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Investing In the Japanese Yen: How to Profit From the World’s Most Mispriced Currency
by Alexander Green, Investment Director, The Oxford Club
Friday, February 16, 2007: Issue #642
When I speak at financial conferences about the world’s most mispriced currency, many attendees assume I’m going to be talking about the yuan.
After all, China has pegged its currency at an artificially low rate in order to fuel its export-driven economy.
But, ironically, it is the free market that has produced the biggest anomaly in currency markets today, not China’s authoritarian government. And there is an easy way to take advantage of it – by investing in the Japanese yen.
The Current State of The Japanese Yen
Over the past several years, the Japanese yen has fallen steadily against the dollar. It recently hit an all-time low against the euro.
The long-term trend is easy to explain. Since 2001, the Bank of Japan (BOJ) has been printing loads of money in order to ward off deflation. An increased supply of yen relative to other currencies pushed down its value.
But this trend ended almost a year ago. In many respects, the yen should be climbing.
After all, deflation is no longer a threat in Japan. Last year the BOJ actually raised interest rates, which had been stuck at zero for five years.
Furthermore, Japan is running a whopping current-account surplus of more than $180 billion. That’s positive for the yen as well.
Why the Yen is Not Climbing
So why is the yen hitting new lows? There are two reasons.
The first is known as the “carry trade.” Investors borrow money in yen – since interest rates are so low – and then invest the proceeds in higher yielding currencies. (And there are essentially none that yield less.)
Since the yen must be sold to put the borrowed money to work in other currencies, it has kept unrelenting pressure on Japan’s currency.
But there is another factor at work. Most international trade is settled in dollars or euros, so importers have to sell their local currencies in order to buy from abroad. Because Asian countries trade a lot with each other, the bulk of currency flows in the region involves the selling of yen.
This is adding still more fuel to the fire, causing the yen to weaken further.
How Can Investors Profit From the Japanese Yen?
Easy by buying Japanese exporters. Why? Because Japanese exporters are taking in revenue in dollars, euros and other stronger currencies and then paying out expenses like manufacturing costs, labor, and interest in yen. That means they make a windfall on the currency exchange alone.
Leading Japanese exporters include:
- Toyota (NYSE: TM),
- Canon (NYSE: CAJ),
- Mitsubishi (OTC: MMTOF),
- Sony (NYSE: SNE),
- Honda (NYSE: HMC),
- Nissan (Nasdaq: NSANY) and
- Matsushita (NYSE: MC).
Buying these companies while the yen is weak gives you two big advantages. Number one, the companies’ products are priced more competitively in world markets, which should give earnings a boost. And, number two, these stocks are currently inexpensive to American investors because of the dollar/yen exchange rate.
In short, buying Japanese exporters today gives you the opportunity to buy world-class companies with improving earnings prospects at cheaper prices.
Perhaps you too should have a yen for Japanese exporters
Good Investing,
Alex
Today’s Investment U Crib Sheet
- Japanese companies are earning record profits amid what Bloomberg calls “the economy’s longest postwar expansion,” as a weaker yen fuels exports of automobiles and electronics. The country’s finance ministry said demand for Japanese cars pushed exports to the U.S. to a record in December. And shipments by Toyota, which posted record profits in the fourth quarter, climbed 23%.
- To follow The Oxford Club’s time-tested Asset Allocation Model, Investment Director Alexander Green recommends investing 30% of your portfolio in high-quality international stocks – companies with a history of positive earnings growth, reliable management teams and whose products are penetrating high-growth markets worldwide. Here are four companies surpassing these expectations. Plus, a look at the fundamental forces fueling the record growth rates overseas.
Shock Stocks
The iShares MSCI Japan Index Fund (AMEX: EWJ) is close to its 52-week high of $15.55 set in May of last year. The fund is up 139% since April 2003.
Toyota is the fund’s largest holding. Sony, Canon, Honda and Matsushita are among its other top 10 holdings.
- Toyota (NYSE:TM): A First Time For Everything
- How to Play Rising Foreign Stocks and a Rising Dollar
- The Biggest Threat to America’s Relationship With China
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Alexander Green is the Investment Director of The Oxford Club. A Wall Street veteran, he has over 20 years experience as a research analyst, investment advisor, financial writer and portfolio manager.
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