXIS Slim&#8221; series &#8220;Global Equity [All Country]&#8221;). (Orcan is the common name for Mitsubishi UFJ Asset Management&#8217;s eMAXIS Slim &#8220;All Country&#8221; series.)</p>
<p>The reason for this is the ongoing depreciation of the yen. Most individual investors are not hedged against exchange rate fluctuations, so when they invest, they convert yen into dollars or other foreign currencies. Therefore, the more the yen weakens, the more the prices of foreign currency-denominated assets, such as the S&amp;P 500 and the Orcan, rise.</p>
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<h3><span class="strongInContent"> Rates of appreciation due to the &#8220;weaker yen&#8221; exceed those of the indexes.</span></h3>
<p>The impact of the yen&#8217;s depreciation is larger than one might imagine. The S&amp;P 500, which consists of about 500 U.S. companies listed on the U.S. stock market, rose about 7% from the end of 2011 to the end of April 2012, while the index fund in yen terms rose about 19%. <span class="strongInContent">This</span><span class="strongInContent">difference of</span><span class="strongInContent">about</span><span class="strongInContent">12</span><span class="strongInContent">percentage points can be attributed to the yen&#8217;s depreciation</span>.</p>
<p>How about Orcan? The underlying index, the MSCI All Country World Index (&#8220;MSCI ACWI&#8221;), on a local currency basis has also risen about 5% from the end of last year to the end of April &#8217;24. In yen terms, it rose about 17%, the same as the S&amp;P 500 by about 12 points. The yen&#8217;s depreciation has also boosted the index by 12%, exceeding the growth rate of the underlying index.</p>
<h3><span class="strongInContent"> The fund is linked to an index calculated by the management company on a yen-equivalent basis.</span></h3>
<p>The <span class="strongInContent">impact of exchange rates on index funds that invest in overseas markets</span>, such as the S&amp;P 500 and Orkan, is <span class="strongInContent">larger than is generally believed</span>. This can be clearly understood by understanding how the NAV of a fund is determined. Let us explain the NAV of a fund that invests in overseas markets.</p>
<p>The monthly reports and management reports of the &#8220;eMAXIS Slim&#8221; series show that the NAV is linked to the underlying indexes of the S&amp;P 500 and MSCI ACWI, but not to the underlying indexes of the S&amp;P 500 or MSCI ACWI, which also reflect &#8220;dividends,&#8221; so the difference between the two is the NAV in &#8220;yen terms. The difference is the &#8220;yen-equivalent basis. The difference is that the S&amp;P500 and MSCI ACWI are calculated by the asset management companies on a &#8220;proprietary&#8221; basis. In the case of the &#8220;eMAXIS Slim&#8221; series, Mitsubishi UFJ Asset Management calculates them.</p>
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<h3><span class="strongInContent">The NAV is calculated using the &#8220;mid-rate&#8221; of the foreign exchange market.</span></h3>
<p>The calculation method is to multiply the closing price of the underlying index on the &#8220;previous day&#8221; in the overseas market by the exchange rate of the domestic market on that day. The exchange rate used here is called &#8220;Nakane&#8221; or &#8220;TTM,&#8221; and is usually determined at around 10:00 a.m.</p>
<p>For example, in the case of the S&amp;P 500, the closing price of the S&amp;P 500 in the U.S. market on the previous day multiplied by the TTM of the domestic exchange market on that day becomes the NAV for that day (in the case of eMAXIS Slim, the closing price of the S&amp;P 500 on the business day before July 3, 2006, was set at The value differs from that of the underlying index because the closing price of the S&amp;P 500 on the business day prior to July 3, 2006 is used as the index value.)</p>
<p>In the case of Orcan, the procedure is to multiply the previous day&#8217;s fixed closing price of the foreign asset by the day&#8217;s domestic mid-market price, and then add the closing price of the subject asset in the domestic market on that day. After all this is done, the NAV for the day is finally determined.</p>
<p>Thus, the <span class="strongInContent">fluctuations of the underlying index and the exchange rate are multiplied, rather than added together. Conversely, if the yen appreciates when the underlying index declines, the decline in the NAV will also be amplified.</span></p>
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<h3><span class="strongInContent"> The influence of the dollar-yen rate on the &#8220;Orcan&#8221; is less than 90%.</span></h3>
<p>The S&amp;P 500 is composed of U.S. companies, so all asset prices are denominated in dollars. Therefore, the degree of influence of the exchange rate can be determined by looking at the dollar-yen rate.</p>
<p><span class="strongInContent"> May</span><span class="strongInContent"> May 10</span><span class="strongInContent"> The NAV on May 10 was 29,170</span><span class="strongInContent"> The NAV on May 10 was ¥29,170</span><span class="strongInContent"> yen, and the midpoint is</span><span class="strongInContent">155.70</span><span class="strongInContent"> The NAV on the 10th was 29,170 yen, and the mid-price was 70 yen. Tentatively,</span><span class="strongInContent"> S&amp;P500</span><span class="strongInContent"> were the same and the middle price was</span><span class="strongInContent"> 10</span><span class="strongInContent"> yen at a 10% higher level.</span><span class="strongInContent"> 140</span><span class="strongInContent"> yen, the NAV would be</span><span class="strongInContent"> 10</span><span class="strongInContent"> NAV would fall 10% to 26,200</span><span class="strongInContent"> JPY6,200</span><span class="strongInContent"> The NAV would fall 10% to about 26,200 yen.</span></p>
<p>How about [ORKAN]? It consists of a total of approximately 2,900 stocks of companies from 23 developed countries and 24 emerging countries, of which U.S. companies account for more than 60% by market capitalization. Although U.S. companies account for a high percentage, nearly 40% are companies from other developed and emerging countries, so the currency is also diversified.</p>
<p><span class="strongInContent"> Based on the results obtained from the data so far, it is estimated that just under 90% of the foreign exchange fluctuation to the Orcan is due to the dollar-yen rate, while more than 10% is due to other currencies, but surprisingly, other currencies have appreciated more against the yen than the dollar, which has had the effect of pushing the price of the Orcan even higher.</span></p>
