Here’s how you can potentially generate additional income through FSMOne Margin: JPY Positive Carry

Are you familiar with the concept of a positive-carry trade? It is a margin strategy where investors borrow at a lower interest rate (e.g. 1.5% p.a.) to invest in an income-generating asset offering a higher return (e.g. 6.6% p.a.), allowing them to potentially profit from the difference (e.g. 5.1% p.a) without any additional capital outlay.

For instance, John is an FSM+ Accredited Investor who recently opted in for FSMOne Margin. The market value of his portfolio (UT/Bonds/ETFs/Stocks/AutoSweep) stands at around S$500,000:

(updated on 1 August 2024)

From the illustration above, John does not want to take on excessive leveraging which might pose significant margin risk. By adopting a prudent level of leverage, John can potentially generate an additional S$15,000 per year (or S$1,250 per month) without any additional cash outlay, since he can simply pledge his existing investments in FSMOne to perform this carry trade.

Fund in Focus

iFAST Research Team has accurately predicted that Nikkei 225 has surpassed its all-time high after publishing extensive research on Japanese equities over the past 1.5 years, investors should know that this marks the beginning of a multi-year rally for Japan’s growth narrative. Despite the recent rally, Japanese equities are still trading at low valuation compared to US equities. More than 30% of companies in Nikkei 225 still trade below book value, compared to the 3% of companies in S&P 500 trading below book value. Investors now have an opportunity to further capitalise on this momentum with an unhedged exposure (i.e. JPY), potentially unlocking greater gains with a potential Yen turnaround.

As such, investors may consider pairing this margin strategy with NikkoAM Japan Dividend Equity JPY (renamed as Amova Japan Dividend Equity JPY as of 1 Sep 2025). The fund focuses on a well-diversified portfolio of dividend-paying equity investments listed on the Tokyo Stock Exchange, focusing on companies with robust, sustainable cash flows and stable dividend payouts.

(Source: Nikko Asset Management, 2023) 

(renamed as Amova Asset Management as of 1 Sep 2025)

Last year, iFAST conducted a Q&A session with the NikkoAM Fund Manager (renamed as Amova Asset Management as of 1 Sep 2025), shedding light on the fund’s dividend methodology and track record of dividend pay-out, where they strike a balance between capital appreciation and dividend growth. This provides assurance in mitigating downside risk for dividend investors. While the JPY share class was only incepted in 2022, it has already delivered returns of 34.80% since inception (as of 8 Apr 2024) while its SGD-hedged share class has delivered an annualised net return of 12.46% over a 10-year period (till Mar 2024)!

The Popularity of Yen Carry Trade

The Yen has historically served as a popular funding currency for carry trades because of Japan’s low interest rates. Many have utilised the Yen as a borrowing currency to fund for cross-currency carry trades, for e.g. to borrow in Yen and invest in USD bonds. However, this approach exposes borrowers to inherent FX risk if the value of Yen appreciates against the investment currency (e.g. USD). For example, if you had borrowed the equivalent of US$1million in Yen in Oct 2022 to invest in USD products, the strengthening of Yen over that 3-month period would have been disastrous for your loan portfolio. You would have suffered a 15% FX loss, or around US$150,000 due to the Yen/USD movement.

(updated 20 May 2024)

However, borrowing in Yen to invest in Yen-denominated products is a currency-neutral trade. A notable example comes from renowned value investor Warren Buffett, often referred to as the Oracle of Omaha. Buffett executed a similar Yen carry trade through Berkshire Hathaway, by borrowing Yen at a rate of 0.5% p.a. (via the issuance of Yen-denominated bonds) to invest in Japanese industrial companies offering a dividend yield of 5% p.a. (same focus as NikkoAM Japan Dividend Equity) (renamed as Amova Japan Dividend Equity JPY as of 1 Sep 2025). They yielded 4.5% net return from the carry trade alone, notwithstanding the substantial capital gains from the rally in Japanese equities. This year, Berkshire intends to leverage more Yen borrowing to potentially fuel more investments in Japan.  

Mastering Risk Management

To effectively mitigate the risks associated with leveraging, it is essential to define risks parameters and understand how to minimise such risks. In a carry-trade scenario, there are three key risks that come into play: Market Risk, Interest Rate Risk and Currency Risk.

1) Market Risk

It is noteworthy to mention that in the event of a flat market performance with no capital appreciation, this carry trade would still enable investors to profit from the dividend spread of 6.6% - 1.5% = 5.10% p.a. (indicative only). However, adverse market performance may impact the strategy in terms of margin risk.

