ETFs To Play A Weaker Yen

by on August 12, 2010 | ETFs Mentioned:

Frustration in Japan is running high these days, as the thorn in the side of the struggling Asian economy digs deeper still. While many in America cheer any appreciation in the dollar–a strong greenback makes Asian electronics and European vacations more affordable–Japan has learned the hard way about the adverse impacts of a rallying local currency. As a fresh wave of risk aversion has washed over global financial markets, the Japanese yen recently hit a 15-year high against the dollar, baffling policy makers who have made a gradual weakening of the currency a primary goal.

A strong yen may be good for Japanese consumers who buy significant amounts of overseas goods, but it’s bad for the country’s stock market. A strong yen makes Japanese goods more expensive to international consumers, a potentially devastating development for an export-dependent economy. As the yen has continued its climb higher, Japanese companies have seen demand for their products fall sharply. The CFO for automaker Honda recently noted that cars made in Japan at an exchange rate near 85 yen to the dollar “are not economically feasible.”

The opinion among many analysts and observers has been that the Japanese government would be hesitant to intervene in currency markets, as such a move would potentially attract criticism from other world leaders and weaken the country’s position in pushing other governments (particularly the one in Beijing) to pursue flexible currency policies [also read Three ETF Ideas For The Third Quarter].

But the events of recent days clearly indicate that Tokyo is monitoring the yen very closely, and make an intervention seem like a very real possibility. On Wednesday Japan’s Ministry of Economy, Trade, and Industry announced that it will conduct an emergency survey of approximately 200 companies to assess how the strong yen is impacting operations. A day later Finance Minister Yoshihiko Noda said the government “will take appropriate action while closely monitoring economic developments.” Historically, officials have used the term “appropriate action” to foreshadow a currency market intervention. “I have great interest in currency-market movements, and I will watch them extremely carefully,” said Noda.

Also on Thursday, the Bank of Japan conducted a “rate check,” a process that involves asking commercial banks for details of currency transactions. In the past, similar acts have been sometimes followed by foreign exchange purchases of easing of monetary policy [see Do You Need A Hedged Equity ETF?].

ETFs To Play A Rising Yen

The yen staged a minor rally after comments from the finance minister and news of the rate checks, but the movement on the day was hardly sufficient to ease the worries of Japanese exporters. Now the stage is set for a showdown between the current administration and the nebulous market forces that have pushed the yen consistently higher [also see Three Reasons Why Japanese Yen ETFs Are Headed For A Crash].

Yesterday we highlighted some of the ETFs that will allow investors to bet on a further strengthening in the yen. Today, we profile some fund options that could get a boost if Noda and his colleagues gain the upper hand and are successful in weakening the Japanese currency [use the ETF screener to find exposure to dozens of currencies]:

  • iShares MSCI Japan Index Fund (EWJ): This ETF tracks the performance of the MSCI Japan Index, a benchmark that consists primarily of large cap Japanese equities. EWJ is heavy on automakers and electronics manufacturers, two corners of the Japanese market that would almost certainly get a boost from a weaker local currency [view EWJ's holdings].

  • PowerShares FTSE RAFI Japan Portfolio (PJO): For investors who wish to avoid the potential pitfalls of cap-weighted indexes [read about them here], PJO may be an interesting way to establish exposure to Japanese equities. This ETF’s holdings are determined based on four fundamental measures of size, including book value, income, sales, and dividends. PJO’s holdings will overlap with those of EWJ (in some cases there is considerable overlap), but the seemingly small differential in the methodology used to select and weight holdings can have a potentially large impact on bottom line returns [see a breakdown of PJO's holdings].

  • ProShares UltraShort Yen (YCS): While the aforementioned funds should benefit from a weaker yen, YCS offers more of a pure play on the currency. This leveraged ETF seeks daily results that correspond to 200% of the inverse of the U.S. dollar price of the yen. There is also a leveraged bull ETF on the yen, the ProShares Ultra Yen (YCL).

Disclosure: No positions at time of writing.