FXY Invesco CurrencyShares Japanese Yen Trust

In the world of currency ETFs, 2012 wasn’t nearly as volatile of a year as many were predicting to start the time frame. The main ETF product tracking the dollar, UUP, lost about 3% on the year, while the euro—an early favorite for worst performer of 2012—managed to actually finish the year up (as represented by FXE) on the dollar, a pretty impressive feat given the broad market headwinds.

Instead, the worst performing developed market currency this year—against the greenback—has been the Japanese yen. This currency, as represented by the popular CurrencyShares Japanese Yen Trust (FXY), is down about 10% this year, and is currently trading below its 52 week low (read Zacks Top Ranked Currency ETF: ICN).

This may be somewhat surprising given that Japan has been pretty much immune to developed market debt woes that have hit both America and Europe, despite the fact that Japan has a debt load that is pretty much double any EU country or the USA. Instead Japan’s 10 year benchmark debt is a measly 80 basis points suggesting that worries over a default or even high inflation are quite low at this time.

What Gives?

The Japanese yen’s epic slide can largely be blamed on political issues and the nation’s new Prime Minister, Shinzo Abe. This is pretty evident when looking at a one year chart of FXY, as the bulk of the losses hit the fund in the past few months, with a three month loss of 8.4% crushing the yen as it became clear that Shinzo Abe would take over the Prime Minster spot once again in Japan (see A Technical Look at the Japanese ETF).

This is a huge problem for Japanese yen investors as Shinzo Abe has declared his support for a weaker currency in order to spur exports and boost domestic levels of growth. He has pretty much promised inflation—something that has been sorely missing from Japan’s depressed economy—and has urged the BOJ to hit an inflation target of 2% per year.

The new Prime Minister is wasting no time in pushing the central bank towards its goal either. Right before Christmas, he—somewhat ironically—threatened to revise a law guaranteeing the bank’s independence if they didn’t back his more ambitious inflation target.

Clearly the moves and the perception of action are already starting to have some impact as the yen is now trading at its lowest level against the dollar since 2010. More expected stimulus measures could push this even lower in the months ahead, suggesting that the yen could see more weakness in 2013 as well (read Developed Asia Pacific ETF Investing 101).

In fact, in the latest policy meeting, the board of Japan’s central bank voted unanimously to release another 10 trillion yen—roughly $119 billion—in new stimulus measures in order to boost growth and add to the already $1.2 trillion that has been dumped into asset purchase and loan programs in the nation.

The yen looks to be quite weak in the months ahead with this kind of backdrop, which is part of the reason why we currently have an unfavorable rank for FXY. The currency ETF has a Zacks ETF Rank of 5 or ‘Strong Sell’ so we expect the pain to largely continue in 2013, especially if Shinzo Abe gets his way and more stimulus programs are the name of the game in the Japanese market.

Better Way to Play

If investors are determined to invest in Japan in hopes of a slide in the yen boosting growth in the struggling country, there is still a solid option in the equity space, DXJ. This ETF, the WisdomTree Japan Hedged Equity ETF, focuses in on securities that are based in Japan, while also utilizing hedge to get rid of yen fluctuations relative to the dollar (see Currency Hedged ETFs: Top International Picks?).

For a potentially broader play, investors also have the db-X MSCI Japan Currency-hedged Equity Fund (DBJP) which is a bit less liquid, but a potentially a more well rounded choice. This ETF also removes yen exposure from its profile, giving a pure play investment on the Japanese market.

With this focus, either DBJP or DXJ could make for solid picks that may benefit from a rising Japanese market in the months ahead. These also will do better than their Japanese peers who are unhedged if the yen continues to slide, making them potentially better choices if inflation and stimulus remain the focus of Japan’s attempt to get back to economic prominence.  

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DB-X MS JPN CUR (DBJP): ETF Research Reports
 
WISDMTR-J HEF (DXJ): ETF Research Reports
 
ISHARS-JAPAN (EWJ): ETF Research Reports
 
CRYSHS-EURO TR (FXE): ETF Research Reports
 
CRYSHS-JAP YEN (FXY): ETF Research Reports
 
PWRSH-DB US$ BU (UUP): ETF Research Reports
 
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