Japan's Currency: How To Invest In and Buy Japanese Yen

Safe-Haven, Carry Trading, and Currency Hedging

Getty Images / Agustin Rafael C. Reyes.

Japan's economy is the third largest in the world, after the U.S. and Chinese economies, with nominal gross domestic product of about $4.21 trillion in 2015. But, the country's status as the world's largest creditor, rather than its economic prowess, has given its currency - the Japanese yen - a safe-haven reputation in the marketplace. As a result, the Japanese yen has become the third most traded currency in the foreign exchange market after the U.S. dollar and the euro.

During the eurozone's sovereign debt crisis, the Japanese yen appreciated significantly in value as one of the few safe-haven currencies, particularly after the Swiss franc was pegged to the euro's valuation to prevent further appreciation. The Japanese yen has also been a popular carry trade in the past, due to its low interest rates that made it cheap to borrow. While the currency lost some of this clout in 2015 and 2016, the currency plays a vital role in the lives of many international investors.

In this article, we will take a look at the safe-haven status of the Japanese yen and how traders use the currency for capital gains opportunities and hedging purposes.

Safe-Havens, Carry Trades & Hedges

The Japanese yen has been historically popular amongst international investors as a safe-haven, carry trade and currency hedge. Since the early 2000s, investors had begun borrowing Japanese yen given the Bank of Japan's very low interest rates.

The funds from these borrowings were then lent out in other currencies, like the U.S. dollar at a higher interest rate. By 2007, some estimates pegged the Japanese yen carry trade at around US$1 trillion in size, before unwinding.

Between 2008 and 2012, the Japanese yen became a desirable safe-haven investment for international currency traders, given the country's creditor status.

These activities drove up the yen's valuation versus other currencies and hurt its export sector considerably. In 2013, Prime Minister Shinzo Abe was elected on the promise to reduce the Japanese yen's valuation through quantitative easing and other measures, which helped bring down the valuation.

Throughout all of these periods, the Japanese yen was also used as a currency hedge, given Japan's status as an investment destination. International investors based in the U.S. could offset the currency effects, gains or losses, in the volatile Japanese yen by purchasing long or short Japanese yen funds or buying directly in the spot foreign exchange market.

Investing in Japanese Yen with ETFs

The easiest way for international investors to gain exposure to the Japanese yen is using exchange-traded funds ("ETFs"). Using a variety of derivatives like currency swaps, these funds attempt to mimic the price of the Japanese yen versus either the U.S. dollar or a basket of international currencies. Some funds also offer leveraged or short-selling options that enable investors to capitalize on the Japanese yen's movement in a variety of ways.

The two most popular Japanese yen ETFs include:

  • ProShares UltraShort Yen (YCS) - YCS seeks daily investment results that correspond to two-times the inverse (-2x) of the daily performance of the U.S. dollar price of yen, with a 0.95% expense ratio and approximately $425 million in total assets, as of March 2013.
  • CurrencyShares Japanese Yen Trust (FXY) - FXY is designed to track the price of the Japanese yen by holding Japanese yen in deposit with the share price reflecting the price in U.S. dollars of the Japanese yen, with a 0.40% expense ratio and approximately $215 million in total assets, as of March 2013.

Buying & Selling Yen in the Forex Market

The spot foreign exchange ("forex") market offers another option for traders looking to buy or sell Japanese yen. By using one currency to buy another currency in a highly leveraged (e.g. 50:1 or more) situation, traders can realize a profit when the currency purchased increases in value relative to the currency used to make the purchase. The Japanese yen is most commonly traded against the U.S. dollar in a currency pair known as USD/JPY.

But before trading in these markets, international investors should be aware that the leverage involved often involves a greater amount of risk.

These trades are also typically placed in specialized forex broker accounts that may differ from existing stock brokerage accounts.

Key Takeaway Points

  • The Japanese yen has been historically popular amongst international investors as a safe-haven, carry trade and currency hedge.
  • The easiest way for international investors to gain exposure to the Japanese yen is using Japanese currency ETFs.
  • The spot forex market offers another option, but it's a bit riskier than other using ETFs.