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Japanese Yen ETFs and the Carry Trade


The Japanese yen and related currency exchange traded fund are depreciating in value as the government implements aggressive quantitative easing measures. Consequently, more currency traders are implementing carry trades to capitalize on the depreciated yen.

For carry trades, currency traders would borrow a low yielding currency, like the yen, to fund investments in higher yielding assets, like the Australian dollar. A depreciating currency is also better for a carry trade as the investor would have to repay less when he or she returned the borrowed funds.

However, the yen carry trade has been less popular in the past few years as U.S. and Eurozone monetary easing pushed rates to near-zero levels.

Now that the yen is depreciating again, traders have turned back to the Japanese currency. The yen depreciated 13% against the U.S. dollar in the past three months, dipping to a two and half year low, reports Dhara Ranasinghe for CNBC. [Yen ETF Bounces After Bank of Japan Decision]

Meanwhile, the CurrencyShares Japanese Yen Trust Fund (FXY) is down 12.3% over the last three months. [Japan ETFs: More Room for Yen Weakening?]

“The yen is regaining its ground as a funding currency,” Jesper Bargmann, head of G11 currencies at Royal Bank of Scotland, said in the article. “Sentiment has changed in markets, pretty much since January 1. Risk appetite has returned, there’s increased confidence and a search for yield, so the yen seems to be suffering as a result of that.”

Bargmann anticipates the dollar/yen rate to hit 100 in the second half from its current 90 level. Other analysts expect the yen carry trade to pick-up if the global economy rebounds and stokes demand for riskier assets.

“We are seeing the carry trade, but it is more selective than what we saw in 2004-2007, when money went into all risk assets,” Bargmann added. “The reason for this is because fear in financial markets has been replaced by caution following the global financial crisis.”

The weakening Japanese yen has also taken a toll on the iShares MSCI Japan Index Fund (EWJ) , which does not hedge currency risks, even though Japanese stocks have rallied. EWJ has gained 9.2% over the past three months. In comparison,  WisdomTree Japan Hedged Equity Fund (DXJ) and db-X MSCI Japan Currency-Hedged Equity Fund (DBJP) , which both hedge against the depreciating yen, have gained around 24% over the last three months.

Investors can also look at ETF options that implement a carry trade strategy. The PowerShares DB G10 Currency Harvest Portfolio (DBV) and the iPath Optimized Currency Carry ETN (ICI) both invest in a basket of high-yielding currencies while borrowing from currencies with low interest rates.

For more information on the yen, visit our Japanese yen category.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Mr. Lydon serves as an independent trustee of certain mutual funds and ETFs that are managed by Guggenheim Investments; however, any opinions or forecasts expressed herein are solely those of Mr. Lydon and not those of Guggenheim Funds, Guggenheim Investments, Guggenheim Specialized Products, LLC or any of their affiliates. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.