Remember the 80s, and all the paranoia about Japan outdoing us economically? Supposedly they were going to buy up the entire country. Obviously, it didn’t work out that way. In fact, the Japanese economy has stagnated for the last 15 years. In an effort to stimulate its sagging economy, Japan has worked hard to keep the value of its currency low. This gives Japan a significant competitive advantage when exporting goods overseas, as it makes its goods cheaper for foreigners to buy.

Free Money for Banks

Japan has accomplished this in part by keeping its interest rates incredibly low. In fact, its prime rate was zero for a number of years. This has resulted in a phenomenon known as the “yen carry trade.” Investors have been busy for years borrowing Yen and investing the money at higher rates in other currencies, and securities in other countries, such as China. This naturally drove the value of the Yen down even further.

The result is that the Yen has been significantly undervalued for a while, now. Experts have estimated that it is undervalued by at least 40%, in fact. This situation can’t last forever. Japan recently increased its interest rates for the first time in many years, and its overall economy is heating up. The recent meltdown in Chinese stocks spooked some carry traders, resulting in a big jump in the value of the Yen on the same day. As the Dollar continues to weaken , the stage is set for a significant shift in the balance of world currency valuations.

Time to Look at Japanese Assets

The end result will be unpredictable, as always, but the odds point to a big jump in the value of the Yen vs. the Dollar. With the Japanese economy strengthening steadily, Japanese assets of all varieties warrant a close look. They will present the opportunity to profit both from the currency shift, and from the rising fortunes of Japan.

Stay tuned for articles on specific Japanese asset classes, and how to get into them.