One-month U.S. Dollar at 10% per annum: A Surprising Pitfall of the Weakening Yen

Amid the unstoppable depreciation of the yen, beware of “Do Not Buy” financial instruments that are appearing one after another.

The yen continues to weaken: from 115 yen per dollar in mid-March to 130 yen per dollar in late April. In just over a month, the yen plunged a historic 15 yen. Then, in mid-July, it temporarily dropped to the 139-yen level, the lowest level in about 24 years. The Internet spewed articles such as “bad yen depreciation,” “selling Japan,” and “BOJ’s failure,” creating the impression that the Japanese economy is in a terminal state.

Against this backdrop, financial instruments that “should not be bought” have appeared.

Is it only a matter of time before the yen hits 140 against the dollar?

Amid growing concerns about global inflation, there has been a rush of price hikes in Japan as well, including electricity and gas rates, food products, and daily necessities. In early June, BOJ Governor Kuroda caused a firestorm when he commented that “households are becoming more tolerant of price hikes. This was an outburst of public frustration in the face of successive price hikes after years of no wage growth.

While major Western countries tightened monetary policy, the Bank of Japan continued to ease monetary policy, which was the main cause of the yen’s depreciation. This has led to higher import prices and pushed up various costs. The dominant view in the financial markets is that the direction of monetary policy in Japan and abroad will remain the same and that the yen will weaken further. The tone of the media, including the Internet, is that it is only a matter of time before the yen surpasses 140 yen to the dollar, and the possibility of the yen hitting the 147 yen level seen in August 1998 is being discussed in the currency markets.

The “one-month deposit period” foreign currency deposits are a “weak yen” business….

Then, every time you see an article that says “Japan’s economy will be in trouble due to the weak yen and inflation,” even those who have never been involved in investment may be motivated to do something about it. They may be motivated to do something about it. There is an active campaign for a financial product that is probably targeted at this segment of the population. Foreign currency deposits.

For example, an online bank is running a campaign for a foreign currency time deposit that offers a one-month U.S. dollar deposit at 10% per year. If you see this offer and think, “Sounds good! Be careful. The most important thing to note about this foreign currency time deposit is that the deposit term is “one month. Since the interest rate on savings accounts is shown as an “annual percentage rate,” an interest rate of 10% per year can be converted to a one-month rate of 10% ÷ 12 months = 0.83% (rounded off to two decimal places; the same applies below). The interest rate during the term is 0.83% (rounded to the second decimal place) .In other words, the interest rate during the period is only 0.83%.

Foreign currency deposits are high-risk financial instruments: “There is always a 50-50 chance that the yen will appreciate or depreciate.

In addition to interest, foreign currency deposits provide foreign exchange gains if the yen depreciates from the time of purchase, but conversely, foreign exchange losses are incurred if the yen appreciates. If the aforementioned foreign currency time deposit of 1 million yen is placed at 139 yen to the dollar, and there is no change in the exchange rate at maturity one month later, and the dollar remains at 139 yen to the dollar, the interest will be approximately 8,300 yen. However, if taxes and the bank’s exchange commission of 25.00 yen are deducted, the interest would be 4,840 yen. And if the yen appreciates by 1 yen to 138 yen to the dollar at maturity, the foreign exchange loss would be approximately 7200 yen, resulting in a deficit of more than 2,000 yen, including interest.

Of course, if the yen weakens, a foreign exchange gain will be generated, but the possibility of the yen appreciating or depreciating is always 50-50. Foreign currency deposits are quite risky financial instruments. When the exchange rate is moving rapidly, as it is now, a fluctuation of about one yen in one day is quite possible. You must understand that you are taking a considerable risk in making a foreign currency deposit in such a situation. If you are worried that prices will rise due to a weak yen, you may jump into a seemingly profitable foreign currency deposit, only to lose money due to an unexpected appreciation of the yen–this would be the worst-case scenario.

Financial assets denominated in foreign currencies should be considered from a long-term perspective.

Holding financial assets denominated in foreign currencies is rational in itself. From a long-term perspective, it makes sense to prepare for the risk of a future decline in the value of the yen. In this case, it is necessary to take the basic steps of asset management, such as first checking the status of one’s assets and liabilities, including real estate, and ascertaining how much surplus funds are available for asset management, and then considering what percentage should be allocated to assets denominated in foreign currencies. Aiming for short-term foreign exchange gains is “speculation.

For those who are eager to do something, there are banks that offer high interest rates, such as online banks. For example, some savings accounts, such as Aozora Bank (BANK account), offer an interest rate of 0.2%. This will not cover the higher prices, but it will be a comfort.

If you want to invest, go back to basics and invest in “mutual fund savings.

And if possible, why not take this opportunity to sit back and invest in asset management? I recommend that you invest in mutual fund accumulations. In general, accumulation investment is to purchase financial products in fixed amounts every month, with the aim of achieving continuous results over a long period of time. Since the most important thing is to continue the investment for 10 or 20 years, the amount of monthly savings should be within the range of reasonable spending.

A good target mutual fund (=fund) would be the “Global Equity Type. Simply put, this is a fund that invests in stocks around the world. In the past few years, various investment management companies in Japan have begun offering this type of fund, making it easy to accumulate investments. Some of these funds are eligible for the “Tottate NISA” ( small amount investment tax-exemption system), and we will pick out some of them with low holding costs (called “trust fees”) below.

Asset management risk “can be adjusted by the amount invested.

Since the beginning of this year, global stock markets, including Japan’s, have been declining. Under such circumstances, investing in foreign stocks must seem like a high hurdle. As a financial product, it is riskier than foreign currency deposits. However, by investing in small amounts in a reserve fund, the total investment risk can be controlled.

The investment trusts listed here have a high percentage of foreign stocks, which are assets denominated in foreign currencies, so they can diversify their assets with yen assets. We hope that investors will invest with an eye to the next 10 to 20 years, rather than being distracted by immediate concerns about the yen’s depreciation or inflation. The global stock market is currently in a low price range, which is not a bad time to start investing in savings accounts.

Will the “bad yen” continue?

Finally, a quick note on the exchange rate: since mid-June, long-term interest rates in the U.S. have been on a downward trend, and interest rates for terms up to two to three years have clearly reached a plateau. Therefore, the “selling of the yen” based on the interest rate differential between the U.S. and Japan has temporarily ended. Although the yen has weakened in the aftermath of the dollar’s rise in the euro/dollar exchange rate, it is unlikely that the yen will move lower in the near term unless new materials emerge.

In addition, a weaker yen has a positive impact on the Japanese economy as a whole, as indicated by various macroeconomic models. One clear reflection of this is in the nation’s tax revenues, which in FY2021 are expected to reach approximately 67 trillion yen, up more than 6 trillion yen from the previous year due to an increase in corporate tax revenues benefiting from the weaker yen. This will be a record high for the second consecutive year. In fact, the current trend of yen depreciation began at the end of 2020, and its effects are already being seen. Probably, the yen will further weaken in the current fiscal year and reach a record high.

However, the benefits of a weaker yen are mainly enjoyed by large corporations, with strong disadvantages for small and medium-sized enterprises and households. The best policy to alleviate this inequity is the use of taxes. A 5% consumption tax cut is feasible as a time-limited measure over two to three years if it is financed by an increase in national tax revenues. Measures such as foreign exchange intervention and monetary tightening, which are not expected to be effective, could exacerbate the aforementioned inequalities.