Themes: Japanese Investors, Asian Markets, Yen, International Economies
For years the Japanese yen moved inversely to the S&P 500 index as the ‘carry trade’ was all the rage. That’s where investors borrowed yen at virtually zero interest rates to fund purchases of riskier, higher yielding currencies and investments.
These trades aimed to profit from the difference between low borrowing costs and higher yield in other investments. And as all this capital flowed out of Japan, the yen declined in value.
But when the financial crisis took hold, money flowed out of stocks and repaid those loans, causing the yen to rise.
In the chart below, we’ve represented the yen with the CurrencyShares Japanese Yen Trust (ticker: FXY; red line) which is an ETF closely tracking the yen’s movements. This is plotted against the S&P 500 Index (green line) for the past two years. You can see that the yen peaked in January this year (circled).
The yen/stock disconnect
If you would like a larger version of this graph please click here
Source: Financial Times
Over two years, the stock market has trended down, and the yen has trended up. But what’s more interesting about this chart is that since the stock market bottomed in March of this year, the yen has also rallied. The yen ETF is up 5% versus the S&P’s 41% gain.
This is a strong indicator of Japanese investor sentiment right now. Japanese investors have not bought into the worldwide appetite for stocks. They are not prepared to pour money into international markets at the moment.
What that shows is that Japanese investors don’t believe that international stock markets offer good value right now. And we agree with them.
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