There haven’t been many trades as good as the short Japanese yen/long Japanese stocks trade over the past several months. The reason why actually is quite simple. You see, ever since the Japanese people voted for a change in political leadership by electing Shinzo Abe prime minister, the country has shown its willingness to reflate its economy by pushing down the value of the yen.
The new policy prescription, which has become known as “Abe-nomics,” essentially consists of the joint goal of devaluing the Japanese yen, and increasing the Bank of Japan’s (BOJ) inflation targets. This is precisely what’s happened since Abe has assumed the reins of power, and hence the decline in the yen and the near concomitant rise in the value of Japanese stocks. As the yen’s value slides relative to currencies such as the U.S. dollar, Japanese exports become cheaper, and that’s good for Japan’s export-oriented economy.
Click to Enlarge Numerically speaking, the yen has fallen more than 15% versus the dollar since November, and that’s translated into 30%-plus gain for the ProShares UltraShort Yen (NYSE:YCS), an ETF designed to deliver twice the inverse of the dollar/yen trade. So, if the yen falls 2% vs. the dollar, then YCS should climb 4%. The chart here of YCS shows just how strong the trade has been over the past four months, but I suspect that the yen has further weakness to go.
My suspicion is based on Abe’s selection of Asian Development Bank President Haruhiko Kuroda as the BOJ’s next governor. Kuroda is considered to be a stanch proponent of a “dovish” yen policy, a stance perfectly in-line with Abe’s mission to try and reflate the Japanese economy by debasing its currency.
Now, there’s certainly a case to be made that the rush to reflate via yen debasement is a very bad idea for Japan’s long-term fiscal health, but that issue is beyond the scope of this article. The reality is that with the election of Abe, and Abe’s selection of Kuroda to be BOJ governor, Japan now is committed fully to yen debasement.
The bottom line here is that I think there will be more upside for traders who buy YCS at current levels. That upside likely will continue through April 4, which would be the first official BOJ meeting that Kuroda will be in charge of (assuming he gets confirmed to the position, as is widely expected).
I think traders could be looking at another 10-15% upside rise in YCS up through April 4, and hence I am setting a personal price target on this trade of $64 over the next five weeks. If I’m wrong, and if the yen suddenly begins to rise versus the dollar, then the easiest way to protect yourself is with a stop-loss price set about 8% below your official buy price.
At the time of publication, Jim Woods did not hold a position in any of the stocks mentioned here.