Japanese Yen ETF Investing: Japan Yen ETFs 101

by on December 9, 2009

On the issue of currencies, investors are somewhat divided. Some prefer to avoid currency investing altogether, likening the activity to high-stakes gambling that can lead to big swings in fortunes in a matter of minutes. While this might be an accurate portrayal of leveraged forex trading, proponents of including currencies as an asset class within portfolios point out that unleveraged investments actually exhibit low volatility, and can add valuable diversification benefits to a portfolio.

Japanese Yen ETFs Are In Focus NowJudging by activity in the ETF industry, it seems clear that more and more investors are making at least a small allocation to currencies in their portfolios. According to the latest data from the National Stock Exchange, currency ETFs saw cash inflows of about $2.3 billion through the first 11 months of 2009, almost ten times the cash flows from the same period in 2008.

The Japanese yen is one foreign currency that has seen a great deal of attention from investors in recent months. Along with the euro, the yen is one of the dollar’s major rivals, meaning that its movements generally mirror those made by the greenback.

The yen has been in focus recently for a few reasons. The dollar’s well-publicized and prolonged downturn has translated into a steady run-up for the euro, yen, and pound, and makes an investment in the yen potentially appealing for those who foresee an extended period of weakness in the U.S. currency due to record low interest rates and concerns about the future of its reserve status.

While most of Asia has made an impressive recovery from the recent economic downturn, Japan’s economy has languished, with deflation setting in and the manufacturing sector continuing to sputter. Many economists have fingered a strong yen as one of the culprits, and the government seems committed to intervening in the matter. Because a significant portion of the Japanese economy depends on exports to the U.S. and other countries, a strong currency can be a major problem. As the value of the yen rises, goods manufactured in Japan become more expensive to overseas consumers, thereby reducing demand.

At the center of the Japanese government’s plan to avoid a “double dip” recession is an emergency $80 billion stimulus plan that will focus on public works spending and job creation. The expectation for the third massive injection of cash into the financial system for the year sent the yen tumbling in recent weeks.

JPY / USD Drivers

Predicting movements in exchange rates between developed countries is an extremely challenging task, as numerous factors contribute to the relative values of currency. Similar to most other asset classes, the value of one currency relative to another is a function of supply and demand, which can change based on:

  • Inflation/Deflation Rates: Generally speaking, countries with lower rates of inflation will experience currency appreciation, as purchasing power relative to other nations will increase. Whereas concerns over inflation are beginning to pop up in the U.S., the primary worry in Japan has been deflation. Declines in prices may sound like good news, but can actually pose some very serious problems. Falling prices lead consumers to delay purchases, leading to decreased spending and increased unemployment.
  • Interest Rates: Higher interest rates relative to other countries usually results in currency appreciation, as foreign investors flock to the high-interest rate country, thereby creating demand for that currency. This factor, more than any other on this list, can be controlled by the central bank, affording the government some degree of control over a country’s exchange rate. Interest rates at near-zero levels in both the U.S. and Japan, and expected to
  • Equity Market Performance: Countries with strong equity market performance may also experience an appreciating currency as inflows from foreign investors create demand.

ETFdb Pro members can see a complete list of the drivers behind currency ETFs in our ETFdb Category Report (if you’re not a Pro member yet, you can sign up for a free trial or read more here).

Japanese Yen ETF Options

ETF YTD Return Expense Ratio
FXY 2.6% 0.40%
JYF 3.4% 0.35%
JYN 2.1% 0.40%

For investors looking to gain exposure to the Japanese yen through ETFs, there are several options available. While the investment objectives of these ETFs are similar, the funds use different strategies and tools to accomplish their goals. Moreover, expense ratios among these ETFs vary slightly, potentially making certain funds more attractive than others.

  • Rydex CurrencyShares Japanese Yen (FXY): FXY is by far the largest exchange-traded product offering exposure to the yen, with more than $450 million in assets. For investors expecting the yen to depreciate, FXY can be shorted to offer inverse exposure to the currency.


  • WisdomTree Dreyfus Japanese Yen Fund (JYF): This ETF is similar in many respects to FXY – it offers exposure to the same exchange rate – but far from identical. The CurrencyShares product is offered in a grantor trust structure, whereas JYF is a true exchange-traded fund. This means that JYF invests assets in a number of different yen-denominated securities, diversifying credit risk across multiple government and corporate issuers. FXY, on the other hand, has its assets in foreign bank deposits, concentrating the entirety of its credit risk to the depository bank.


  • iPath JPY/USD Exchange Rate ETN (JYN): While JYN offers exposure to the same exchange rate as FXY and JYF, this product is structured as an exchange-traded note (ETN), meaning that it is a senior, unsubordinated, unsecured debt instrument that will make a cash payment upon its maturity (May 2037 in this case).


Leveraged Japanese Yen ETFs

For investors looking to capitalize on short-term currency movements, ProShares offers a pair of leveraged ETFs that seek to amplify the daily exchange rate swings between the dollar and yen. Because these products have a daily focus, they should be monitored carefully by investors, and may need to be occasionally rebalanced.

  • ProShares Ultra Yen (YCL): Seeks daily results that correspond to 200% of the U.S. dollar price of the yen.
  • ProShares UltraShort Yen (YCS): Seeks daily results that correspond to -200% of the U.S. dollar price of the yen.

Disclosure: No positions at time of writing.