After crossing the 90 level during Friday's Asian session, the
U.S. dollar is holding onto its gains against the Japanese yen in
U.S. trading today. The pair traded as high as 90.21 earlier
today, meaning it took that many yen to purchase $1, and the
Japanese currency is now within spitting distance of a 31-month
low against the greenback.
This might be one example of political rhetoric actually
having a positive impact on financial markets. New elected
Japanese Prime Minister Shinzo Abe made tough talk regarding a
weaker yen a cornerstone of his campaign and that proved to be a
wise strategy. In mid-December, Abe cruised to victory while his
Liberal Democratic Party swept to a majority in Japan's lower
house of parliament.
All the while the yen has been decimated against the
greenback. The dollar is up 3.7 percent against the yen in 2013.
In the past month, the ProShares UltraShort Yen (NYSE:
) has gained 13.5 percent and more downside could be on the way
for the yen if Abe has his way.
"Abe has been relentless in a multi-pronged approach to weaken
the yen," said WisdomTree Research Director Jeremy Schwartz in a
note. "He has called for targeting inflation of 2%, set an
aggressive nominal GDP growth target, threatened to change the
Bank of Japan's (BOJ) mandate (and has the power to do so) and
discussed introducing more fiscal stimulus measures as well as
the creation of a large investment fund to buy foreign bonds (to
weaken the yen even more). Thus far, the yen has weakened versus
the U.S. dollar strictly in anticipation of all these measures,
as each of them will take time to be implemented."
Abe has pushed the Bank of Japan to engage in unlimited
monetary easing and has even threatened to revoke a Japanese law
guaranteeing the central bank's independence if it does align its
inflation target with his. The prime minister wants to see
Japanese inflation of at least two percent per year and it is
widely expected BoJ will oblige when it meets next week. BoJ's
current inflation target is one percent.
Citing Bloomberg data, Schwartz notes "Japan's five-year
estimated inflation rate is just over 83 basis points." That rate
was far worse early last year.
"Earlier in the 2012 calendar year, Japan's estimated
five-year inflation rates were a negative 60 basis points-meaning
that investors in five-year government bonds collectively
expected price levels in Japan to fall approximately 60 basis
points per year for five years,"
Still, Abe has been able to affect yen depreciation as much
through rhetoric as through realized policy initiatives. Perhaps
even more so and the results have been positive for equity-based
. Since it became clear that Abe was running for Japan's highest
office in mid-November and following his win last month, an array
of Japan-focused ETFs have surged.
The SPDR Russell/Nomura PRIME Japan ETF (NYSE:
), the MAXIS Nikkei 225 Index ETF (NYSE:
) and the iShares MSCI Japan Index Fund (NYSE:
) have all delivered solid returns. However, the star of the
Japan ETF group has been the WisdomTree Japan Hedged Equity Fund
Not only does DXJ track an index that screens out companies
that are dependent on the still flailing Japanese economy for the
bulk of their revenue, but the fund features hedges USD/JPY
fluctuations. In other words, the current environment of yen
weakening and appreciation in Japanese equities has bolstered the
allure of DXJ.
And its returns. Over the past month, the ETF has surged over
12 percent compared to a gain of 4.8 percent for EWJ. The ETF's
assets under management growth has been stunning. DXJ
had $516 million in AUM in early December
. As of January 17, that number had swelled to $1.6 billion,
according to WisdomTree data
More upside for DXJ and its rivals could be on the way as
sentiment drives more yen downside.
"I believe much of the yen's strength over the last five years
was not caused by true fair value of the yen appreciating-much of
it was sentiment driven," said Schwartz. "With sentiment having
now changed dramatically, I would not be surprised to see the yen
ultimately overshoot back above 100 yen to the U.S. dollar. There
will be volatility in the near term, as the market trades on each
statement from Japan's policy makers about how close they are to
accomplishing their mission to weaken the yen. But I believe it
is clear the period of relentless yen appreciation we saw prior
to Abe's election is over."
For more on Japan ETFs, click
(c) 2013 Benzinga.com. Benzinga does not provide investment
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