Customer Service 1 (888) 261-2693
Please enter Search keyword. Advanced Search

Japan Is About to Devalue Its Currency: Here's How to Profit

By Tom Dyson, publisher, The Palm Beach Letter
Monday, January 12, 2009

Before you read today's investment idea, look at the chart below. It's Toyota's worst nightmare.

In the last five months, the yen has moved from 110 to 90 against the dollar, making it 2008's strongest currency. The yen is the highest it's been in 14 years... and it's only a few points away from its highest level ever.


Toyota sells cars all over the world. When the yen rises against other currencies, Toyota's cars are more expensive to foreigners. They don't buy so many. They choose American, European, or Korean cars instead. Toyota loses money.


According to the Wall Street Journal, every point the yen rises against the dollar costs Toyota $433 million in annual operating profit. In other words, over the last five months, Toyota saw $8.6 billion in annual profits disappear... That's about a quarter of its annual operating profit.

This chart shows the Yen Trust. When this fund rises, it means the yen is getting stronger.

 

CurrencyShares Japanese Yen Trust

Japan's entire economy is a large version of Toyota. Japan is an export economy. Its strategy for prosperity is producing goods and selling them to foreigners. Every point the yen rises costs Japan billions of dollars in profits for its companies, billions of dollars in tax revenues for the government, and thousands of jobs in the economy.

In the past, when the yen rose too high, Japanese authorities intervened in the markets to make the yen fall. One tool they use is cutting interest rates. Low interest rates discourage people from storing their money in yen and encourage them to save their money in other currencies with higher interest rates.

Right now, the Japanese yen has the world's second-lowest official interest rate, after the U.S. The official central bank rate in Japan is 0.3%.

The second tool Japanese officials use to devalue their currency is direct intervention in the foreign exchange markets. The Bank of Japan prints money and then exchanges the yen for dollars in the foreign exchange market, pushing down its price.

The last time the Japanese got worried about the yen being too high was in 2003 and 2004. The yen was around 105 at the time. They spent $2.5 billion pushing their currency down about 20% against the dollar.

The Japanese yen is now around 15% higher than it was in 2003-04. And Japan's economy is much sicker than it was back then. The stock market is close to 20-year lows and GDP is shrinking. There's no room to keep cutting interest rates. I'm certain the Japanese authorities are going to start intervention again soon. It may be happening already. Last week, the head of Japan's central bank told the press he was looking at ways to devalue the yen.

Japan's currency pays no interest. Japan's economy is in tatters. But debt is the big reason I expect the yen to fall. Japan's government is the most indebted in the world... with a government debt-to-GDP ratio expected to hit 150% next year. (It averages between 70% and 75% for the six largest economies in the world.)

To devalue its currency, Japan's going to have to print money using the same "quantitative easing" techniques Bernanke is using right now. These techniques are highly inflationary... and guarantee the yen will fall against other currencies.

You won't hear any other writer in the world predicting inflation and currency devaluation in Japan right now. That's why it's such a good bet. Plus, as you can see from the chart above, we've got the trend in our favor.

FXY is the symbol of the Japanese Yen Trust. When the yen falls against the dollar, this fund falls. The easiest way to bet on a fall in yen is to short this fund or buy put options on it.


Good investing,

Tom





Market Notes


NEW HIGHS OF NOTE LAST WEEK

JetBlue (JBLU)... airline
VSE Corp (VSEC)... military systems
Apollo Group (APOL)... secondary education
Brink's Home Security (CFL)... home security
Force Protection (FRPT)... military vehicles
Applied Signal Technology (APSG)... terrorist surveillance
Answers Corporation (ANSW)... answers... duh
Emergent Group (LZR)... surgical equipment
Crucell (CRXL)... biotechnology
Repros Therapeutics (RPRX)... biotechnology
Ecology & Environment (EEI)... environmental consulting
Aceto Corporation (ACET)... drug materials and distribution
Tiens Biotech Group USA (TBV)... nutritional supplements


NEW LOWS OF NOTE LAST WEEK

Steelcase (SCS)... furniture
Hill-Rom (HRC)... hospital beds
M&T Bank Corp (MTB)... bank
United Bancshares (UBOH)... bank
Lloyds TSB Group (LYG)... bank
Texas Capital Bancshares (TCBI)... bank
Lions Gate Entertainment (LGF)... movie studio
CurrencyShares Russian Ruble (XRU)... Russian ruble ETF

Recent Articles


  • What the 9th Inning of This Bull Market Will Look Like
    By Dr. Steve Sjuggerud
    Thursday, August 28, 2014

    This was the first time I'd experienced "The Ninth Inning" of a major stock market boom. I sure got the full experience...

  • Why Stocks Should Run Higher From Here
    By Brett Eversole
    Wednesday, August 27, 2014

    Right now, a stock market extreme is pointing to higher stock prices from here...

  • When It's Okay NOT to Listen
    By Dr. Steve Sjuggerud
    Tuesday, August 26, 2014

    How can you be at the top of your game if you don't even know what the top of your game looks like right now? If you don't even know what your peers are doing?

  • "Non-Reportable" Gold
    By Dr. Steve Sjuggerud
    Monday, August 25, 2014

    "If I hold gold at a bank in Switzerland, is that reportable to the IRS?" That little question sure kicked open a can of worms...

  • The Simple Concept That Made Me $6 Million Last Year
    By Mark Ford
    Friday, August 22, 2014

    Of the many ways to build wealth, entrepreneurial equity offers the greatest potential. This is how the richest of the rich – from Andrew Carnegie to Bill Gates – acquired their vast fortunes...