Japan's newly elected president, Shinzo Abe, has signaled his
intention to do whatever he can to devalue the Japanese yen in
order to provide a boost to the nation's ailing economy. This
virtually assures a lower yen and this article looks at how traders
and investors can profit from it.
Last weekend Japan's Liberal Democratic Party ((
)) led by Shinzo Abe won a clear majority in the country's general
election. Shinzo Abe has said that his top priority is the Japanese
economy which has been combating deflation for over two
He has been quoted as saying that he is in favor of "unlimited"
monetary easing by the Bank of Japan (BoJ). It is also expected
that he will nominate a new governor to replace Masaaki Shirakawa,
whose term as head of the BoJ ends in April.
In the coming weeks, it is thought that Shinzo Abe will bring
considerable pressure to bear on the BoJ to print fresh yen and
inject them into the economy. The objective being to dilute, and
therefore devalue the yen and spur inflation. Shinzo Abe has also
said that he wants the BoJ to increase its inflation target from 1%
Bruce Kasman, chief economist at JPMorgan Chase & Co.,
described the LDP party's election win as
"one of the most important monetary policy events for
Last week, Kasman's colleague Masamichi Adachi in Tokyo said that
the BoJ may adopt a "new style of open-ended asset purchases" as
soon as this week.
A 15-year chart of the Japanese yen
(click to enlarge)
Chart courtesy of stockcharts.com
Thanks to the unwinding of the
yen carry trade
, the Japanese currency began a long uptrend in 2007. In late 2011,
however, that rise came to an end and following a significant
bounce that lasted much of this year, the yen now looks to be in a
How to profit from the decline of the yen
With so many of the world's central banks engaged in
deliberate currency devaluation
, it is increasingly difficult to find a strong currency to short
the yen against. In particular, the U.S. Federal Reserve's 12
September announcement of open-ended QE makes the US dollar a less
than ideal candidate, since both currencies will be declining
Perhaps, a better option would be to short the yen against one
of the commodity currencies such as the Canadian dollar or the
Australian dollar. That's because the Chinese economy appears to
have made a cyclical bottom, and renewed demand for base metals and
other commodities should benefit both Canada and Australia.
According to some sources, the sale of commodities such as iron
ore and coal makes up nearly 55% of Australia's annual revenues,
and the country's biggest client is China. As Ambrose
Evans-Pritchard pointed out in a recent article entitled "The
world's commodity supercycle is far from dead," in 2011, China's
share of total world demand for commodities was:
"soya (27%) cotton (38%), aluminum (40%) iron ore (40%), coal
(42%), zinc (42%), lead (43%), copper (43%), and lean-hogs
As a result of deliberate policies aimed at cooling its property
price boom, the Chinese economy has slowed. However, it is still
growing at over 7% and as Paul Bloxham, Chief Economist at HSBC
pointed out recently, "Real commodity prices at well above their
late 20th century levels are expected to continue to support
Australia's growth prospects."
Evans-Pritchard also notes that the Reserve Bank of Australia
argues that the construction boom in China "will not peak in
absolute terms for another five years as 20 million rural migrants
pour into the cities each year. The pace will not slow much until
the urbanization rate reaches 70% in 2030."
The bottom line
There can be little doubt that the Japanese yen is headed lower.
The difficulty for traders and investors, however, is finding a way
to capitalize on it. As mentioned in
my 13 July article
Longer-term investors should consider buying a selection of
Japanese exporters that stand to benefit from a lower yen...
These companies are likely to see greater demand for their
products, thanks to the greater relative purchasing power of
The problem, however, is that Japan's traditional export
customers, i.e. the US and Europe, have also now adopted
ultra-loose, open-ended monetary policies aimed at devaluing their
currencies. As a result the best bet for capitalizing on a
weakening yen looks to be shorting it against the Australian
dollar, perhaps via a spread bet.
I have no positions in any stocks mentioned, and no plans to
initiate any positions within the next 72 hours. I wrote this
article myself, and it expresses my own opinions. I am not
receiving compensation for it. I have no business relationship with
any company whose stock is mentioned in this article.
FX Market Wary Of 'Safe' Trade