Significance of the Surprisingly Weak Yen

Includes: CAJ, EWJ, MC-OLD, TM
by: Steven Towns

Excerpt from our One-Page WSJ Summary:

HEARD IN ASIA: Weak Yen Helps Japan's Big Exporters, But Sparks Investment-Strategy Shift

Summary: The yen's weakness over the past two years and especially of late has surprised both economists and corporate executives. The dollar has gained about 15% against the yen since the start of 2005, while the yen is now trading near an all-time low against the euro. Even against the S. Korean won the yen has weakened nearly 23% in the past two years. A weak yen results in a dual benefit for Japan's major exporters: improved price competitiveness of exports, and higher repatriated profits. Stephen Jen, Morgan Stanley's head of research in London, says, "I now recognize that there are genuine, and possibly lasting, forces holding up" the dollar and the euro against the yen -- referring mainly to heavy outflows of capital from Asia into overseas financial assets. Nomura Securities estimates that every one-yen rise in the dollar's value results in a 0.6% increase in pre-tax profit at Japan's 400 largest firms. Given that profits are seen rising 7% to 8% this year based on an average exchange rate of US$1/Y113 versus the prevailing rate of near US$1/Y118, a Nomura analyst says, "We could well see a double-digit increase this year."
Related links: Full WSJ articleBoJ's Tankan Surprises to Upside, Investment ImplicationsYen Falls as Japanese Investors Go Shopping Abroad...Japan Auto Saved by ExportsYen Carry Trade Not Over Yet
Potentially impacted stocks and ETFs: Major exporters mentioned in WSJ article: Canon (NYSE:CAJ), Matsushita Electric Industrial (MC-OLD) and Toyota (NYSE:TM). • Most actively traded Japan ETF: iShares MSCI Japan Index (NYSEARCA:EWJ) • Other Japan ETFs and CEFs: iShares S&P/TOPIX 150 (ITF), Vanguard Pacific (NYSEARCA:VPL), Japan Equity Fund (NYSE:JEQ), Japan Smaller Cap Fund (NYSE:JOF), WisdomTree Japan Small Cap Dividend (NYSEARCA:DFJ), WisdomTree Japan High-Yield Equity (NYSEARCA:DNL) and WisdomTree Japan Total Dividend (NYSEARCA:DXJ). • Editor's note: Returns for U.S. investors in the aforementioned stocks and funds can be negatively impacted by a weakening yen, meaning gains can be limited whereas losses can be exacerbated. Should the yen strengthen from the time of your share purchase however, the opposite is also true.

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