Investors looking to diversify their portfolios may want to consider the Japanese yen, as recommended by Russell Napier in his recent analysis. Despite Japan’s reliance on imported energy, the relative stability of the yen exchange rate in recent months is noteworthy. However, with import price inflation rising and bond yields elevated, interest expenses are also increasing, further intensifying the need for Japan to repatriate capital.

While data on capital flows may have a lag, the current stability of the yen exchange rate could be a sign of the start of capital repatriation to Japan. Nationalist governments have been known to mobilize national savings in times of emergency, and with the Japanese government now possessing a strong electoral mandate, it is possible that further action will be taken to shore up the yen exchange rate and the JGB market.

Napier suggests that investors should consider adding a further third to their ultimate holding in yen deposits or short-term government debt. With Japan’s current account surplus equivalent to 4.8% of GDP, there is potential for returns on these investments. The yen may be grossly undervalued, and repatriation of capital could lead to increased demand and higher prices.