How Low Can the Yen Go?

05/06/2015 12:01 am EST

Focus: CURRENCY

Jim Jubak

Founder and Editor, JubakPicks.com

MoneyShow's Jim Jubak reviews Japan's efforts to weaken the yen and provides a strategy for any weak yen investments.

How much lower can the yen go?

If you remember at the end of 2014, a good play was to buy shares of Japanese exporters like Toyota, or Honda or Fanuc, the Japanese robotics maker, with the idea that since the Abe government was interested in forcing down the yen in order to get more exports going and to goose growth, as it were, it would be good to invest in those companies because, a) they'd get a boost from a weak yen in terms of the amount of stuff they sold and they'd also get a boost from the weak yen when they translated stronger dollars back into weaker yen.

My sense then was that maybe 125 yen to the dollar would be about as low as we would go. We're already at 118-119. The question is, are we going to get to 125 or are we going to blow through 125?

Really, what you are looking at here is the kind of currency arbitrage between the Bank of Japan and the Fed.

Basically, you've got the Federal Reserve looking to raise rates. I don't think you're going to see that until early 2016, but anticipation is likely to drive up interest rates and strengthen the dollar as we get closer and closer to 2016. On the other hand, the Bank of Japan has lowered its inflation forecast for 2015-2016. Getting back to 2% was one of the big goals of the Abe economic plan, but they've also said, hey, we don't see any real need. Despite the fact it doesn't look like we're going to get to that 2%, we don't really see any need to increase our stimulus, that what we are doing about buying 80 trillion yen worth of government securities seems like enough so we're not going to increase that stimulus even though we're not reaching our goals.

If that is the way these two banks run things—with the Fed looking to raise rates, the Bank of Japan saying it is not going to do anything to stimulate the economy more to weaken the yen further—I think 125 might be where we're going to wind up as a low point for the yen, certainly worth looking at.

At this point, if you are trying to say well do I want to buy Japanese equities on the basis of that weakening, I would say probably not because you are getting close enough for this to be a real risky trade, not real risky but riskier trade without a whole lot of upside.

If you are already holdings these things certainly hold until we get to 120, 125. We are at 118-119, we've got in fact the yen and the dollar stuck in a very tight trading range around 118-119 yen to the dollar. I'd look and see if we break through that if we get to 125 and at 125 I'd certainly think about selling some of the Japanese shares you might have bought as a weak yen play.