Japanese_Yen-300x186The Federal Reserve is engaged in a massive $85 billion per month bond buying scheme, also known as quantitative easing. The central bank’s zero interest rate policy, or ZIRP, will undoubtedly put downward pressure on the value of the U.S. dollar in the long run, but you already know this.

What you may not know is that before the monetary chickens come home to roost, the dollar may actually be relatively strong when compared to several of the world’s other major currencies, namely the euro and the Japanese yen.

Why would the dollar be stronger relative to the euro or the yen?

It’s simple. In an effort to reflate their respective recessionary economies, central banks around the world are locked in a rather shameful race to see who can debase their respective currencies the most. We’ve seen this to some extent in the actions of the European Central Bank, or ECB. However, the real race to debase is taking place in Japan, where policymakers are committed to reversing 30 years of economic stagnation by making the yen worth much less, and thereby making Japanese exports more attractive.

In December, the Japanese people endorsed this policy for a weak yen by voting in Shinzo Abe as their new prime minister. During his election campaign, Abe made it clear that he wanted Bank of Japan, or BOJ, to increase its inflation target to 2% or 3% from its current 1%. Shortly after his election, Abe selected then-president of the Asian Development Bank, Haruhiko Kuroda, to be the next BOJ governor, a position akin to our Federal Reserve chairman. As you might expect, Kuroda is a resolute proponent of a dovish yen policy, a stance perfectly in line with Abe’s mission to try to reflate the Japanese economy by debasing its currency.

Now, there’s certainly a case to be made that the rush to reflate via yen debasement is going to have disastrous consequences for Japan’s long-term fiscal health, but this a question that will be adjudicated by history. Of greater importance for investors is that the Japanese race to debase represents a transformational change that can put big money in your pocket.

You see, the falling yen is something that investors can bet on directly via an exchange-traded fund (ETF) that’s pegged to its decline. Yet perhaps an even more attractive way to play the Japanese policy changes is by investing in Japanese stocks. That’s because when the yen falls, it’s good for the value of yen-denominated equities of the kind that trade on the Tokyo Exchange. And thanks to another easy-to-own ETF, getting long Japanese stocks takes only a few mouse clicks.

Let’s take a closer look at two ETFs you can use to ride the crashing yen

ProShares UltraShort Yen



If you suspect, as I do, that the yen is going to continue its precipitous slide relative to currencies such as the U.S. dollar, then one great way is to own an ETF that’s not only pegged to the inverse of the yen, but one that employs leverage such that you can capture twice the inverse performance of the dollar/yen trade. The fund that does this the ProShares UltraShort Yen (YCS).

This ETF has been designed to deliver twice the inverse of the dollar/yen trade, which means that if the yen falls 2% vs. the dollar, then YCS should climb 4%. The chart here of YCS shows just how strong the dollar/yen trade has been since it became clear that Abe would be elected prime minister. Over the past six months, YCS shares are up some more than 56%, but despite this sharp rise I don’t think the upside in YCS is anywhere near over.

If you’re not afraid of the added volatility that goes along with owning a leveraged ETF, then YCS is a great way to ride the crashing yen.

WisdomTree Japan Hedged Equity Fund


Another great way to take advantage of the yen’s downward spiral is via equities that trade on the Japanese stock market. The Wisdom Tree Japan Hedged Equity Fund (DXJ) does just that, as it holds some of the largest Japanese companies, e.g. Mitsubishi Financial, Canon, Honda and Toyota to name just a few.

The great thing about DXJ, however, is that while providing you exposure to these powerful companies, the fund also hedges out the yen currency risk. That means you get the upside price appreciation in Japanese stocks without the worry of a declining yen cutting into returns. The chart here of DXJ shows the incredibly bullish trajectory in the shares since mid-November, again when it was clear that Abe would be installed as prime minister.

Like YCS, shares of DXJ are up more than 56% over the past six months, a clear testament to the momentum in the space. Also like YCS, I suspect there’s more to come in DXJ, as Japanese companies are actually starting to see their bottom lines positively affected by the weak yen. For example, Japanese electronics giant Sony (SNE) just posted its first quarterly profit since 2008.

Basically, I think you can view the upside potential in both YCS and DXJ as akin to the upside potential we saw in U.S. equities right before the first round of quantitative easing by the Fed. We all know what’s transpired in the market since the Fed began juicing the system with easy money, and the same thing is happening right now in Japan—and that means now is the time to ride the crashing yen.

Jim Woods is Editor-at-Large of The Wealth Shield.


Share This