November 3, 2011
Taipei, Taiwan
In our regular conversations, we’re constantly talking about the importance of diversifying overseas, what I call “planting multiple flags.” But international diversification is more than just second passports and offshore bank accounts.
You see, every country on the planet has something to offer. Sure, asset protection is important… but there are also things like lifestyle, healthcare, business opportunities, investment deals, personal relationships, educational opportunities, etc.
Every country has a certain advantage in one or more of these areas. Singapore is great for banking, terrible for cost of living. Ecuador is great for cost of living, terrible for asset protection.
I’m actually in Taiwan right now because a company I co-own has its products manufactured here– Taiwan has a lot of advantages as a ‘production flag’ for businesses.
These advantages change over time, sometimes very quickly. Japan is a great example of this that I want to share.
Now, I haven’t exactly been shy about pointing out its massive economic and demographic woes. Japan’s aging population is being crushed beneath a mountain of debt which dwarfs even the porkiest of the PIIGS.
And yet, for completely incomprehensible reasons, the Japanese yen is considered a safe haven currency. The crazier things get in the west, the more investors are rushing into the yen. In fact, the yen stubbornly hovers near its historic high despite recent government intervention and a zero interest rate policy.
It’s a conundrum indeed, but also a great ‘multiple flags’ opportunity.
You’ve probably heard of the carry trade– this is when you borrow money at low rates, and then invest the funds at a higher rate, often in a different currency or jurisdiction.
This is an old, common approach to make money from countries like Japan where interest rates are low. Investors often borrow from their broker (Interactive Brokers offers Japanese yen for as little as 0.611%) and purchase high yield stocks or bonds, keeping the difference in yield for themselves.
If the exchange rates or the value of your investment fluctuates, however, it’s definitely possible to get hurt. So know the risks and have tight stops in place before you rush out and do this.
To me, the better opportunity to take advantage of in Japan right now is selling into the consumer market. Japan still has a large, highly dense population that wields one of the strongest currencies in the world right now.
It’s a temporary phenomenon– the currency strength won’t last. The entirety of Japanese corporate structure is built on the foundation of a weak yen. The big companies don’t want a strong yen, the government doesn’t want a strong yen.
I suspect the Japanese government may be allowing the yen’s strength to persist for a short period, solely to give companies the chance to buy cheap parts and supplies from overseas. Afterwards, the real devaluation will begin.
For now, though, we’re talking about a market of 130 million people whose per capita income trumps Norway, Hong Kong, and even the United Arab Emirates.
A large part of this is because of the unsustainably strong yen. As such, selling high quality products into this market right now is a very solid opportunity, particularly if you can source from ‘cheap’ countries nearby.
In a way, it’s just another version of the carry trade– buy inventory from countries with undervalued currencies, sell the inventory in Japan’s overvalued currency. I have several friends here doing this and they’re making a fortune.
One friend has been selling for years through a variety of channels– in stores on consignment, via online domestic auction sites [note: the Japanese curiously prefer Yahoo! Auctions], and even in Japan’s famously high-tech vending machines. It’s not rocket science, it just takes someone with the drive to seize the opportunity.
And that’s the thing about international diversification– you’re free to choose whatever you like about every country, whether it’s passports in Cyprus, banking in Hong Kong, a resilient community in Chile… or some unique financial and business opportunities in Japan.
