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Jeff Weniger, Head of Equity Strategy at WisdomTree (AT)spoke with Quartz for the latest episode of our Smart Investing video series.
Watch the interview above and read the transcript below. The transcript of this conversation has been lightly edited for length and clarity.
ANDY MILLS (AM): Your company is a proponent of investing in Japan. Can you tell me more about that?
JEFF LESSER (JW): And we’re number two in Japanese ETFs in the U.S., behind, you know who, so we’re right up there with the front runners here when it comes to Japanese assets and ETFs. If you think about Japanese equities and the reasons for that, nothing has changed in the last month or so. Corporate governance reform is moving along apace. In fact, they just recently announced that they’re really going to encourage the remaining companies that are still trading below book value to essentially disclose why they haven’t gotten above book value yet. I think that with the reversal of the yen carry trade a couple of weeks ago, a lot of risk was taken out of the system. By many estimates, maybe 50% to two-thirds of the ongoing yen carry trades have been washed out. That’s led to a weak washout. And again, going back to the fact that people don’t want to be embarrassed, the Street still believes that the Bank of Japan is probably going to give us another rate hike this year. And I tell you, I would not want to run the Bank of Japan and do that. It is easier for me not to raise interest rates at all than to experience something in October and then hear that aren’t you stupid? Didn’t you see what happened in August when they raised rates? So the surprise you see from the Bank of Japan is, surprise, no hikes. And that causes the yen carry trade to go back to ever so slightly risky assets in a bull situation.
AM: So you think they’re going to look at the situation a few weeks ago and just say, “You know what? We’re going to let this carry trade continue in the interest of stability.” Is that right?
Jehovah’s Witnesses: Yes, and also you already had that because the yen was at 1.62 and suddenly it dropped to 1.42. It settled at about 1.47, 1.48 as we’re talking about. That was the tightening of policy. The whole point of the rate hike was, hmm, you know, maybe we can get this from the 1.60s to the 1.50s and then, hey presto, we sent this thing to the low 1.40s. So that’s the tightening. That would be what would mitigate the inflationary pressures, that we’re no longer at extreme yen weakness there. And I mean also, this is a country where inflation is becoming a normalized concept, I think. I think people are comfortable with two percentage points of inflation or something like that. Wage negotiations were around five percent. So you could actually get some consumer sentiment in this country as long as the BOJ doesn’t upset the cart. And I think there was some embarrassment there in August. People being what they are, I don’t think they’re going to raise interest rates any time soon.
AM: If they raise interest rates, the consequences of the carry trade may not be over yet.
Jehovah’s Witnesses: That would be the theory. So let’s say we left this room and there was a surprise increase in the middle of the night for reasons unknown to us. The yen would strengthen as a result of that reaction. And then when you think about what you borrowed yen for, what did you buy? Maybe you bought Bitcoin, maybe you bought AI games. It’s kind of the opposite side of that trade. Those were the things that were causing the most excitement in the early August action and the Japanese stocks themselves. Those were basically the things that were going on that were seemingly unraveling under this kind of negative shock – this sudden thing that would catch us by surprise. And you would wake up and see the S&P 500 Tech seemingly underperforming because of this news. There would be headlines like, “Oh man, the carry trade is back as a risk factor. Are we going to drive the markets down?” Those would be the kinds of risks that the market would face. But again, who’s doing a yen carry trade here other than someone who could take that shock and get through it? So I think it was one of those things where you know. The yen carry trade can reverse. Now September and October are coming. If you’re putting it on, it’s because you’ve double- and triple-checked your risk parameters, brought in management to look at it, and asked all the quants in the business to look at it a third time. So I think we’re probably OK. And you can see that in the action in the tape. We’re bouncing back.
AM: Thank you, Jeff.
