Investing in the Yen

There are many reasons why the Yen may be a good long-term bet:

• If you see the Yen as a share of Japan, Inc., it is a country where unemployment is at a historical 9-year low, whose population is one of the most educated in Asia, with the biggest savings rate in the world (and one of the main creditors of the US), and whose yield curve is pointing to an increase in interest rates.
• It is undervalued by 21% with regards to the US dollar according to the Economist’s Big Mac Index shows.
• The undervaluation of the Yen has a lot to do with the “carry-trade”, a process that will surely revert as soon as the yield of US assets, particularly equities decreases, or as the Bank of Japan increases its interest rate once global inflationary pressures gives them some comfort.

Note that this last point makes the Yen a particularly good hedge against the fall of the US equities as this graphical comparison between the Dow Jones Industrial Average and Yen/USD conversion rates shows (when the DJI decreases, the Yen increases, most notably during the late February mini-crash).Note: As I wrote this article, the last 5 days have seen a relatively large decrease (-1.13%) of the US dollar agains the Yen.

If all this does not convince you, consider that according to sources mentioned in this Financial Times article, “One object of Mr Buffett’s affection could be the yen”

Investment vehicles

One simple way to invest in the yen is the CurrencyShares Japanese Yen Trust (FXY), which is roughly equivalent to holding Yens on a Japanese deposit account. In addition to the appreciation or depreciation, the trust may pay a monthly interest to shareholders based equal to the Bank of Japan Overnight Call Rate minus 27 basis points, minus the Trust’s expenses. Note that under Internal Revenue Code section 988, gains or losses related to an investment in FXY will be viewed as ordinary income or loss for U.S. federal income tax purposes.

Another way is to invest in Japanese stocks. I don’t believe that companies traded on US market through ADRs are very attractive in the face of a raising Yen: the US is typically a very large market for them and a raising Yen’s weigh on their exports would offset any effect of the exchange rate on their share price.