Y119/US$1 Good for Japanese Exporters, Potentially Bad for American Investors (EWJ, ITF, VPL)

Includes: CAJ, EWJ, JPXN, SNE, TM, VPL
by: Steven Towns

Since the BoJ announced its plans last Thursday to (gradually) end its super-easy monetary policy and allow interest rates to climb as high as 2%, the yen has weakened from about 117.65 to 119.1. This is a difference of 1.23% and although it may seem small, it is limiting recent gains by Japanese stocks, thus hurting share prices of Japan-related ADRs, ETFs, and funds. Until interest rates rise it is unlikely the yen will strengthen much; it's also unlikely in my opinion to see the yen weaken past 120.

This is a good-news, bad-news situation. The argument goes like this: good news because Japanese exporters and those with overseas local manufacturing and sales operations will benefit when profits earned in dollars are converted to a weaker yen. However, for U.S. dollar denominated investors, a weaker yen means a reverse conversion from yen to dollars results in an unfavorable exchange and consequently share prices are impacted.

If you are looking to add to your position a weak yen is a positive. The problem is Japanese stocks and indices will tend to rise with a weaker yen given the clout of large scale exporters and those with large overseas operations, such as Canon (CAJ), Sony (SNE), and Toyota ( TM ) .

For domestic-demand or domestic-oriented Japanese companies a universally weak yen will usually result in higher raw material and imported goods costs. A potential double punch exists where, as China's RMB (yuan) continues to appreciate against a weak yen, it will result in even higher import costs (from China) for Japan.

Don't despair because the consensus among analysts is that as Japanese interest rates begin to rise, the yen will be bought in favor of the dollar, reversing the dollar's strength and ultimately leading to higher Japan-related share prices for American investors. And cheaper import costs for Japanese importers. As for the Japanese exporters, their FOREX profits will fall but at least for this quarter the decline may not be more than the rate at the end of last quarter. At any rate, Japan's Big-3 Auto will still be pleased to have a yen/dollar exchange rate seemingly around the 110 level while simultaneously (and hopefully) assuaging angry U.S. auto companies claiming unfair currency exchange rates and manipulation.