We don't often use foreign currency in our daily life, but in the world of investment, there are various ways to use foreign currency. However, unlike other investment methods, not many people may understand the necessity of foreign currency investment in the first place. This time, I will introduce the necessity of foreign currency investment, the difference between foreign currency deposits and FX, and the criteria for determining which type of foreign currency investment suits you.
Are your assets only in Yen? Why we need foreign currency
Foreign currency is closely related to the economy. Japan has a declining birthrate and an aging population, and the working population, which is the generation in the prime of life, is decreasing. As a result, the economy may stagnate and tax revenues may decline, leading to a deterioration in public finances.
If Japan's economic strength begins to decline, people will think that the Japanese yen is worthless even if they have it, and foreign investors will sell it, leading to a depreciation of the yen and an increase in the price of imported goods. It is possible.
This not only has a major impact on the Japanese economy, which is a major importer, but also has implications for individual asset management. If you hold foreign currency assets, even if the value of the yen declines, if the value of foreign currency assets rises, the rate of decline in the overall assets can be suppressed.
Rather than saying, "Foreign currency investment is irrelevant because there is no opportunity to pay in foreign currency in everyday life," it can be said that foreign currency investment is necessary for risk hedging to protect your entire assets.
Fundamentals of foreign currency investment
Here, we introduce basic knowledge related to foreign currency investment.
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Currency exchange refers to a method of settlement instead of cash, and familiar examples include bills and checks. When this is done in the currencies of different countries, it is called "foreign exchange" because it requires an exchange of currencies.
The exchange rate of each country's currency is called the foreign exchange rate, and it is characterized by fluctuations depending on supply and demand. The exchange rate is used when exchanging currencies between different countries, and the appreciation or depreciation of the yen is determined based on this exchange rate. A strong yen means that the value of the yen is higher than that of its counterpart currency, and if the value of the yen declines, the yen will weaken.
The interest rate difference between the Japanese yen and foreign currency
In foreign currency investment, not only the exchange rate but also the interest rate is important. The current situation is that the Japanese yen has a lower interest rate than foreign currencies. For example, when comparing the same ordinary deposits, although it varies depending on the financial institution, Japanese yen ordinary deposits are generally 0.001% per annum, while foreign currency ordinary deposits in US dollars are 0.01% per annum (February 2021 Current)
If there is no exchange rate fluctuation, the difference is 10 times. The fact that there are many currencies with higher interest rates than the Japanese yen is one of the attractions for foreign currency investment. Foreign currency investments include not only foreign currency ordinary deposits but also various financial products such as foreign currency time deposits and foreign bonds, so you will be able to find products with higher interest rates.
What is the difference between a foreign currency savings account and FX?
Next, let's consider the differences between the most common method of foreign currency investment, "Foreign Currency Ordinary Deposit" and "FX (Foreign Exchange Margin Trading)" while listing the advantages and disadvantages.
What is a foreign currency deposit?
A foreign currency deposit is a deposit made in a foreign currency. There are two types of foreign currency deposits: foreign currency ordinary deposits and foreign currency time deposits. The contents are the same as those of yen ordinary deposits and time deposits. Foreign currency ordinary deposits allow you to deposit and withdraw freely, while foreign currency time deposits do not allow you to deposit and withdraw freely until the maturity date. Foreign currency time deposits are characterized by higher interest rates than foreign currency ordinary deposits, as they cannot be withdrawn freely.
Advantages and disadvantages of foreign currency deposits
・ Advantage 1: You can aim for foreign exchange gains
The first advantage is that you can aim for foreign exchange gains due to exchange rate fluctuations. For example, let's say you bought 10,000 US dollars at a price of 70 yen to the dollar. If it were all converted back to Japanese yen when the dollar was 130 yen, the profit would be 600,000 yen.
This calculation does not take into account currency spreads, but currency fluctuations can make you this profitable.
・ Advantage 2: You may receive a higher interest rate than the Japanese yen
The second advantage is that you may get a higher interest rate with a foreign currency deposit than with a regular deposit in Japanese yen.
As mentioned above, you can operate at a more advantageous interest rate by depositing in US dollars and other currencies than in ultra-low interest Japanese yen. If you take advantage of the campaigns that each financial institution is doing, you may be able to receive a higher interest rate.
・Disadvantage 1: Exchange rate fluctuation risk
Since exchange rates fluctuate all the time, there is no guarantee that the yen will depreciate more than when you deposited it. If the yen depreciates, you will earn foreign exchange gains, but if the yen appreciates, you will suffer foreign exchange losses. Exchange rates fluctuate due to political and economic factors around the world, so it is necessary to be aware of the risks in advance.
