Trading Dollar for Yen

More than oil, gold or even Treasury bonds, the market’s safe haven play during times of crisis over the past 24 months has undoubtedly been the Japanese yen –often forgotten as one of the few assets actually higher in 2008, a year when almost nothing worked.

After treading water for most of 2009, the currency is again knocking up against the multiyear highs last reached toward the end of last year. Right now, it’s hard not to ignore the yen’s strength, which tends to gain as the market’s appetite for risk diminishes. My fund currently holds a position.

The Yen’s Bull Ride

CurrencyShares Japanese Yen Trust (FXY) – 2 year

From a portfolio perspective, the yen provides an attractive element of diversification, showing slightly negative correlation with stocks and commodities and a slight positive correlation with bonds. No doubt the recent rally in bond prices has also put a bid under the yen.

Unquestionably, the biggest risk in currency markets is politics. Japan’s central bank has a history of intervening to push down the value of the yen in an attempt to benefit export-heavy companies such as Canon (CAJ), Toyota (TM) or Sony (SNE). Just this past weekend, Japanese Finance Minister Hirohisa Fujii told reporters “If currencies show some excessive moves in a biased direction, we will take action”, suggesting attempts to weaken the yen were possible. Still, there’s also a belief the Democratic Party of Japan, which assumed power in August, will tolerate a stronger currency as a means of spurring domestic demand.

For individual investors not comfortable trading spot FX, there are three major options for gaining exposure. By far the most popular, and liquid, is CurrencyShares Japanese Yen (FXY), part of Rydex’s suite of currency funds, boasts $500 million in assets and trades an average of 140,000 shares a day. Less attractive, at least from a liquidity perspective, is iPath ETN (JYN), an exchange-traded note (ETN), essentially an unsecured debt obligation, which charges the same 0.40% as the more-liquid CurrencyShares product.