The Bank of Japan ended its negative interest rate policy in March of this year, maintaining the interest rate at a level of 0%-0.1%, marking the first rate hike since 2007.

However, the Japanese yen did not receive a boost against the US dollar; instead, it continued to fall.

On the morning of April 29, 2024, it once fell to the 160 level.

Although it soon returned below 160 with the intervention of the Bank of Japan, it remained weak and has not been able to break through the 155 yen level.

Since February 2016, when the negative interest rate policy began, the yen has been continuously depreciating against the US dollar (the higher the value, the lower the exchange rate of yen to US dollar), showing a high correlation between the two.

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What is the fundamental reason for the depreciation of the yen?

The widening interest rate differential is the most intuitive reason to explain this trend.

The Federal Reserve began a rate hike cycle in March 2022, and according to general expectations, it is now at a high point in this dollar interest rate cycle, as the market expects the Federal Reserve to start cutting rates in the second half of this year.

However, looking at the recent decent employment data in the United States and the somewhat stubborn consumer price index, the market seems to realize that expectations for the Federal Reserve to start a rate cut cycle are a bit too optimistic.

In other words, the dollar interest rate may remain at a high level for a longer period.

At the same time, to stabilize exchange rate expectations, the Bank of Japan has stated that it will continue to maintain a loose monetary policy, which means it may not raise rates further.

This means that the interest rate differential between the dollar and the yen will remain at a high level for some time, which is undoubtedly a favorable time for speculative capital to short the yen - selling yen, buying high-interest currencies, and then buying back yen to close positions, which can earn both interest and exchange rate differences, making it a highly profitable business.

The interest rate differential between the US 10-year Treasury bonds and Japanese 10-year government bonds has risen sharply after 2022 and has remained at a high level of more than 300 basis points since the end of 2022, even breaking through 400 basis points in October 2023 when the expectation of the peak of the Federal Reserve's rate hike cycle was the strongest.

However, the interest rate differential has actually fallen back at the end of 2023.

Although it has recently rebounded slightly due to speculation that the Federal Reserve may delay the rate cut cycle, it has not returned to the level at the end of 2023.

Why does the yen's depreciation continue?

The Financial Times believes that rampant speculative activities should be the main reason - betting that the Bank of Japan will not intervene massively and unexpectedly in the foreign exchange market.

On the other hand, Japan's economic fundamentals do not seem to have improved significantly, prompting capital to quickly flee from Japanese assets to gold (safe-haven), US dollars (higher interest), and emerging markets (such as China).

The latest economic data released by Japan shows that in the fourth quarter of 2023 (from September to December 2023), its actual GDP (calculated based on total social expenditure) was 142.64 trillion yen, a year-on-year increase of 1.20%, the lowest increase in the four quarters of 2023.

Looking at the sub-sectors, the Financial Times noticed that in the fourth quarter of 2023, the largest component of Japan's GDP, household consumption expenditure, actually decreased by 0.52% year-on-year, and government expenditure only increased by 0.1%.

The largest driving force for its actual GDP increase should be the export item, which increased by 3.52% year-on-year.

As an export-oriented economy, the fluctuation of Japan's export trade has a great impact on its actual GDP.

In 2020, when the epidemic was the most severe, despite the increase in government expenditure, its overall GDP still decreased due to the decline in export trade.

In 2023, due to the growth effect of exports, despite the slowdown in the growth rate of household consumption expenditure and government expenditure, its overall GDP increase of 1.92% was still higher than the previous year's 0.96%.

The growth of Japan's household consumption expenditure is weak, but the depreciation of the yen has encouraged a large number of tourists to travel and shop in Japan, which will help promote domestic demand.

At the same time, the depreciation of the yen is also beneficial to Japanese companies' exports, which is the advantage of the yen exchange rate being under pressure.

The Financial Times noticed from the data of the Japanese Ministry of Finance that Japan's export value in March of this year (the recent wave of yen depreciation started in early March) increased by 7.32% year-on-year to 9.47 trillion yen; the import value decreased by 5.13% year-on-year to 9.08 trillion yen; and a trade surplus of 387.01 billion yen was generated.

However, the continuous depreciation of the yen exchange rate also has disadvantages.

Japan is a country relatively lacking in resources, and many resources, minerals, and consumer goods need to be imported.

Taking 2023 as an example, Japan's largest net import trade partners are Australia and the Middle East (especially Arab and the United Arab Emirates), because it needs to import minerals from Australia for processing into finished products for export, such as a large amount of imported iron ore, processed into steel to support the development of its automobile manufacturing and export industry - automobiles are the industry with the highest export value in Japan, and it also needs to import fuel from the Middle East to support domestic consumption.

