Foreign currency effect: the EURJPY

The other day I talked about the foreign currency effects and their importance for investing.

In that article I talked in a general way without any specific example.

Today I am going to talk about the EURJPY, the Japanese stock market and its “three lost decades”.

In this case I looked for a case where we could consider that the yen and the euro were over and undervalued respectively. Besides I tried not to go to the extremes.

nikkei ibex currency investing

For example, one range that would be quite appropriate for us would be the one from 115 to 145, in which there are several movements of 20%; movements of magnitude in the Forex market.

In this case we are going to try to buy the Japanese stock market when the yen is cheap and sell it when the yen is strong.

As we see in the long-term chart there are 3 cases in which we can buy the Nikkei and 3 in which we sell it to buy the IBEX 35.

Besides we can notice that this pair has had huge swings in the last 25 years in a sort of cyclical movement.

For example, from the bottom of 1995 to the peak of 1998 there were 3 years. We had 2 more bull markets and several bear markets.

In total we had bull markets of 3, 8 and 2 years.

On the other hand we had bear markets of 2, 4 and 2 years.

As we can see the bull markets in the EURJPY are longer than the bullish ones.

Investing with the currency effect depending on the Forex cycle.

Suppose we are at the beginning of 1997 and the euro has risen 20% against the yen, so therefore the yen is “cheap”.


In this case we would have bought the 1st of January of 1997 and wait until the 1st of September of 1999, when the EURJPY touched again the level of 115.

Let us see what happened.

The 1st of January of 1997 we had bought the Nikkei at 19,340 and in 1999 we sold it at 17,430.

It was not a good investment actually since we lost 10% approximately, to which we should deduct around 1% of annual dividends (Japanese dividends are not very generous normally). With that we would have lost around 8%.

If we count on the EURJPY effect we should add 20% to that and our return would go to 12% of gains.

Let us have a look to the IBEX 35.

If we bought the IBEX in 1997 and sold it in September 1999 we would have made almost 100% return (from 5000 to 9900) without dividends.

Therefore, here we can see how it was not a good idea to invest thinking of a possible currency effect. This would have been a disaster in which we would have not won 88% even though our currency rose 20% against the other one.

The next time the market went from an “expensive yen” to a “cheap one” in the summer of 2006.

In this case the Nikkei went from 17,430 to 15,400, another fall similar to the previous one, in the middle of the Nasdaq collapse. This would be a fall of 11%. After we add the dividends we would be almost even.

The IBEX 35 went from 10,530 to 11,300 approximately, a win of almost 8%. If we add the dividends we could have a return of around 20 or 22%.

However, if we consider that if we had invested in Japan we would have lost 20% due to the currency effect (Euro bull market), our loss would have been higher: around a 20% loss.

Here we can notice how big was the long-term collapse that the Japanese stock market had during so long time.

Well, let us imagine that we would buy again the Nikkei because the yen would be cheap again, with the hope of getting a future return, again.

In this case our investment would go from the summer of 2006 to February of 2009.

In those hard years the Nikkei fell from 15,400 to 7,900, a fall of almost 50% (48). If we add the dividends we would be close to a 45% loss.

As our investment in the Nikkei had a 20% rise due to the currency effect of the EURJPY, we would have lost only 34% of that investment. Not too bad after the disaster of those years.

The IBEX 35 went from 11300 to 8300, a fall of 36%. If we add the dividends our loss would have been of 32% approximately.

We can say that until 2009 our investments in Japan were or would have been a disaster.

Let us see what happened after 2009.

In the next case we would have invested in the Spanish stock market since the yen was “expensive” in 2009.

After that year it took  5 years for the yen to touch 145. If we see, this period coincided again with a bull market, a phenomenon that usually happens when the yen is bearish.

Those years the Yen rose from 7900 to 16100, a rise of more than 100% (104). If we add dividends we get almost a 108% win.

The IBEX 35 went from 8300 to 9900. The return was approximately 19%. Adding dividends we would get around 25%. If we take into account that the euro rose 20% against the yen, we would have made around 65% in the Japanese stock market.

2014 would be another cheap year for the yen.

There we would buy the Nikkei 225.

In this case we had to wait until 2016 to be able to buy “cheap euros”.

The Nikkei went from 16000 to 15700, a fall of 2%, but if we count on the dividends we could get a return of 2% actually. To this we should add the 20% yen rise.

The IBEX 35 went from 9900 to 8200, a fall of 17%. If we add the dividends we would have a loss of 13% approximately.

In this case, at last, the currency effect worked out.


As we have seen, this thins of “currency effect” for investing is a relative thing.

Sometimes we win and sometimes we lose.

The resume would be like this:

Nikkei Investment (€)Spain investment (€)
January 97 to september  9912 %100 %
October 99 to june 06– 20 %22 %
June 06 a february 09– 34 %– 32 %
February 09 a january 1465 %25 %
January 14 a july 1622 %– 13 %
Total68 %100 %


First of all, as we can see the years when we invested in the yen because it was “cheap” (data in bold) our result was quite bad.

Only in the last of the 3 mentioned periods we had a good return compared to our “national investments”.

As we can see the investments based on the “currency effect” are quite complicated, to say the least.

In other words, nobody can guarantee us that we are going to get it right if we do something like that. Sometimes it will work, sometimes it will not.

Another thing we can see in this example is the fact that when a stock market such as the Japanese losses so much money against other markets such as any other from a developed country, it means that it is very likely that it could behave better in the next years or decade.

For example, when we see that the Japanese stock market lags the Spanish for so long, with a relative loss of 150% until 2006, it would be a bad idea to start investing in Japan and not in Spain afterwards. As history showed us, after those years, the Nikkei has performed much better than the IBEX 35.

However, the most difficult thing to know is what will happen after today.

Regards and good trading.