<p>The reason why this was surprising is that, in general, the degree of volatility in asset prices is reduced when currencies are diversified. Nevertheless, the NAV of the Orcan has risen more than the rise in the dollar. <span class="strongInContent">Perhaps, the huge boom in the Orcan brought in a large number of orders to sell yen against a currency that had previously had little trading volume with the yen, causing it to rise more than the dollar.</span></p>
<p>In light of this, although there is a possibility that the <span class="strongInContent">NAV of the Orcan may fall more than the rate of decline in the dollar-yen rate if the trend turns toward a stronger yen in the future, the continuous demand to sell yen through reserve investments and other means may have the effect of currency diversification during periods of yen appreciation, and may act as a brake on price declines due to a weaker dollar and a stronger yen. This may well have the effect of putting the brakes on price declines due to the weak dollar and strong yen.</span> This will depend on the trading conditions of currencies other than the dollar and the yen.</p>
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<p>Therefore, in the case of a weak yen, the effect of the exchange rate on the NAV of Orcan is expected to exceed the rate of increase in the dollar-yen rate, as it has been in the past. On the other hand, when the yen appreciates, it is probably best to assume that the impact of the exchange rate will be about 90% of the decline in the dollar-yen rate, assuming the braking effect of continued yen selling demand.</p>
<p><span class="strongInContent"> May</span><span class="strongInContent"> 10</span><span class="strongInContent"> NAV on May 10 was 20,000</span><span class="strongInContent"> The NAV on May 10 was 20,000 yen.</span><span class="strongInContent"> The NAV on May 10 was 24,737 yen, which is a</span><span class="strongInContent"> 10% appreciation of the yen</span><span class="strongInContent"> yen appreciation of 10% from the current value.</span><span class="strongInContent"> At 140 yen, the NAV would fall 9% to 20,000 yen.</span><span class="strongInContent"> When the yen appreciates 10% from the current level to 140 yen, a 9% decline in the NAV would result in a loss of 22,500,000 yen.</span><span class="strongInContent"> 2500</span><span class="strongInContent"> The NAV would fall by 9% to about 22,500 yen.</span></p>
<p>Note that this is the result of going back to &#8230;&#8230; for the past 1, 2, and 3 years from the end of April &#8217;24, as Orcan started operations in October &#8217;18 and the sample of data is small, Please note that this is a tentative conclusion, as the data sample is small and the Orcan has only been in operation since October 2006.</p>
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<h3><span class="strongInContent">Why is currency diversification less effective?</span></h3>
<p>To begin with, I would like to add some additional information on why the impact of the dollar-yen rate is nearly 90%, even though the countries, regions, and currencies in which we invest are diversified.</p>
<p>When you trade yen with a currency other than the dollar, you basically buy dollars with yen first, and then use those dollars to buy the currency you originally wanted to buy. For example, when buying euros with yen, the procedure is to buy dollars with yen and then buy euros with those dollars. Thus, when <span class="strongInContent">investing in developed or emerging countries other than Japan with Orcan, once you buy dollars,</span> you are buying dollars.</p>
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<p>The reason why this procedure is used is that the trading volume of currencies other than the yen and the dollar is not large, so directly placing a large volume of buy orders will cause the rates to fluctuate greatly. The dollar, the key currency with high liquidity and narrow price range, has a certain volume of transactions with all currencies, so transactions are stable.</p>
<p>Even if you exchange yen to dollars to local currency and hold the local currency, you will continue to be affected by the dollar. In the foreign exchange market, for example, the &#8220;Euro-Yen&#8221; rate is displayed as &#8220;1 euro = 165 yen,&#8221; but that is a figure calculated by multiplying &#8220;euro/dollar&#8221; and &#8220;dollar/yen. The combination of currencies other than the dollar and yen is called &#8220;cross yen,&#8221; but the cross yen rate itself is affected by the dollar-yen rate. This is the background of the strong influence of the dollar-yen rate, even if the currencies are diversified.</p>
<p>Orkan&#8217;s investment report (overall version) lists the currencies used for the year-end valuation of foreign currency denominated assets. Those interested should refer to it.</p>
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<h3><span class="strongInContent"> What You Need to Know about Mutual Funds for Long-Term Investments</span></h3>
<p>Recently, there has been a noticeable increase in the number of people close to me who say, &#8220;I am investing in Orkan through NISA. However, very few people understand the essential details, such as the impact of exchange rates. While it is true that understanding the mechanics does not necessarily improve investment performance, there are at least some things that one should know about the products to which one is allocating one&#8217;s valuable assets.</p>
<p>This is necessary in order not to panic if the excessive depreciation of the yen is corrected and the yen appreciates, or if the S&amp;P 500 or the Orcaans unexpectedly decline.</p>


 After working as a money writer, financial planner, and market analyst for a securities company, Matsuoka became independent in 1996. He writes articles on finance and asset management mainly for business and economic magazines. Author of "A Textbook for the First Year of Robo-Advisor Investing" and "Understanding with Rich Illustrations! A book that will definitely benefit you with cashless payment".

 Kenji Matsuoka

 While domestic and foreign stocks are soft, index funds such as "S&P500" and "Orcan", which are very popular in NISA, have maintained strong price movements. The main reason for this is the ongoing depreciation of the yen in the foreign exchange market.

“S&P 500” and “All Country Index” Boom Due to Weak Yen

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