Therefore, the depreciation of the yen will cause domestic production prices and consumer prices to rise - the price of imported products will be raised due to the depreciation of the yen.

For example, due to the depreciation of the yen, steel factories in Japan need to pay a higher yen price for imported mineral products, leading to increased production costs - the cost of automobile manufacturing rises.

If it cannot pass the price to the export price, it will be absorbed by the manufacturer; similarly, consumers need to pay a higher yen price for imported gasoline, which will suppress their willingness to consume, which is not what the authorities are willing to see.

In addition, according to IMF data, Japan's debt-to-GDP ratio has continued to rise, reaching 261.3% in 2022, and according to commodity.com data, the ratio on April 16, 2024, is still as high as 241.64%, which means that the government's debt scale far exceeds its annual income, which will increase the cost and financial pressure of government borrowing.

This is the main reason why the Bank of Japan quickly intervened in the market when the yen fell to 160.

People may be concerned about the impact of the depreciation of the yen on the "stock god" Buffett who has entered the Japanese capital market.

The depreciation of the yen and Buffett's trading response, Buffett had already bought five comprehensive companies in Japan in August 2020, namely Mitsubishi Corporation (8058.TYO), Mitsui (8031.TYO), Itochu Corporation (8001.TYO), Marubeni Corporation (8002.TYO), and Sumitomo Corporation (8053.TYO), and continued to increase holdings.

These five companies are not ordinary, they have a long history and a global business scope.

It is particularly worth noting that these companies all have a common feature: mineral resources constitute their main source of income.

In addition, the business of these companies also extends to various aspects of domestic and foreign consumer life, showing the characteristics of their business diversification.

As mentioned earlier, Japan has obvious shortcomings in mineral resources.

Despite this, as an important force in the world's industry, Japan's industrial production is highly dependent on mineral resources, such as iron ore, copper, lead, nickel, etc.

To cope with this challenge, the Japanese Ministry of Economy, Trade and Industry has been actively guiding domestic large enterprises to invest in mineral resources abroad since last century.

It is worth mentioning that the five major groups invested by Buffett have a large scale in the field of mineral investment, so they can make full use of Japan's market demand and economic development opportunities.

In addition, because the mineral resources of these companies are mainly concentrated abroad, they are relatively less affected by the depreciation of the yen in the operation and management of mineral resources.

Since the surge in the Japanese stock market in 2022, these five major groups have increased by more than 70%, among which the stock price of Mitsubishi Corporation and Mitsui has more than doubled, and this year, the five major groups still maintain a strong double-digit increase, showing a strong capital appreciation momentum.

Since the surge in the Japanese stock market in 2022, these five major groups have increased by more than 70%.

It is particularly worth mentioning that the stock price of Mitsubishi Corporation and Mitsui has more than doubled.

And this year, the five major groups still maintain a strong double-digit growth, showing their strong capital appreciation potential.

What is even more interesting is that the recent yen bond issuance financing strategy adopted by Buffett covers the general needs of corporate operations.

This transaction is essentially an arbitrage operation, and the specific operation process is: borrowing yen at a low cost, then converting these funds into other high-interest currencies, and investing in high-interest assets.

When the bond matures, the funds are converted back into yen to complete the repayment of principal and interest.

From the documents submitted by Berkshire Hathaway (BRK.B.US) to the U.S. Securities and Exchange Commission, the total principal of these bonds is 283.3 billion yen, equivalent to $1.819 billion, of which the largest principal is the 16.9 billion yen preferred notes with an annual interest rate of 0.974% for three years, and the Financial Times estimates the total annual interest of these bonds to be about 3.471 billion yen, equivalent to $22.29 million, with an average annual interest rate of only 1.225%.

For Berkshire Hathaway (BRK.A.US) with tens of billions of dollars in cash holdings, such interest expenditure is not a problem at all.

The key is that Berkshire Hathaway can earn returns much higher than this cost with the borrowed funds.

Even the risk-free U.S. Treasury bond yield is far higher than this interest rate.

Ycharts data shows that the current U.S. one-year Treasury bill rate is 5.21%, which means that Berkshire Hathaway can earn at least 399 basis points of interest difference, not to mention the additional income from the further depreciation of the yen.This is precisely the investment logic of the "Stock God."

Therefore, the wisest investment strategy is not to maximize risk-return by luck during stormy times; but to gain a foresight into the future trends of the macroeconomy during calm times, ensuring stable returns without risk.

This concept is hoped to assist investors who are at a loss at the crossroads of the capital market.