A Few Reasons to Buy Yen

In a continuing theme of diversifying my cash holdings into currencies other than the U.S dollar, I used the opportunity of the Yen correcting about 8% over the past 2 weeks to buy into CurrencyShares Yen ETF (FXY) at $95.39. FXY is the easiest, lowest cost and most liquid instrument that I know of for virtually converting the U.S dollar into Japanese Yen. FXY has current support at around $95 per trust share.

Another reason that I chose to go into Yen at this time is that Japan is finally starting to see inflation. According to Agence France-Presse, decade high inflation of 1.2% in March was reported just last Friday. The rise in inflation is likely to force the Bank of Japan to raise interest rates well before the Fed is likely to contemplate such moves. Even with rates in Japan as low as they are now, the Japanese started to repatriate cash earlier this year. According to Bloomberg, those that did not lost 7 percent on U.S debt in the first quarter - the worst such loss in a decade.

All in all, I expect the U.S dollar to weaken further in the long term as consumer credit card debt and commercial construction loans come to limelight. More on this later...

Disclosure: Author holds a position in FXY

Comments

[Lance]

Maybe.

But you should know that the Japanese *always* repatriate cash leading up to year-end book closings (March 31). So that means very little at present.

Moreover, the BoJ is unlikely to raise interest rates anytime soon. A bit of inflation is actually *welcome* here -- somewhat of a relief -- after prolonged deflation. Politically, with a weakening job market and stagnant salaries, raising rates here right now is a non-starter. And remember, the BoJ Governor is a third-pick political compromise, hardly anyone to show a streak of independence when it comes to monetary policy. Also, "round two" inflation (higher salaries demanded by unions to keep pace with higher prices) is much less likely here now than in the Euro zone or America. A rate hike here before the Fed? I'll give you at least 3-2 odds that does not happen.

My bet is that the yen-dollar cross goes almost nowhere for the next year or longer. Maybe 4 or 5 percent up and down but not getting any real directional traction either way. The people who were calling for 80 six weeks ago have lost their bet, which was really a bet on a complete American economic collapse. Didn't happen, and looks less likely day by day.

[William L.Florida, CFA]

I don't follow a couple of things here:
1. Can it ever be a good sign for a currency when inflation increases?
2. The issue here is real interest rates, I think. Doesn't the yen have a long way to go on real rates before it competes with USD and EUR?

[Jake Berzon]

I forgot to mention that the cash used in this transaction was that, freed up by selling PDS on March 28th, 2008. I wrote about that in my Odesskiy Listok blog. Seeking Alpha did not republish that post.

[Jake Berzon]

William,

Japan has much lower inflation than the US and BOJ is in a much better position than the Fed to keep inflation at bay by raising interest rates, which should increase demand for Yen further. Looking at the graph of FXY, you will notice that Yen skyrocketed in the first quarter, at the same time that the Japanese were converting their holdings back into Yen. Looks like the rush by the Japanese out of $US debt took a breather in the second half of March and April, but I expect this primary trend to resume. Even after reducing their holdings by more than 5% in the first two months of the year, Japan still owns 12% of all treasuries - more than any other nation.

I am concerned with future changes in the supply of and demand for Yen vs the $US, which is the ultimate driver for market price. Current and expected real rates of return in various markets are certainly a part of the equation driving demand for currencies.

[Coelacanth]

Interesting take.

Japan is arguably a deep value investor's dream. They largely avoided buying debt backed by sub-prime loans which means their banks aren't getting hammered like Europe's and ours are. As such, Japanese banks seemed uniquely positioned to take advantage of depressed assets prices worldwide and have picked up their deal making activity.

Their exporting activity to emerging Asia may also buffer them from a larger global economic slow-down.

[BobL]

I find this post weird for a number of reasons

First, it assumes that the dollar will keep weakening because it has been weakening. That’s not very helpful. You know what they say about “past performance not being indicative of future results.” Currencies are a zero-sum game and a short-timers game. That’s fine if you know what you’re doing but it doesn’t look like you’re a long time currency trader. If you don’t know what you’re doing, it’s a coin flip. And a short term one. Coin flips make bad investments.

