Q: I’ve recently started a regular investment plan. I send US$400 per month overseas for tax free growth. The returns on my plan have been very good, but I’m worried about the weakness of the yen. I earn yen and when I invest in dollars I feel like I’m paying an unnecessary charge. Will the yen strengthen soon?

A: Keep doing what you are doing. No one knows where currencies will be even a year from now, but by investing monthly you are able to get an average exchange price as currency markets fluctuate. Saving up larger sums of money to try and time the markets seldom works. Many investors forget about the opportunity cost of letting their money sit in a Japanese bank account; and their total annual returns often end up being lower.

The good news is that the yen has already begun to strengthen against the US dollar between the end of June and beginning of August. And we may see further improvements on the horizon.

Common wisdom suggests that the Japanese government is a champion of a weak yen policy to promote national exports. We only need to look to Toyota’s recent press conference to see this principle at work. Toyota announced in early August a Y491.54Bn quarterly profit, adding that weakness in the yen had added Y100Bn to its operating income.

But things are beginning to change. Even if we ignore market volatility related to US sub-prime loans there is still reason to be optimistic about the dollar-yen direction. On June 26, 2007 the Nihon Keizi Shimbun said that within the Japanese Ministry of Finance a weak yen is no longer being seen as acceptable. There are several possible explanations for this seemingly abrupt change in policy but overall global competitiveness is a common theme. A country cannot depend solely on robust export for a healthy, growing economy. To attract foreign investment there needs to be some strength in the underlying currency. Furthermore, a weak yen has a direct negative effect on small and mid-sized manufacturers as the cost of imported raw materials have a negative impact on their already tight profit margins.

Only time can show the direction of any currency pair, but it would seem that a shift in the fundamentals of the dollar-yen pair is very possible. For investors such as yourself who are taking advantage of investment opportunities in low-tax districts, your yen work that much harder for you.

For more information about Regular Investment Plans for foreigners living in Japan contact Objective Trading.

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