With the prospects of mounting collateral damage piling on, Japan is draining its foreign assets in favor of Japanese yen to pay for what could be the most expensive natural disaster on record, sending the Japanese yen and related exchange traded funds (ETFs) to record highs.
As the nuclear crisis watch continues, Japanese firms are demanding more yen and bringing more money back home, pushing the Japanese yen to its highest levels against the dollar in almost 16 years, report Neil Shah and Javier E. David for The Wall Street Journal. The U.S. dollar closed at 79.54 yen on Wednesday.
The potential for a nuclear meltdown has triggered heavy repatriation inflows through selling U.S. investments and buying yen as rebuilding costs and insurance payouts would likely be astronomical. However, the Bank of Japan will likely sell yen if the currency appreciates too rapidly to protect the country’s exporting industries. The finance minister is expected to talk with the Group of Seven finance ministers today to discuss the situation.
In the currency markets, demand for yen “calls,” which allow investors to buy the currency at a predetermined price in the future, has been increasing, suggesting that traders are worried yen’s value could further appreciate. Additionally, the traders in the options market have also shown greater concern over the high volatility in the dollar-to-yen rate. [Japan: Restructuring with ETFs.]
Andrew Wilkinson, senior market analyst at Interactive Brokers, remarks that Japanese corporations are selling stocks and money from the sales “is finding its way back home through dollar sales and purchases of yen,” write Myra P. Saefong and William L. Watts for MarketWatch.
While foreign capital is leaving Japan on greater uncertainty, funds are also being repatriated due to the unwinding carry trade, with the unwinding carry trade outweighing the capital outflows.
The Japanese yen resumed gains during Japan’s stock market trading session on Thursday amid signs that policymakers could delay intervention in the foreign exchange market, report Akiko Ikeda and Lynn Thomasso for Bloomberg. The yen appreciated to 76.36 U.S. dollars during trade in Tokyo.
- CurrencyShares Japanese Yen Trust (NYSEArca: FXY)
- WisdomTree Dreyfus Japanese Yen (NYSEArca: JYF)
- iPath Yen/Dollar Exchange Rate ETN (NYSEArca: JYN)
- ProShares Ultra Yen (NYSEArca: YCL)
For more information on the Japanese yen, visit our Japanese yen category.
Read the disclaimer, as Tom Lydon is a board member of Rydex Funds.
Max Chen contributed to this article.