To recap, margin ratio is calculated by taking the account’s outstanding loan balance divided by total collateral value, expressed as a percentage. A margin call occurs when this percentage surpasses 100% and above, indicating a substantial decline in collateral value relative to the loan amount, where it necessitates the need to restore the margin ratio to below 100%.

Excessive leveraging poses a significant risk that should be avoided at all times. It is advisable to ensure that the margin ratio does not exceed 65% when placing any transaction. This provides a minimum level of safety buffer to cushion against any market decline, although additional buffer should be considered if the portfolio comprises riskier assets. Fortunately, the system is able to provide an overview of the margin ratio (before and after trade placement) on the order confirmation page, allowing investors to adjust the amount of leverage accordingly.

2) Interest Rate Risk

It is no surprise that Bank of Japan recently hiked its rates for the first time in 17 years, ending its negative interest rate policy. This move aligns with the expectation of the majority of analysts, given the return of inflation after two decades of economic stagnation, which has paved the way for improved economic growth. While rising interest rates would impact the returns of this strategy due to spread compression - a phenomenon where either the dividend yield decreases or the cost of borrowing increases, the BOJ has said that financial conditions will remain accommodative  as they are mindful that rapid rate hikes would have an adverse impact on the economy. This means that the economy is not in a state where rapid interest rate hikes are necessary.

Additionally, the market has also priced in future rate hikes, projecting the policy rate to reach 0.3% by the end of this year. This could potentially lead to a slow and gradual increase in borrowing costs by year end. However, even with these projected rate hikes, the net yield of this carry trade is likely to still return above 4% p.a. assuming the dividend yield remains unchanged.

In a worst-case scenario involving spread compression, it is advisable to establish a pre-defined threshold to exit the trade. For instance, if the carry trade’s spread drops from 5% to 3%, investors may consider performing a partial sell-down or staggering loan repayments to minimise margin risk. If the spread continues to decline e.g. 1.5%, investors may consider exiting the position entirely and repay the outstanding loan.

3) Currency Risk

No cross-currency risk would be present if the investment currency and fund currency are the same (i.e. Yen). In fact, investing in an unhedged share class offers the opportunity to benefit from Yen appreciation as it is currently trading significantly at its lows against major currencies. Japan’s exit from negative interest rate era, coupled with the narrowing of interest rate differentials between Japan and other countries, provides the potential for strengthening of the Yen. When this happens, any redemption or dividend proceeds in Yen would be worth more when it is converted back to Singapore Dollars. The decision of whether an investor should opt for the payout or reinvestment option depends on their risk profile:

Try out this strategy and enjoy the promotional JPY margin interest rate of 1.5% till 31 July 2024! Opt in now by launching FSMOne Mobile App > Holdings > Margin Enrolment.

Terms and Conditions:

1.       Promotion is applicable for all existing and new margin opt-ins on FSMOne Platform.

2.       Promotional rate of 1.50% is only indicative as rates may still fluctuate on an ongoing basis based on prevailing interest rate movements (as of 15 April 2024).

3.       Promotion is applicable only for Japanese Yen currency and promotional margin rates will be valid from 15 April 2024 to 31 July 2024 (both dates inclusive).

4.       iFAST reserves the right to amend the Terms and Conditions without prior notification and has the final decision on the qualification of the promotion.

Disclaimer: Investment products involves risk, including the possible loss of the principal amount invested. Past performance is not indicative of future performance and yields may not be guaranteed. All materials and contents found in this advertisement are strictly for information purposes only and should not be considered as an offer or solicitation to deal in any capital market products. You should consider carefully if the investment products you are purchasing are suitable for your investment objective, experience, risk tolerance and other personal circumstances. If you are uncertain about the suitability of the investment product, please seek advice from a financial adviser, before making a decision to purchase the investment products. While iFAST and/or any of its third-party providers has/have tried to provide accurate and timely information, there may be inadvertent omissions, inaccuracies, and typographical errors. Opinions expressed herein are subjected to change without notice. This advertisement has not been reviewed by the Monetary Authority of Singapore.

*The use of margin involves a high degree of leverage and risk which can lead to losses as well as gains which are of a larger magnitude as compared to the movement of a security or market. You should therefore carefully consider whether such a financing arrangement and/or investment products you are purchasing is suitable for you in light of your own financial position, experience, objectives, ability to bear risks and other relevant circumstances