Yen Gains Against Dollar on Minister's Warning, But Carry Trade Intact

The yen gained 0.6% against the US$ in late trading in Tokyo, pushing it just below 123 -- the first time in two weeks it has traded at the 122 level. However, as I've said repeatedly, the downward pressures on the yen are too strong for an unwinding.

Yen weakness will undoubtedly persist.

In fact, the yen/US$ opened above 123 to 123.10 - 123.20 this morning in NY.

The yen rose on news Finance Minister Koji Omi warned investors of the need to realize the risk behind one-way currency trades, according to a report by Bloomberg. He told reporters "disorderly moves of foreign exchange rates are undesirable."

Despite the quick rise in the yen, the situation for yield starved Japanese investors remains unchanged. In fact, it seems to me the Minister's comments may have actually hurt some of the retail investors he seeks to protect.

Although the yen rose today against a basket of 16 currencies, it is still currently trading at/near multi-year lows against the US$, an all-time low against the euro, a two-decade low against the NZ$, a 16-year low against the A$ and a 15-year low against the British pound.

At any rate, it's likely the media will pick up on the "yen carry trade" news and overdo it.

If you are a Japanese ADR and/or ETF investor, a rise in the yen will boost gains or limit downside. The reverse is true when the yen weakens, thus there's about a 4% difference in ordinary share returns versus ADRs, reflecting the yen's decline against the dollar.

Some investors are confused why iShares MSCI Japan Index ETF (EWJ) rises despite a decline for the Nikkei 225. First of all, EWJ does not track the N225 and secondly, a rise in the yen, if large enough, can push EWJ to the upside. Also, don't forget the impact of sentiment, large institutional/fund trades and futures trading in Chicago.

See below for a chart of EWJ and the N225 (as of Monday's close -- it lost 0.1% to 18,066 Tues.)

     

In terms of making a play on the yen, there's the CurrencyShares Japanese Yen Trust ETF (FXY), which may see a jump in volume today, but expect to see its downtrend continue. See below for a chart of FXY.

I'm not sure if it makes sense to short FXY here, or if it's even possible, despite my bearishness on the yen. I think at 123 to the dollar there is more possibility of a 10% appreciation than a decline, but I don't expect this to happen suddenly nor over a short period, although there's the case of a 20% short-term move in '98.

It is possible to trade options with FXY, but the trading activity is rather light. I wouldn't pursue this unless you already trade options and understand the risks/rewards.

Accumulating shares of FXY or entering a long position is not necessarily a bad idea, but you'll certainly need patience and plan on a long holding period. Don't expect any help from dividends!

Separately from the Bloomberg piece, it is mentioned a Finance Ministry official on the condition of anonymity said Hiroshi Watanabe, Japan's top currency official, will step down as vice finance minister for international affairs. Japan has not intervened in the forex markets since he took the post in 2004.

Also, Bloomberg mentions the impact retail investors may have on forex since it's bonus season in Japan. I covered this in an earlier post: Weak Yen Likely to Weaken Further Ahead of Bonus Payouts.

Further reading: Mr. Yen Calls the Currency 'Absurdly Cheap', Says BoJ Must Raise Rates • Morgan Stanley's Jen: The 'Schizophrenic' Yen • What Will Unwind the Carry Trade? • Expect Higher U.S. Rates To Attract Japanese Investors

Disclosure: The author does not own shares of any companies/funds mentioned above.