Exchange traded funds pegged to the Japanese yen were the worst currency ETF performers in early 2012 on efforts by Japan’s central bank to push the yen lower, and easing tensions over the Eurozone debt crisis.
Yet over the past month, the yen has recovered versus the dollar after many traders apparently threw in the towel on the Japanese currency. The yen is seen as a traditional safe-haven currency.
CurrencyShares Japanese Yen Trust (NYSEArca: FXY) is the largest exchange traded product that follows the yen/dollar cross.
“For Japan’s exporters, the outlook for global growth is tepid because of a slowly recovering U.S. economy and the sovereign debt crisis in Europe. These firms have also been fighting against a continuously rising yen. From January 2007 to December 2011, the yen rose more than 50% against the U.S. dollar. All of these factors weigh heavily on a stock market tilted toward cyclical stocks,” Patricia Oey wrote in a Morningstar analyst report. [Currency ETF Chart of the Day: Japanese Yen]
Japan has struggled to regain its position as an exporting powerhouse, especially as China, South Korea and Taiwan have started to develop. Although the Japanese economy has remained sluggish, the currency was able to remain resilient for some time. [Why Japanese Yen ETFs are in Free Fall]
For the long term, the two factors that drive currency movements are the relative growth of the monetary base and the relative growth of the economy using that currency. Japan has not been able to kick-start its economy since the 1990’s, and since the earthquake and tsunami, the set-back has been detrimental.
“Despite the above warnings, FXY has its legitimate uses as a cheap hedging instrument. Anyone anticipating a large yen-denominated expense, such as a contract to buy Japanese goods in the future, could hedge the risk that the it will appreciate by investing in this ETF and locking in the dollar cost today. In the other direction, shorting this fund could provide a useful hedge to U.S. investors with substantial holdings in Japanese equities,” Michael Rawson wrote in a Morningstar analyst report. [Japan ETFs Rise to Start Year]
Investors are looking forward to Friday’s meeting for The Bank of Japan, to decide on new monetary measures. Analysts are expecting an increase of the asset purchase program that the BOJ is implementing. Stock markets tend to perform well after monetary easing has been implemented.
CurrencyShares Japanese Yen Trust
Tisha Guerrero contributed to this article.
Read the disclaimer; Tom Lydon is a board member of the funds for Guggenheim Investments.