Inflation has nothing to do with currency strength. You can have strong inflation and a weak currency and vice versa. There is some tie to central bank rates but even if Japan experiences some inflation doesn’t mean the BOJ is going to jack up rates. And even if they do, they have a long long long (long long long long) way to go.

And how long have you been tracking the yen? Its exchange with the euro is correlating tightly with stocks. Unless you think stocks are going to fall a whole bunch this year, it doesn’t make sense to think the yen is going to get much stronger. I’ve been following the yen exchange since Ken Fisher covered it in his Forbes column. (You can read it here www.forbes.com/free_fo...). It's pretty remarkable how srong the relationship has been over the last 18 months. The relationship fell apart a little bit just recently, but its still pretty strong. And if it comes back, this is going to work out badly for you. Or maybe you think stocks will tank this year, but that can’t be it because you keep recommending stocks. I recommend you take a look at the yen-euro exchange and how it relates to world stocks.

[Jake Berzon]

Dear BobL,

Firstly, judging by your statements, you appear to be acting as an agent for Fisher Investments. As such, you must be aware of the fact that Fisher Investments is taking legal action against me over a review article I wrote about them: www.odessapage.com/new... . To others, I would suggest that this fact by itself is sufficient to discredit Ken Fisher and disregard Fisher Investments.

Secondly, I am not "recommending stocks" or anything else for that matter. I am not (and do not pretend to be) either a financial adviser or a stock analyst. I am a writer and comment on my personal market moves. Unfortunately, this year, I have been additionally burdened with having to get out of the 69 positions that Fisher Investments put me in. I have gradually done just that over the past three months and expect this process to take another 12 - 18 months to complete. (For various reasons I do not comment on these trades.)

My view is that markets will come down from their current levels this year, which is why I have been a net seller of stocks since August of 2007. The last three trades I wrote about have been a sale of PDS and iShare purchases of Canadian and Japanese currencies. To say that I "keep recommending stocks" after reading my blog, would, at best, be a drastic misrepresentation. On the other hand, even the worst markets for stocks, sometimes present great buying opportunities. When I see what I think to be one of these, I try to take advantage. More times than not I have turned out to be right.

Now, as far as Yen and Japan are concerned. I have been following them continually since my days at Hitachi - something like 14 years now, but only decided that it was time to invest in Japan recently. (Seeking Alpha posted my original article on Japan on 11/8/07 here: seekingalpha.com/artic... ). In it I wrote: "In the past quarter, Japanese currency began decoupling from the US$, appreciating 8% since June." It went up more than another 15% until the middle of March and I only made my recent Yen purchase after it corrected close to 8% from that high and hit a support level. Thus, contrary to your claims, nothing in my actions "assumes that the dollar will keep weakening because it has been weakening."

In both my Canadian currency (FXC) and Japanese currency (FXY) articles I plainly state that I am making these purchases to diversify some of my cash holdings away from $US and not as an "investment"... Is it a coin flip? Perhaps, but I like to think of it as insurance (or hedge) instead. In any case, at least I will stand some chance of having coins to flip, in case the next US president will do what Mr. Bush should have done at the start of his presidency.

One last note, Bob. I enjoy healthy arguments and welcome folks pointing out inaccuracies, oversimplifications, poor assumptions and etc. in my articles, however if you intend to misrepresent what I say and twist my words around, please do us both a favor and stay away.

Sincerely,
Jake

[BobL]

Wow. I certainly touched a nerve. Well, Jake, I can certainly tell that you “enjoy healthy arguments and welcome folks pointing out inaccuracies, oversimplifications, poor assumptions and etc,” since you responded by asking me not to post here and making a wild paranoid accusation about my motivation in pointing out what I saw as weakness in your post in the first place.

Your review there doesn’t really discredit anyone. To be honest, I didn’t read it. Too long. Too ranty. Phew! But I did read some of the comments. Yep! You sure seem like a guy open to debate, since it seemed like every person who disagreed with you, you responded to with the same irrational and emotional response I got. (I did read some of your posts about ordering poison to kill rabbits. Bizarre, sir. Bizarre. But to each his own.)

