Japan To Take One More Step Towards A Cheaper Yen

Feb.24.13 | About: ProShares UltraShort (YCS)

Recent reports indicate that Japan's Prime Minister Shinzo Abe will be seeking the employment of fellow inflationary advocate Haruhiko Kuroda as Governor of the Bank of Japan. Kuroda has been linked as Abe's number one pick for some time as he offers the most support of all the candidates for the Prime Minsters' inflationary agenda.

The current Governor, Masaaki Shirakawa, recently chose to take an early exit and will be out next month. It is important to note that Abe does not hold full power in deciding who becomes the next governor. His recommendation will need to pass the Parliament, whose endorsement in Kuroda could be seen as a major indication as to how worried Japan might be about its most recent trade and current account deficits.

Election of the Governor of the Bank of Japan is the last hurdle Prime Minster Shinzo Abe will need to clear before gaining full control of the monetary policy in Japan. Due to his plans, the Yen has devalued from 80 to 94 Yen/USD in the last few months, with resistance around the 92.5-94 Yen/USD range. As an indication of which way the Yen may go if Kuroda were to become Governor of the Bank of Japan, the Yen just broke through this barrier and has risen to 94.42 (up 1.41%) Yen/USD at the beginning of trading today, after the announcement.

While this trade has been one of biggest of the year, with George Soros already pocketing more than a billion dollars, one can only imagine how much more is to be made. As an indication of where the Yen could go under Kuoda's rule, the Bloomberg article linked above states that:

In November 2002, Kuroda said that a yen trading at about 120 per dollar was too strong and "Japan will take appropriate action in the foreign-exchange market."

As I previously reported:

How to play this?

1. Buy YCS, Proshares UltraShort Yen ETF

This ETF has moved from 52 week lows to 52 week highs recently with seemingly more to come as its performance moves inverse to that of the yen.

High Risk/Reward Plays

1. Buy FXY Puts

FXY moves with the yen so long puts can be purchased to benefit from future declines.

2. Buy YCS Calls.

While I think the deck is stacked against Japan, there is a long way to go before 120 Yen/USD. But, for those wishing to initiate a trade that's a good thing. Hope this helps and as always, please don't put in more than you can afford to lose.

Disclosure: I am long YCS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I also have YCS calls and FXY Puts.