WMA Cara Report for week ending June 1, 2018
  • June 01, 2018 10:52 pm
  • by Bill Cara & Owen Williams

The Yen Trade


Many investors remember the Yen Carry Trade, popular back when interest rate differentials between Japan and an investor’s home country were sizable. Recall that the yen carry trade involves borrowing in yen at their rock-bottom interest rates, then exchanging the borrowed yen for a currency in a high interest rate country, such as the U.S. dollar, the euro, or British pound. As long as the currencies remained stable, traders earn a low-risk profit.

Since the Financial Crisis when all major world central banks adopted indefinite zero interest rate policies (ZIRP), the attractiveness of borrowing in yen has more or less disappeared. However we have seen a return of yen carry traders as the Federal Reserve (Fed) has inched up rates (Fed Funds currently at 1.75%) while the Bank of Japan (BoJ) has held its discount rate at -0.10% since 2016 (yes, that is a minus sign before the 0.10).

Looking back over the past few years, trading in the yen picked up in October 2012 when Shinzo Abe became Prime Minister. He promised to boost economic growth by increasing government spending, lowering interest rates, and opening up trade. Abe raised consumption taxes in 2013, sending Japan’s economy back into recession. The Bank of Japan responded with more quantitative easing. By mid-2015, the yen fell to an eight-year low.



At extreme multi-year oversold levels, the yen began recovering in early 2016 as financial markets reacted to fears of a China growth slowdown. The extreme return to the risk-on trade following Donald Trump’s election in November 2016 sent the yen plunging once again. Since catching a bid in early 0217, the yen has been slowing gaining ground against the dollar, holding above the major, multi-year support line drawn in our chart from 2015 lows.

The yen, along with the Swiss franc to a lesser extent, are the two currencies that display the greatest countercyclical behavior. During the Great Financial Crisis, the yen gained over +42% versus the dollar, as traders were forced to frantically close yen carry trades.

Currently, the yen is trading at levels that prevailed in late 2007/early 2008 – a time of general complacency among investors. The renewed interest in the yen carry trade is also a contrarian sign that risk-on has gone too far.

The Yen Trades To Be Putting On

Many readers are likely skittish in today’s market and are holding quite a bit in cash. Even those who do not believe that U.S. equities are in a bubble are likely to admit that equities have come too far, too fast since 2016. For U.S. dollar, Canadian dollar or euro investors, we believe that a bit of currency management is called for today. Moving 10% (or more) of your sleeping cash into yen is a first step. For unadventurous investors, you can just buy the CurrencyShares Japanese Yen ETF, ticker FXY (your account remains in USD, but with exposure to the JPY/USD).

Having exposure to yen will reduce volatility in your portfolio when (and not “if”) the risk-on trade ends. That is, holding yen will reduce your portfolio draw-down more than just holding cash in your home currency.

For more adventurous investors, we recommend buying physical yen. Why? Because you can invest your yen in something that can further neutralize your portfolio when risk-off sticks up its ugly head. Most commodities contracts, including oil and gold, are priced in dollars. When the dollar is strong versus cyclical currencies (EUR, CAD, AUD, GBP and most emerging currencies), the prices of these commodities fall. However when the dollar is strong versus cyclical currencies, the yen still tends to be stronger than the dollar.

One way to use your yen cash account is to buy the 1540 ticker on Tokyo. This is the Mitsubishi UFJ Japan Physical Gold ETF. The comparison chart below shows gold in yen (white line) versus the GLD gold tracker on NY (red line). The difference between the two lines is obviously the yen/dollar cross.



During the risk-off period in early 2016, the GLD rose +12%, while the gold tracker in yen was up +18%. The gold price in yen has greater upside potential that the gold price in dollars. If you are already holding gold in your portfolio, consider holding the gold via Japanese yen.

A second use for your yen cash is to invest in the Next Funds Nomura Crude Oil ETF. This will create an interesting pay-off pattern with a risk-off asset (yen) along with an asset that tends to perform best in economic boom times (risk-on) but also can perform well in periods of geopolitical risk (thus also a risk-off asset). The ticker for this oil ETF in yen is 1699. Be careful as the ETF investors in West Texas futures contracts, so there will be deterioration over time with oil prices in contango.


The yen is coming off a multi-year cyclical low. Given the counter-cyclical qualities of the yen, moving cash holdings into yen makes sense both from a risk-management and diversification perspective. Investors can still use yen holdings to play the end of the economic expansion (buying crude oil) or prepare for the next recession (buying gold).


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