Thoughts On Japan Market Crisis

On August 5, 2024 you probably woke up to doom and gloom on the news today about Japan’s stock market and how it’s crashing and how that’s going to affect the US stock market and basically how the world is ending. The world is not ending by the way.

I figured many of you might be wondering why your portfolios are temporarily getting hammered last week and probably this week too, so let me try and give you a brief explanation in plain English of what’s going on.

Japan’s Central Bank (basically the same thing as our Federal Reserve) held its interest rates near 0% for the last 15 years. Because rates were so low and remained low, Japanese, as well as other investors, borrowed Japanese money (they used debt) and began investing that borrowed money in stronger currencies and assets, like the US dollar and US stock market.

Essentially, they were betting that the Yen, which is their currency, would continue to fall in value and they could continue to borrow Japan’s cheap money and convert it to US money. That all worked great until about the middle of last week.That’s when Japan’s Central Bank raised their interest rate from 0 to 0.25% which is still insanely low, but it caused the value of the Yen to spike by 7.5%. Now these investors that used debt to invest with are in trouble.

Not only must they pay higher interest for the money they borrowed, they are now facing huge foreign exchange losses from the money they converted to US Dollars as well. The US Dollar assets they are currently holding are not enough to repay the Japanese Yen money they have borrowed.

In short, they need cash right now so this is causing a huge sell off in markets around the world. These traders are facing big losses and are selling their US stocks to raise US Dollars, converting that money back to Japanese Yen to try and pay back their loans. (Don’t ever use debt to invest. The bill always comes due.)

This can (and apparently is) lead to more selling pressure on US stocks and even more declines in the short term.

Middle East war escalation, US political uncertainty is also adding to the fear and panic.

I could go on for hours about this stuff but I'll end it there.

For long-term, goal-focused investors like me and my clients, all of this is noise and means nothing. In fact, these short term crises that cause others to panic are what gives us opportunities to scoop up the stocks of high quality companies at discount prices.

If you read my blogs I always talk about keeping immediate cash needs safe and buying and holding and buying low and selling high and investing in quality companies and rebalancing your portfolios and things like that.

This is why I do that.

I want you to be proactive and not reactive.

You ACT on your financial plan and you do not REACT to financial news.

Hope this helps ease your mind a bit, and hopefully some of you may be in a position to buy while these good companies are temporarily on sale.

You need a plan

If you're interested in "beating the market" or finding the next "hot stock" we can't help you.

If you're interested in creating a goal-focused, long-term plan to ensure you don't run out of money in retirement we can help you.

We create and manage retirement income and investment plans for electric cooperative retirees to ensure the money you have saved lasts the duration of a 20-30 year retirement and beyond.

We work to ensure the money you need in the early years of retirement is safe and not subject to temporary market fluctuations, while at the same time putting the money you'll need in the later years of retirement in a position to receive the permanent market returns necessary to provide an income that increases and outpaces inflation.

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Brian Coleman/Electric Cooperative Retirement Specialist

80/20 Financial Services is an Independent Registered Investment Advisor (RIA) registered in the state of Missouri (CRD# 300772). We help electric cooperative employees in Missouri and throughout the United States transition into retirement. Being independent allows us to work exclusively for YOU.

Photo by Pourya Gohari on Unsplash