I can certainly tell you are not a money manager. I am not accusing you of being a professional, don’t worry. And maybe you are a “net seller” of stocks, but you certainly keep writing here about stocks. I can understand why you want to pretend you didn’t recommend GE in February (that blew up on you) right here. That’s a cute trick though. Sometimes I use it on my kids. “That’s not broccoli. That’s cookies!” It doesn’t work with them either. I always tell them honesty’s the best policy.

You recommended JP Morgan, Cigna, Brady Corp, Pentair and a whole bunch of others since January. Those sound like stocks to me! I’m not misrepresenting your words. I’m just looking at what you’ve written lately. Don't be embarrassed Jake. There’s no shame in it. I happen to think stocks should do well this year too, and we just went through a correction. But if you want us to believe what you’re saying today and you are a “net seller” in stocks, then you’ve missed a big move up since mid-March. That’s too bad!

I don’t understand why the need for the blustering and obfuscation. I was just pointing out that if you think stocks will rise, you probably don’t want to buy yen. But, as you very clearly point out, today you are a “net seller.” Fair enough! I think that will blow up on you, and that’s my opinion. (Other people are allowed to have opinions, you see. That’s how it works.) But later you’ll probably just point to your posts where you recommended stocks and say “See I was recommending stocks.” You can’t lose! Good job. I suppose it doesn’t matter since probably only about three people read this page.

So, I have no quarrel with you, friend. Though, judging from you past behavior, you’ll probably write back and accuse me of causing the cyclone in Burma and being in cahoots with Ben Bernanke.

[Jake Berzon]

Dear BobL,

First of all, I would like to thank you for thoroughly studying my blog on odessapage.com/new (even if your goal was to twist my words around). Once again, I would like to remind you that I do not recommended anything to anyone. YTD, I have, in fact, saw some opportunities and purchased Brady (up 10% as of this writing), Pentair (up 19%), GE (down 3%) and added to my Cigna position (down 11% on the added portion and up overall), among others. I have also opined that JP Morgan stock price will benefit at the expense of Bear Stearns. It did significantly the day after I wrote that article, but I did not purchase it, because my Fisher Investments portfolio had too many financials in it as it was, even though JPM was not one of them. Both of my recent currency trades are also up since purchase. This year I have also sold PDS at a more than 35% profit, which I held for 5 months, KG, which went up almost 16% in 6 days that I held it. In this portfolio, so far this year, I am comfortably beating the S&P 500, as I also did last year. I have also gotten rid of 17 of the 69 stocks that Fisher Investment purchased for the account they were managing.

As far as the run up in stocks over the past two months, even with that S&P 500 is still down 12% since its peak in September. Now, please keep in mind, that my basic strategy is to buy on dips of individual high quality stocks in the "right" industries and sell those stocks when they run up. Thus being a net seller is mostly a function of the stocks I have bought having reached my targets for them and not seeing as many opportunities for new buys.

Now, as far as my two tongue and cheek writings about the rabbits - I don't expect everyone to understand or enjoy my humor and to read everything that I write. There are sufficient number of others who "get it" and enjoy it!

Thanks,
Jake
P.S. Please allow me to simply ignore your silly comments on the article that you did not read, because it was "too long."

[BobL]

hilarious. Poisoning rabbits isn't cool. Getting internet bloggers all riled up, priceless. Seems like Mr. Berzon needs to get a thicker skin or a sense of humor. Also don't ask him to babysit your pets. I don't have anything to say about trading currencies. The stock market is up a lot recently though.

[BobL]

(What's even funnier, is seriously 3 people must be reading this. I'll go respect my "ban" now.)

[Jake Berzon]

BobL,

Not that this has any relevance to Japan and Yen, but to set the record straight, I have never poisoned any rabbits. I wrote a couple of Bugs Bunny type of short stories, were I cast myself in the role of Elmer Fudd.

Thanks,
Jake
P.S. Send my best regards to Ken. He would never ask you to post this, if it was a matter of "3 people"...

[Tao Man]

Thanks for wasting my time reading the comments in the hopes of gaining more insight on FXY.