・ Disadvantage 2: Exchange fees are charged
Fees are something you have to be careful about when investing in foreign currencies. A fee will be charged when converting Japanese yen to another country's currency and when converting from another country's currency to Japanese yen. This fee is called an exchange fee or exchange spread, and the amount varies depending on the financial institution and currency.
It is better to check in advance when trading. Also, be aware that if you convert back to yen without considering exchange fees, you may get less profit than you expected.
What is FX?
FX is an abbreviation for "Foreign Exchange" and is officially called foreign exchange margin trading, an investment product aimed at obtaining foreign exchange gains. Since it is a transaction that allows you to deposit a certain amount of collateral and use it to increase the investment amount for foreign exchange trading, the risk is high, but you can expect a high return accordingly.
Advantages and disadvantages of FX
・ Advantage 1: You can aim for foreign exchange gains
The first advantage is the same as foreign currency deposits, and foreign exchange gains can be obtained due to fluctuations in exchange rates.
・ Advantage 2: You can receive swap points
A swap point is a characteristic advantage of FX, and is the difference in interest rates received when selling a currency with a low-interest rate and buying a currency with a high-interest rate, and must be paid in the opposite case.
Since the interest rates of each country are different, it would be unfair to exchange only currencies. Swap points exist to solve this problem. For example, let's say you sell a currency with an interest rate of 1% and buy a currency with an interest rate of 3%. Then the difference will be 2% (yearly). You can receive the amount converted to 2% per day as a swap point. With foreign currency deposits, you can't receive interest for one year if you don't deposit for one year, but with FX, you can receive one day at a time.
Advantage 3: You can trade with a larger amount than your cash on hand
Leverage can be used in FX, so by depositing a "margin", which is the meaning of a security deposit, it is possible to trade several times the number of funds on hand. The higher the leverage, the higher the expected return.
・ Disadvantage 1: There is a possibility of large losses due to market fluctuations
The exchange rate is affected not only by Japanese news, but also by various factors such as global economic news, natural disasters, and remarks by leaders of various countries. Therefore, even in a short period of time, there is a possibility of large fluctuations, and in some cases, there is a possibility of having a large loss.
・ Disadvantage 2: You may lose more than your funds
If you trade using leverage, which is also mentioned as an advantage, you will have to deposit additional margin if a sudden market fluctuation causes a loss that exceeds the margin. There is also a mechanism for loss cut (forced liquidation) if the unrealized loss exceeds a certain level.
How to invest in foreign currency (foreign currency deposit, FX)?
To start a foreign currency deposit, you need to open an account at a bank or online bank. Foreign exchange fees and deposit interest rates differ depending on the financial institution. Choose a financial institution that is convenient for you and offers the most favorable conditions.
To start Forex, you need to open an account with a securities company, online securities company, or Forex trading company. As with foreign currency deposits, foreign exchange spreads and swap points are different for each company, so be sure to compare and choose a financial institution that is easy to use.
Please note that both foreign currency deposits and FX may require a tax return for foreign exchange gains and losses. Please remember that it is considered miscellaneous income under the tax law and is subject to taxes such as income tax.
Foreign currency deposits are safe for low-risk people
Both foreign currency deposits and FX are products with exchange rate fluctuation risk. Foreign currency deposits are funded from cash on hand, but FX is also a product that allows you to use your cash on hand and invest a larger investment amount. Therefore, if you adjust the leverage, you can choose between high risk, high return, and low risk, low return.
Foreign currency deposits have the image of being deposited in a bank while receiving interest, but with FX, if there is a big fluctuation, there is a possibility that the loss will be cut off. If you don't always check the exchange rate situation, the response may be delayed.
From the above, foreign currency deposits are suitable for low-risk people. It is suitable for people who do not have time to constantly monitor the exchange rate or who do not trade frequently. It is also good for those who are thinking about operations in the medium and long term.
Forex is suitable for those who are thinking about a large return by operating with a larger investment amount than the cash on hand. It is a good idea to set leverage based on your own risk tolerance. In addition, it can be said that it is an investment method suitable for those who can frequently check exchange rate changes, those who have their own market outlook, and those who want to manage in the short and medium term.
If you are interested, first check the currency you are interested in
If you invest in foreign currency, you will naturally be interested in each economic index and political movement of the world. Collecting data that form your own view of the market, such as "How much the exchange rate fluctuated when this economic indicator was announced," will be useful for investors.
When starting foreign currency deposits and FX, think about how much risk you can take. If you have thought about it but are not sure which one to choose, first check the exchange rate movements and interest rate changes of the currencies you are interested in, and study foreign currency investment.
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