How to Invest in Japan
For investors hoping to trade or invest on the currency view alone, there are ETFs which are designed to replicate investing in the yen. With these vehicles, investors can go long yen, short yen, and some even offer “leverage” be replicating double short or double long positions.
To access Japan’s fixed income market, typically investors use global or international bond funds. Since Japan represents a large chunk of the international debt market given its massive stock of government debt, it is usually represented significantly in these taxable fixed income mutual funds, especially those that track the popular world government bond indices. While Japanese bonds vary in their ability to offer much in yield, they can offer periods of positive return and also diversification. Currently it is difficult to find much appeal in these bonds; since all bonds up to 15 years in maturity have negative yields, the only way to make money is for the currency to appreciate, or for yields to go even more negative. This move is not impossible; as shown in the chart below, Japanese 10 year government bond yields have continued to surprise by falling more and more for years. Currency movements aside, investors may be able to squeak out a small positive gain if they are willing to buy bonds maturing over 20 years from now; however, at 0.35% yield, there is small incentive.
Japan 10 Year Government Bond Yields (%)
In sum, Japan offers distinct investment plays for those interested in active or passive investing. Given the observable drivers of Japanese asset markets over the last few decades, it is clear that much of the impetus behind returns – either positive or negative – derives from broad macroeconomic trends and policy initiatives. Consequently, knowing a bit about the policy dynamics in Japan will help the global investor assess trends for this country. For 2016, the Japan playbook will remain firmly centered on developments within both monetary and fiscal policy; if nothing is done, markets will likely continue to slump.
