If you hold growth stocks and have never thought about Japanese monetary policy, here’s why you should.
Japanese rates sat near zero for decades and are only now around 1%, which is historically high for them. US rates are several points higher. So you borrow cheaply in yen and buy higher-yielding assets elsewhere. Done conservatively, it’s a small spread on safe paper.
That’s not what most people do. They borrow in yen and buy risk assets, which means leverage stacked on top of leverage across the system.
The trade needs a weak yen to keep working. But Japan imports nearly all its energy, so a falling currency eventually becomes intolerable, and the Bank of Japan steps in. Now the trade unwinds: sell US assets, buy back yen. The first person out is fine. Everyone after that is selling into a falling market with margin calls behind them, and if you’re leveraged in a high-beta name, a 5% market move is not a 5% move for you.
August 2024 is the template. The yen rallied hard, the Nikkei fell over 12%, the Qs dropped roughly 5% in days. It recovered within months.
Nothing has broken this time. That’s the honest answer. It’s a headwind worth knowing about, not a reason to do anything.
Which is why we’re changing nothing. We place the trades the systems give us and go do something else. No leverage in names we hope will move.
That’s Stats Edge Pro, $149.99 a month, 30-day money-back guarantee.
Michael Nauss, CMT, CAIA, CDMS