The Japanese yen has seen unprecedented growth last year, which has resulted in multiple Bank of Japan interventions to stem the strength of the yen. This is due to the fact that the Japanese have an export-driven market and rely on a weaker currency to make their exports more attractive and mitigate massive deficits.
The Japanese government realizes that the international competitiveness of its exports is paramount, especially in the current global economic uncertainty. Japan is also trying to reinvigorate its economy after a year of damage dealt by the earthquake, tsunami, and nuclear disasters; Japanese ETFs collectively lost around 15% of their value in 2011.
The latest major intervention, at the end of October, was a record one-day intervention that many estimated to be between $90 billion to $130 billion. However, many analysts, such as Steve Barrow, a strategist at Standard Bank, have noted that the yen could quickly regain ground within the following months in lieu of another significant Bank of Japan intervention
Indeed, it has. The Japanese yen recently hit a new 11-year high against the euro and fell below 76 to the dollar. Even after mulitple rounds of Bank of Japan interventions, exports fell by 16% in November, which has led many in Japan's domestic industries, such as Eiji Hayashida, the head of the Japan Iron and Steel Federation, to call on the Bank for another round of interventions.
The strength of the Japanese yen can be attributed to the fact that it is the least unattractive among the G3 currencies. Japan maintains a current account surplus which makes it less reliant on overseas borrowing and results in the Japanese yen performing well in times of worldwide economic duress and instability. As a result, due to Europe's sovereign debt crisis, wariness over China's ability to sustain growth, and weak domestic reports in the U.S., international investors have flocked in droves to the yen.
The imposition of a price ceiling by the Swiss central bank on the Swiss franc, long considered to be an alternative safe-haven, has also factored into the equation. As Carl Forcheski, a director on the corporate currency sales desk at Societe Generale, has noted that "euro-yen is reflecting that euro-Swiss is taken out of the equation at the moment. I wouldn’t be surprised to see the yen strengthen a little bit more."
Yen-linked currency ETFs were up last year, albeit moderately, with such ETFS as Rydex CurrencyShares Japanese Yen Trust ETF (FXY) up 6.5% last year. In perspective, however, this performance is quite outstanding compared to the performance of Japanese ETFs such as the iShares MSCI Japan Index Fund (EWJ), which was down about 14% over the past year. It should also be noted that yen-linked currency ETFs generally outperformed the stock markets; the Dow was up 5.5% for the year, Nasdaq was down 1.8%, and the S&P finished flat.
Despite the yen's 2011 strength, there is a very possible chance it could lose steam in 2012. Minori Uchida, senior analyst at Bank of Tokyo-Mitsubishi UFJ, noted that, amid the possibility of a Japanese trade deficit, the yen is not likely to replicate last year's sharp gains. Also, developments in a free-trade pact with the U.S. and Japan's membership in the Trans-Pacific Partnership may weaken the yen.
I would suggest investing in the yen immediately after a significant Bank of Japan intervention, as the yen has continually displayed a pattern of going down signifcantly after an intervention only to bounce back up; there may very well be another round of interventions in the coming months. For those who believe the world economy will take a turn for the worse in 2012, I strongly advise looking at the yen or yen-related ETFs as potential investments. Gloomy macroeconomic factors in hotspots such as Europe will provide impetus for a yen rally.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.