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Jeff Weniger, head of equity strategy at WisdomTree (WT), spoke with Quartz for the latest installment of our “Smart Investing” video series.
Watch the interview above and check out the transcript below. The transcript of this conversation has been lightly edited for length and clarity.
ANDY MILLS (AM): Your firm is a believer in investing in Japan. Can you tell me about that?
JEFF WENIGER (JW): And we’re the number two player in Japan ETFs in the United States behind, you know who, so we’re right there with Goliath in Japan assets and ETFs here. If you’re thinking about Japanese equities and the rationale for them, nothing has changed in the last month or so. The corporate governance reform continues at pace. In fact, they just recently announced that they’re going to really encourage the remaining companies that are still trading for less than book to basically disclose why they haven’t gotten up above book just yet. I think that there was a lot of risk taken outta the system with the reversal of the yen carry trade a few weeks ago. By many estimates, maybe 50% to two-thirds of the yen carry trades that were on got washed out. There’s a weak hand washout that occurred from that. And again, going back to the fact that human beings don’t want to have egg on their face, the street still believes that the Bank of Japan will probably give us one more hike inside this year. And I’ll tell you, I wouldn’t wanna be running the Bank of Japan and do that. It’s easier for me to just not hike at all, rather than have something blow up in October and have them say aren’t you stupid? Didn’t you see what happened in August when you hiked rates? So the surprise that you see outta the Bank of Japan is, surprise, no hikes. And that puts the yen carry-trade back on ever so slightly risk assets in a bull situation from that.
AM: So you think they’re gonna look at that situation that happened a couple weeks ago and just be like, you know what, we’re gonna let this carry trade continue for the sake of stability. Is that right?
JW: Yeah, and well also, you already had, because the yen was at 1.62 suddenly strength into 1.42. It settled about 1.47, 1.48 as we’re talking right now. That was the tightening of policy. The whole point of hiking rates was, hmm, you know, maybe we can get this outta the 1.60s and into the 1.50s and then suddenly, whoops, we sent this thing into the low 1.40s. So that is the tightening. That would be the thing that would mitigate the inflationary pressures is that we’re no longer at super yen weakness there. And again, also, I mean this is a country where I think, I think inflation is becoming a normalized concept. I think people are comfortable with two percentage points of inflation or thereabouts. Wage negotiations were in the fives. So you could actually get a little bit of a consumer story in that country so long as the BOJ doesn’t upset the apple cart. And I think that there was a level of embarrassment over there in August. So, human beings being what they are, my wager is I don’t think they’re gonna hike anytime soon.
AM: If they did hike, the carry trade fallout might not be over.
JW: That would be the theory. So let’s say we walked outta this room and it was, and there was a surprise middle of the night hike for reasons unbeknownst to us, the yen would strengthen off that reaction. And then if you think about what was your borrowing in yen to, what were you buying? Maybe you were buying Bitcoin, maybe you were buying AI plays. It’s kind of the opposite side of that trade. These were the things that were most upset in the early August action and Japanese equities themselves. Those were basically the things that were on, and those would seemingly unwind under that kind of adverse shock — that sudden thing that would surprise us. And you would wake up and would see S&P 500 tech would seemingly be underperforming on that news. There would be headlines along the lines of, oh man, the carry trade is back on as a risk factor. Are we going to tank the markets? These would be the types of risks that the market would be confronting. But again, who’s putting on a yen carry trade here other than someone who was able to withstand that shock and get through that. So I think it was one of those things where it’s a known quantity. The yen carry trade can reverse. Now September and October rolls around. If you’re putting it on, it’s because you double-checked and triple-checked your risk parameters, called over management to also look at it, and got every quant in the shop to look at it a third time. So I think we’re probably okay. And you can see it from the action in the tape. We’re rallying again.
AM: Thanks a lot, Jeff.
