Following Buffett's "gold mining" in Japanese stocks? Investors need to address the issue of the sharp decline in the Japanese Yen first
Buffett hedged currency risk by borrowing low-interest yen, a strategy that ordinary investors find difficult to replicate. Analysis suggests that for ordinary investors interested in investing in the Japanese stock market, currency-hedged ETF products can effectively mitigate the risk of yen depreciation
"The Oracle of Omaha" Warren Buffett once said that he only focuses on important and knowable things, and currencies do not fall into this category - they may be important, but are difficult to predict. Against the backdrop of the continuous decline of the Japanese Yen, investors in Japanese stocks must take exchange rate risks into consideration.
Recently, Buffett has made a fortune in Japanese stocks, and investors following in his footsteps have done the same. Over the past five years, the MSCI Japan Index, measured in Japanese Yen, has risen by 87%, even outperforming the strong S&P 500 Index.
If investors only invest in the largest Japan-related ETFs, their returns will be much lower. Over the past five years, the iShares MSCI Japan ETF has only generated a total return of 36%, mainly due to the one-third depreciation of the Japanese Yen against the US Dollar during the same period.
Therefore, ordinary investors who wish to emulate Buffett need to pay special attention to the risks brought about by fluctuations in the Japanese Yen exchange rate.
Since Buffett first disclosed his investments in Japan in August 2020, the average stock price of the five Japanese trading companies he holds has nearly quadrupled. However, when calculated in US Dollars, they have only increased by 150% - still significant, but significantly reduced.
At the same time, Buffett hedged currency risks through borrowing in low-interest Japanese Yen, a strategy that is difficult for ordinary investors to replicate.
In April this year, Buffett's Berkshire Hathaway investment company issued Japanese Yen-denominated bonds equivalent to $1.6 billion, with interest rates ranging from 0.97% to 2.5%.
Analysts believe that for ordinary investors intending to invest in the Japanese stock market, currency-hedged ETF products can effectively mitigate the risk of the Japanese Yen's decline.
For example, the currency-hedged Japanese ETF from iShares had a return of 31% in the past year, far exceeding the 12% return of the non-hedged version.
Of course, the relationship between the Japanese Yen trend and the Japanese stock market is changing. The traditional view is that a depreciation of the Japanese Yen benefits export companies, thereby driving stock market growth. However, recent market trends have challenged this view.
Last quarter, the Japanese Yen depreciated by 6% against the US Dollar, reaching its lowest level in over thirty years, but the TOPIX Index only rose by 1.5%. Even stocks of exporters like Toyota, who should benefit from a weaker Yen, saw declines last quarter.
