3 Trades For The Yen Tsunami

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 |  Includes: EWJ, FXY, HMC, NAV, NSANF, TM
by: BubbleBustInvesting

Following through on his promise to put an end to Japan's prolonged deflation, Bank of Japan's new boss Haruhiko Kuroda announced overnight a massive bond purchase plan to drive the country's ultra low interest rates closer to 0 percent. In essence, Japan's new round of aggressive monetary easing unleashes a yen tsunami that will touch every asset category around the world, creating new investment opportunities for investors placing the right bets.

Here are three trades to consider:

1. Short the Japanese Currency Yen Trust (NYSEARCA:FXY) -- the fund is already down 5.13 Year To Date, close to 6 percent in the last three months, and 12 percent for 1-year. However, we believe that the trend is just beginning, as Mr. Kuroda seems determined to have Bank of Japan print sufficient amount of yen to achieve the 2 percent inflation he promised during the election campaign. But there is one more factor that makes this trade a compelling bet: Japan's heavy debt load (Debt/GDP is north of 250), which creates the possibility of a Greek-style crisis that will fuel a run on the yen.

Trailing Returns (%) Vs. Category

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Return

FXY (Mkt)

FXY (Nav)

Category*

Index*

Year To Date

-5.13

-5.29

1.90

0.51

1-Month

+0.2

-5.29

0.27

0.03

3-Month

-5.5

-12.50

-0.27

0.10

1-Year

-12.00

-16.78

1.90

0.51

3-Year

-0.85

-0.62

1.21

0.37

5-Year

2.69

2.81

0.77

1.18

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* Category refers to Currency and Index refers to BofAML USD LIBOR 3 Mon CM

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Source:Yahoo.finance.com

2. Buy iShares MSCI Japan Index Fund (NYSEARCA:EWJ) -- a diversified fund that invests in the major stocks that are included in the MSCI Japan Index. The fund pays 1.38 percent dividend and has a low expense ratio of 0.53; it is up 6 percent Year To Date and 1.8 percent over the last twelve months. We believe that the index has still room to climb as long as the yen continues to fall and the world economy continues to recover.

Trailing Returns (%) Vs. Category

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Return

EWJ (Mkt)

EWJ

Category*

Index*

Year To Date

4

3.63

7.81

5.27

1-Month

0.5

3.63

5.05

5.27

3-Month

5.5

11.45

5.62

11.27

1-Year

1.8

6.87

7.81

17.25

3-Year

2.28

2.29

3.40

6.94

5-Year

-3.24

-3.20

-2.58

-0.79

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* Category refers to Japan Stock and Index refers to MSCI EAFE NR USD

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Source: Yahoo.finance.com

3. Buy the stocks of companies that will benefit from the weak yen like Toyota (NYSE:TM), Honda (NYSE:HMC), and Nissan (OTCPK:NSANF). I particularly like Toyota, which raised its sales forecast after reporting solid Q4 results.

Company

Forward PE

Operating Margins

Qtrly Revenue Growth

Qtrly Earnings growth

Toyota)

13.02

4.82 %

9.30%

23.40%

Honda

12.27

5.23

24.90

22.50

Ford

7.69

4.97

5.3

-88.3

General Motors

6.41

1.88

3.50

64.7

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Toyota enjoys a number of strengths and opportunities: A large scale that allows it to command the highest margins in the automobile industry; economies of scope that allows the company to cater to different market segments, including the luxury Lexus line. Toyota further enjoys a strong brand name; and a big presence in emerging markets, including China, where there is plenty of room for further growth.

At the same time, Toyota faces a number of weakness and threats: Its competitive advantage is sensitive to currency fluctuations, especially the yen-dollar rate; and its sales are sensitive to world economic growth. Toyota is further vulnerable to competition from domestic and overseas automakers; while its China growth is vulnerable to the China-Japan territorial conflict.

A few words of caution: Driven by a massive QE, Japan's low yen policy may run counter to QE of other countries, most notably the U.S., leading to a currency war that will hurt global trade. That's certainly not a good scenario for Toyota, which relies greatly on exports for its sales growth.

Disclosure: I am short FXY. 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.