Are Traders Right about the Yen?

12/02/2013 12:01 am EST


Jim Jubak

Founder and Editor,

MoneyShow's Jim Jubak is keeping a close eye on the Japanese Yen as we head into 2014, as many are betting on an even weaker Yen, an important sign for investors.

For the weekend ahead and into 2014, watch the Japanese yen. The yen is roughly around 1.02 to the dollar and is one of the worst performing currencies in the world, in 2013. It's down about 15% against the US dollar, and what's interesting is that even with that decline, bets against the yen, yen shorts, have risen to the highest level since July of 2007. Traders are betting that this currency is going to go down even further, and that would, of course, mean even if you're not a currency trader, it would mean good things for Japanese stocks, because as the yen gets weaker, Japanese exports go up, and the earnings of Japanese companies go up, as they're translated from stronger currencies like the dollar back into yen.

If you think that this trade is right, you can either do it by going short the yen, or going long stocks in Tokyo. Here are the two reasons I think that this trade—people are making this trade. One, is that the Bank of Japan has basically, way back in April, said that they were going to buy, they doubled the amount of bonds that they were buying, to put more yen into the market, so they're now doing it at about a rate of $70 billion a month. If you, sort of, correct that for the much smaller size of the Japanese economy, that's roughly equivalent to, if the fed were buying about $186 billion a month. The fed, if you remember, is buying about $85 billion, so we're talking about an extra $100 billion equivalent, so this is a lot of money that's going into the Japanese monetary system.

The Bank of Japan has basically said, “Hey, our goal is to weaken the yen until we have inflation running at about 2%, and we think that that might happen at the end of 2014, end of 2015.” I think that's a very optimistic time table. I don't think that the Japanese are going to be able to get their inflation rate up to 2% that quickly, but even if that's too optimistic and it takes longer, that means that the Bank of Japan will put more money into the Japanese monetary system for a longer period of time. That, again, means that the yen will get weaker and weaker over a longer period, or it will get weak very quickly, as people go, “Oh, okay, so the Bank of Japan is going to do this for a long time.”

The other part of this is a belief that, well, we've gone through a number of, sort of, disruptive events. The yen is the world's favorite safe haven currency at the moment, so the yen rallies, when you get things like worry over the fed taper, or you get worry over a US default, because of the debt ceiling battle, so when those things happen, the yen gets stronger, because people put money into the yen because the yen is a very safe liquid currency. It's going down, but not going down big time.

It's a strange psychology, I know, but that's the way it works. So the other half of the bet is betting that there are no real big disruptive events on the calendar in 2014. The first half of this, I think, is reasonable. I think that it indeed is the policy of the Bank of Japan to weaken the yen. They're going to continue to do that. I don't see any change in that in 2014, so I think you can count on the yen getting weaker because of that. The other one is sort of like, well, who knows, who knows what's going to happen in 2014, in terms of disruptive events, so the likelihood is that you're going to see a falling yen, punctuated by rallies, as something happens in the world that makes people look for a safe haven currency, so you get ups and downs, but I think the long-term trend is down.

If you're a trader, you try to catch these ups and downs. If you're a longer term trader, you sort of go with Japanese equities. The one that I've got in Jubak's Picks is Toyota Motor, (TM), which trades in New York as an ADR. You can also go with something like Torre Industries (TRYIF), which trades as an ADR in New York as well as on the Tokyo exchange. They're the world's largest maker of carbon fiber, good play on exports to the aircraft and car industries. Or you can do something like Seven & I (SVNDY), the Japanese company that owns 7-Elevens around the world. So, those would be my ways to play a weak yen if you want to use Japanese equities for the week and the year ahead.

This is Jim Jubak for the video network.

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