In the aftermath of the bashing the Japanese stock market took, focus strongly remains on the yen, while it temporarily strengthened against the U.S. dollar.
None of this should really be too surprising, as there was no way the Nikkei could continue on up without a correction. Before the thrashing it received, the Nikkei had soared by 50 percent in 2013. Of the over 5,200 points it had risen, it gave back 1,143 on Thursday, closing at 14,483.98. The loss was an extraordinary 7.3 percent.
Most of the blame is being placed on the recent confusing announcements from the Federal Reserve, which has been talking out of both sides of its mouth in regard to whether or not it's going to cut back on its loose money policies some time in the near future. The other factor is thought to be the weaker-than-expected manufacturing data coming out of China.
Japanese 10-Year Bonds
Whatever the reasoning behind it, the actual catalyst for the Japanese was when the 10-year bond jumped above 1 percent for the first time in 2013.
That's important, because as Money Morning Chief Investment Strategist Keith Fitz-Gerald noted, when taking the aggregate debt of the Japanese - public, private and corporate - it adds up to a staggering 500 percent of the gross domestic product of Japan.
With that type of debt load, the Japanese understood there was no way the country could afford to pay the debt with interest rates rising.
Credit Default Swaps
Several years ago I was hired to write for a banking news outlet as the disaster was unfolding. One of the major elements blamed for that crisis was the increasing use of credit default swaps.
How it works is the seller of the credit default swap (CDS) will pay the buyer if the loan defaults (there are other events that could happen as well). We've already seen what happens when a massive number of these agreements are triggered by debt failures.
Along with credit events like bankruptcy, failure to pay, and restructuring, when it enters into the sovereign debt area, things like acceleration, repudiation and moratorium could be considered a default for those that have entered CDS agreements.
As it stands today, a number of hedge funds and banks have entered these agreements again. This is a trade in the sovereign debt of a country using credit default swaps as the instrument of choice. They are extremely dangerous, and a real threat to global markets.
This was another major reason for the plunge in Japanese stocks that isn't understood by most.
How to Play the Yen in this Environment
Even though it's tempting to jump into the Japanese equity and bond market, unless you really know what you're doing, the best play is to invest in the Japanese yen with the ProShares UltraShort Yen (YCS).
Even though the yen has climbed significantly, a number of experts believe it still has a long way to go, with some like currency expert Dennis Gartman, seeing the yen going as low as 150 to the dollar. It's almost certain to fall to the 125 level. That's still a nice gain to etch out in a relatively sure thing. By a sure thing I mean the continuing weakening of the yen, not a sure thing as to how low it really will go.
Nonetheless, there's room to make some money with the ProShares UltraShort Yen fund, and that's the best way to play the yen for the majority of investors.
The official explanation or goal for YCS, is to return twice the inverse of the daily move in the Japanese yen. That's simply jargon saying if the yen weakens at a rate of 1 percent in a day, the fund should jump by 2 percent during the same day.
Keep in mind the reaction could be the opposite of that as far as the risk factor goes.
Another thing going for YCS is the fact that inflows have been rising, with about $35.1 million coming into the ETF last week. Measured in units, that's a jump from 7,799,294 to 8,299,294, or 6.4 percent.
That means the fund still has momentum going for it, and the stimulus in Japan is far from being over. The yen will continue to fall, and holders of Proshares UltraShort Yen will be rewarded.
The plunge in the Japanese stock market points to the consequences of heavy debt, along with the continual printing of yen to bring its value down against the U.S. dollar.
Both of these are going to continue and grow, making it a surety that at least in the near term, the yen has a long way to drop in value.
ProShares UltraShort Yen is the best way to make some money for the majority of investors, and now that it has dropped some as the yen strengthened against the dollar, it offers a good entry point.