To the untrained eye, it would appear that a weaker Japanese yen is a good thing. It certainly has been for Japanese equities. Since early November, the CurrencyShares Japanese Yen Trust (FXY) has plunged over 14%, buoying a sharp rally in Japanese equities along the way.
So strong has the rally in Japanese stocks been that the WisdomTree Japan Hedged Equity Fund (DXJ), an ETF that offers investors a hedge against USD/JPY fluctuations, has surged over 25% since early November while seeing its assets under management total roughly quadruple since early December.
The Downside
Statistics like that obfuscate the fact that there is a downside to a plummeting yen, at least for some countries that are direct export competitors of Japan's. So while investors have their pick of ETFs with which to profit from the weaker yen, there are some other funds that might belong on avoid or short lists should the Japanese currency continue its downward spiral.
- iShares MSCI South Korea Index Fund (EWY). South Korea is being hit by a triple whammy of sorts. The weak yen is bad news for South Korean exporters because many of these firms, particularly the automobile and electronics producers, are in direct competition with Japanese makers of the same goods. So on its own, the weak yen can be a problem for South Korean exporters.
Unfortunately, the won has appreciated against the dollar this year and that could crimp profits for South Korean exporters that rely on the U.S. as a primary end market. Add to all that, South Korea's central bank kept interest rates at 2.75% at the conclusion of its meeting last month and appears in no hurry to pare rates.
The result is South Korea's Kospi is one of just two major Asian exchanges (Malaysia's is the other) to trade lower this year. It has gone somewhat unnoticed, but the iShares MSCI South Korea Index Fund is not off just a little year-to-date. Even with Tuesday's modest gain, the ETF has plunged over nine% since the start of the year.
- iShares MSCI Germany Index Fund (EWG) Like South Korea, Germany faces multiple currency-related issues. The euro's strength against the dollar alone is problematic for an export-driven economy such as Germany. Adding to that strain is the fact that Germany and Japan are two of the largest automobile producers in the world. Whether its Hondas and Volkswagens or Lexus and BMW, both countries are highly dependent on the U.S. as a source of profit and revenue.
For its part, Germany is not taking the weak yen lightly. Policymakers there have accused their counterparts in Japan of manipulating the yen and Germany has shown signs of warming to capital controls for the first time in years. As for EWG, the largest Germany ETF by assets, the fund is modestly higher year-to-date, but it has also recently shown signs of wilting.
- iShares MSCI France Index Fund (EWQ) France faces the same problem as Germany: The euro has been persistently strong against both the dollar and the yen. For France and EWQ, the matter at hand is not automobiles and industrial goods as much as it is luxury products such as fashion and leather accessories. LVMH Moet Hennessy Louis Vuitton SA (LVMUY), EWQ's fourth-largest holding, has pledged to raise prices in Japan if the continues to weaken.
Something else to consider: Sanofi (SNY), EWQ's largest holding, among other European multinationals, benefited from the weaker euro in the second quarter of last year. The reverse scenario could apply now that the euro has soared against the greenback and the yen.