Asia Tea Time - #83 ☕

Why the Yen Is Heating Up and How to Keep Your Money Safe Online

Author

Tim Phillips
November 30, 2024 • Estimated Reading Time: 6 minutes

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This week I talk strength in the Japanese Yen and why we should always need to be on guard for online scams. 

Macro in Asia

Japanese Yen strengthens on hot inflation reading

The Japanese Yen strengthened past the 150 mark against the US Dollar as investors digested a hotter-than-expected inflation report in Tokyo. 

Tokyo’s core consumer price index (CPI) increased by 2.2%, up sharply from the 1.8% rate in October, resulting in the Yen jumping as high as 1.2% versus the US Dollar. 

Why it’s happening

  • When inflation readings come in hot, that typically means a few things but one big takeaway is that interest rates are too low. In other words, monetary policy is “easy” and not restrictive enough.

  • The Tokyo core CPI number is a big one given how much influence it has on the overall data which the Bank of Japan (BOJ) bases it interest rates decisions on.

  • With hotter inflation comes expectations of higher interest rates. What do you get with higher interest rates? Generally, a stronger currency.

Why it matters

  • Speaking of the BOJ, Japan’s central bank is set to meet 18-19 December and – with this hot inflation report – markets now think it’s more likely than not that it will raise the country’s benchmark interest rate at that meeting. 

  • We’ve all been enjoying the super weak Yen (as tourists) but the reality is that higher interest rates will bring about a stronger currency and that will impact both businesses and markets.

  • The Yen has fallen to a 34-year low against the US Dollar in 2024 (a level it hit in April) and whether that weakness continues will be closely watched in the next 6-12 months.

What’s next?

  • Watch the Yen’s strength heading into the US Federal Reserve’s own meeting on 17-18 December, concluding just a day before the BOJ’s own gathering. Investors could see more volatility in those few days.

Tim’s Take 

The Yen carry trade has been one of the most crowded trades in the past few years. What exactly is it? Essentially, it’s betting on the interest rate differential between the higher interest rate in one country (the US) and a super low-rate environment in another (Japan).

Borrowing in a low-yielding currency and then using those funds to buy a high-yielding currency weakens the former (Japanese Yen) and strengthens the latter (US Dollar).

Remember that the Yen carry trade was what was fingered as the cause of that massive market meltdown in early August.

This latest inflation reading could mean that massive differential starts to close a little when the BOJ meets in December – where investors are now pricing in a 60% likelihood that the central bank will raise interest rates. 

Remember that it’s the same month that the US Fed meets and is expected to cut its own interest rate (the Fed Funds rate) by 25 basis points, or 0.25%. The BOJ wants to be able to normalise its interest rate policy over the longer term.

If Japan’s economy can continue growing, while its companies give employees higher wage hikes, then the odds look good that inflation will stay higher and the BOJ can raise rates to a more normal level. Because currently, they’re at 0.25% and that’s not “normal” in any global economy right now.

So, even with hotter-than-expected inflation, that’s technically not a terrible thing for the Japanese economy as long as the BOJ can navigate raising rates without damaging the economy.

For us tourists visiting and spending in Japan, though, it’s not ideal as we head into the winter holiday season.

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Tim’s Money Tip of the Week

It’s pretty scary how common online scams are nowadays. A recent case in Singapore saw a woman lose a total of S$330,000 to an online scammer. She’s now left with just S$600 to her name.

Being rinsed out of our hard-earned money is a scary prospect because it can happen to anyone if we’re not vigilant. How can we stay on top of these things and not get sucked into these traps that scammers try to set?

First off, it’s best to approach anyone contacting us online with some sort of “investment opportunity” as automatically suspect and fraudulent. Promising silly things like “10x your capital in one month” means it’s most definitely a scam.

Remember, most professional investors can’t beat a global index for stocks and global stocks – on average – deliver 8-10% a year over the long term. On a historical basis, that is the best-performing asset. 

Additionally, anyone offering you a “crypto opportunity of a lifetime” is most definitely a scam. I personally feel that’s one of the big downsides to crypto because the asset class is still used widely by criminals due to the inability to trace it. It’s the perfect tool for laundering money and scamming people.

Second, never, ever click any suspect links or links sent from people you don’t know or who would never reach out to you in the first place. By setting our default mode to “cynical” when dealing with online interactions, we can better protect ourselves from online scammers and their numerous traps.