ETFs
ETFs to watch during Japan’s first intervention on the yen since 2022
Japan’s Finance Ministry revealed that the country carried out its first monetary intervention since October 2022, aimed at stabilizing the yen after it fell to a 34-year low in April. The ministry said that from April 26 to May 29, Japan spent 9.7885 billion yen (about $62.25 billion) on the response effort. With this decision, the Japanese financial division seeks to “mitigate” excessive fluctuations in the currency market.
Historical context and recent fluctuations in the yen
After the Bank of Japan ended negative interest rates in March, the yen faced persistent downward pressure, trading at 157.25 against the U.S. dollar in late May. The yen fell dramatically to 160.03 against the US dollar on April 29, then improved to around 156 during the same trading session (read: BOJ ends era of negative rates : ETFs will win).
This rally was likely fueled by speculation about government intervention. At the time, analysts at Bank of America Global Research estimated that the initial intervention could have been between 5 trillion and 6 trillion yen, based on Bank of Japan data cited on CNBC.
The last instance of intervention before the recent effort was in October 2022, when the yen weakened to around 152 to the dollar. That year, the government intervened three times, spending a total of about 9.2 trillion yen to help stabilize the currency.
Market impact
Japan’s recent intervention to support the yen is an important economic event that impacts both foreign exchange and stock markets in several ways:
Strengthen the currency: The main immediate effect of such intervention is to strengthen the yen against other currencies. By buying yen and selling foreign currencies, the Japanese government increases demand for yen, which helps increase its value.Invesco CurrencyShares Trust for Japanese Yen FXY is expected to increase in value in the short term.
Impact on exporters: On the other hand, a stronger yen may pose a challenge for Japanese exporters because it makes their products more expensive and less competitive abroad. This could have a negative impact on the profits of export-oriented companies including Nikkei. Several Japanese automakers have extensive overseas exposure to generate revenue.
The stock market as a whole could therefore be under pressure for some time. Even if investors want to bet on large-cap Japanese stocks, they should avoid currency-hedged ETFs like WisdomTree Japan Hedged Equity Fund DXJ (which performs better in a falling yen environment) for a while and instead bet on regular stocks like iShares MSCI Japan ETF EWJ (read: Concerns about slowing US growth? 3 Asian ETFs look attractive).
The story continues
Influence on small caps: Small-cap stocks are sometimes linked to the national economy. These stocks have less foreign exposure and perform better in a rising currency environment. iShares MSCI Japan Small Cap ETF SCJ and WisdomTree Japan Small Cap Dividend ETF DFJ, which both have a Zacks Rank #2 (Buy), can thus prove profitable in the current scenario.
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Invesco CurrencyShares Japanese Yen Trust (FXY): ETF Research Reports
iShares MSCI Japan ETF (EWJ): ETF Research Reports
WisdomTree Japan Hedged Equity ETF (DXJ): ETF Research Reports
WisdomTree Japan SmallCap Dividend ETF (DFJ): ETF Research Reports
iShares MSCI Japan Small-Cap ETF (SCJ): ETF Research Reports