You are probably losing money while you are reading this. Even if you have your money in the best of the UK’s savings accounts you will be earning 5.7 per cent in interest. Yet inflation is running at 4.4 per cent. After that, you are making a mere 1.3 per cent a year — and that’s before tax.
After tax, lower-rate taxpayers are seeing their spending power fall and higher-rate taxpayers are seeing it all but collapse — every day their cash buys less and less.
This is depressing stuff, but at least saving here hasn’t been such a miserable business for long. Before we complain too much we must spare a thought for savers in Japan.
At the moment interest rates there are 0.25 per cent. That’s about the same level as inflation. The result? The average Japanese saver is making 0 per cent before tax — even less than us! Worse, they’ve been in this situation for years: in an attempt to stave off inflation and recession the Bank of Japan kept interest rates at 0 per cent from 2000 to 2006, only raising them to 0.25 per cent last July.
A Japanese friend of mine rang me a few weeks ago to say that she had been keeping her entire net worth — several hundred thousand dollars — in a savings account in Tokyo for five years. She isn’t much interested in money, but she had just noticed that in all that time her interest hadn’t added up to enough to buy a round of skinny lattes.
So she has decided to move her money out of Japan and she wanted me to tell her where it should go. She’s got the right idea but she has come to it a bit late.
Most Japanese savers have already sent their money abroad — to the UK, Australia, New Zealand and the US — to make its fortune there, and so far with great success. Selling low-yielding yen and buying higher-yielding currencies has turned out to be a brilliant trade.
Two-year government bonds in Britain pay out 4.5 per cent more than similarly dated bonds in Japan, for example, so those that have sent their money here have been making very good returns relative to those they were getting at home without needing any capital growth.
Ordinary investors aren’t the only people doing this. In what has become known as the “carry trade”, professionals and speculators are at it too, only they are gearing things up by borrowing money in yen at Japan’s very low interest rates and then selling it to buy currencies that offer a better return.
All this activity has had one key effect: since everyone is selling, the yen is down to an eight-year low relative to the pound, a four-year low relative to the dollar and a record low relative to the euro. This has been great news for those getting out of the carry trade — if the yen is weaker when they repatriate their money than when they converted it, they get currency gain on top of any returns. But it is also where the opportunity lies for British investors today.
The Japanese stock market had a bad year in 2006 — rising only 4 per cent even as most other developed markets clocked up double-digit gains — but there is every reason to think this should change. Property prices are finally rising; the labour market is picking up; several firms have announced wage hikes for the first time in years; and the nasty decade of deflation the Japanese have suffered could soon be firmly set aside. The economy is on the mend. At the same time, dividend yields are rising in Japan and many stocks — particularly those plugged into the domestic economy — are looking cheap, something you can’t say about many asset classes these days.
All in all, Japan looks like one of the better stock markets. And thanks to the carry trade, buying into the Japanese market is not just about stocks, it’s about the currency too.
As the Japanese economy slowly normalises, interest rates are going to have to do the same — Christopher Wood of CLSA sees them reaching 2 per cent or 3 per cent. This will reduce the interest-rate differential between Japan and other countries, making the yen carry trade much less attractive.
If you are borrowing at 1 per cent to 2 per cent and invested at 5 per cent you may feel that you have a reasonable margin to cushion your risk, but if 1 per cent to 2 per cent becomes 3 per cent to 4 per cent you might feel your trade is no longer quite so safe. If everyone thinks this at the same time and tries to buy back yen in order to get out, we could see a sudden move upwards in the yen. (Most money managers think they’ll be nimble enough to get out before everyone else and so avoid losing money — but they won’t be).
If you buy into Japanese stocks now there is every chance you will get a double whammy of returns over the next two to five years — as the economy shows further signs of recovery, you’ll make money in the market, but you’ll also make money on the currency. The Japanese have made a killing out of buying into us over the past few years. I think we may well be about to do the same by buying into them.
First published in The Sunday Times 4/2/07