As the Japanese economy has continued to sputter in recent months, frustration has gradually built over the stubborn strength of the yen. Still perceived as a safe haven, the Japanese currency has been gaining ground against virtually all of its major rivals as a wave of risk aversion washed over global markets. That has been a major hurdle to the export-dependent Japanese economy, as the prices of goods and services to international consumers have soared. The euro and the dollar have also seen weakness in recent months thanks to a greater concern over budget issues in both of those markets, giving investors further reason to jump to Japan’s currency. This has pushed the yen’s exchange rate against the dollar down to a 15-year low of below 83 yen to a dollar, a remarkable swing considering it took 95 yen to buy the same dollar back in early May of this year.
Amidst countless complaints from automakers, electronics firms, and other businesses adversely impacted by the yen’s continued rise, Japanese lawmakers had pledged to take the necessary actions to lower the value of the yen. Most investors assumed that such initiatives would focus on monetary policy and play out over the long term, writing off the possibility of intervention as remote since it would diminish Tokyo’s stance towards China’s currency policies.
But on Wednesday Japan’s central bank took the unexpected step of intervening in currency markets, spending close to $12 billion in an effort to send the greenback higher and yen lower. It appears that the aggressive intervention had the desired effect, as the dollar quickly climbed back above 85 yen, adding more than 3%. The wave of yen-selling orders reportedly began with a wave of 200 billion to 300 billion yen, followed by further selling that brought the total up to approximately 1 trillion yen during the Asian trading day. Though Japan was active into the European trading session, selling appeared to have concluded by the time US markets opened. Kathy Lien, director of currency research at GFT, said:
It was just a matter of time before the Japanese government took action. The risk of intervention increased tenfold when [the dollar’s rate against the yen fell] below ¥83.
While consumers will generally cheer a more valuable currency, it can be devastating for export-focused markets such as Japan that rely on significant sales to overseas consumers. Mitul Kotecha, head of foreign-exchange strategy at Credit Agricole, said:
Japanese exporters had become increasingly concerned, pained and vocal about [yen] strength at a time when export momentum was waning. However, the move in [the dollar-yen rate] may simply provide many local corporates with better levels to hedge their exposures.
This steep rise in the yen’s value has been seen as being so severe that it could potentially choke off any recovery in the world’s third largest economy, threatening to extend the country’s now two decade long economic malaise. This perception has made many economists believe that the Bank of Japan would be forced to intervene in the currency markets in order to help put the exchange rate at more manageable levels. And these predictions came true earlier today as the Bank of Japan intervened in the forex markets for the first time since 2004.
ETF Impact
This news sent the most popular yen ETF, the Rydex CurrencyShares Japanese Yen Trust (FXY), down almost 3% in early Wednesday trading, with volume in the first hour of trading approaching its average volume for an entire day. Even after the dismal start to the day, FXY remains well into positive territory on the year.
On the flip side, ETFs offering short exposure to the yen jumped in Wednesday trading; the ProShares UltraShort Yen Fund (YCS), which seeks to deliver returns equal to -200% of the yen relative to the dollar, was up nearly 6% in morning trading. Although the fund has surged higher in today’s trading session, it is still down about 15% over the past year. If Japan continues to push for a cheaper yen, today could mark a turning point for YCS heading into the fourth quarter.
Going Forward
Some investors were skeptical about the effectiveness of the currency intervention; as big as the Bank of Japan’s war chest might be, pressure to avoid large-scale interventions is likely to mount. Moreover, it isn’t guaranteed that Wednesday’s actions will have the desired effect over the long-term. Tohru Sasaki, currency strategist at JP Morgan, said in a research note last month:
There is no historical case in which [yen] selling intervention succeeded in immediately stopping the pre-existing long term uptrend in the Japanese yen.
For investors subscribing to this thesis, now may be a great time to get into long yen ETFs should they return on their upward path and pull the rate closer to the 80 yen to a dollar mark.
Disclosure: No position
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