Why The Yen Is Set To Weaken (EWJ, CEW, UUP, FXY, DBV, YCL, YCS)

Jack Crooks: The problems facing Japan (NYSEArca:EWJ) have been building up for some time. And I don’t believe the coming negative impact on its currency can be delayed much longer.

Earlier this week I gave my World Currency Trader members two powerful reasons why. In today’s column, I’d like to share those with you:

Reason #1—Japan just recorded its first current account deficit since 1980

As you can see in the chart below, Japan posted a trade deficit of 2.49 trillion yen in 2011, after the economy was hit by the price shock of oil and a slowdown in global growth.

There are two related points to consider here that should lead to a weaker yen:

•  Japanese industry is being hollowed out by the strong yen. The overvaluation of the yen makes Japanese products less competitive on international markets. As a result, many of the country’s powerful manufacturers have moved much of their operations offshore and are threatening to move more.

•  A current account deficit means Japan will be importing capital. This is important as it relates to the second powerful reason below — it means Japan will need to make itself more attractive for international investors, and that usually comes in the form of higher interest rates.

Reason #2—Japan is quickly losing the ability to fund its huge debt needs with internal savings

The pool of savings in Japan is falling. The Japanese government will increasingly have to attract international investors to fund its own towering debt needs.

Consequently, interest rates on Japanese bonds will have to rise. And this may further dent growth prospects in Japan relative to the United States; helping make the dollar more attractive than the yen.

Normally, higher rates tend to help a currency. But in Japan it has been quite the opposite for many years. It goes to the artificial nature of the Japanese money market.

Just take a look at the following chart and you can see what I mean. For example, when interest rates on Japanese bonds shot up in mid-2008, the yen took a nosedive. And when interest rates fell in mid-2010, the yen’s value soared.

10-year Japanese Gov’t Bond Yield versus Japanese Yen-U.S. dollar

Now take a look at the chart of Japanese yen — U.S. dollar (NYSEArca:UUP). The pair recently tested near-term support.

CurrencyShares Japanese Yen ETF — FXY Weekly

There is a long way for the yen (NYSEArca:FXY) to fall if I am right about this setup. Members of my World Currency Trader service are positioned for the move; are you? If not, click here, and I’ll show you why you can always count on currencies to present serious profit opportunities.

Related: Dreyfus Emerging Currency Fund (NYSEArca:CEW), CurrencyShares Japanese Yen Trust (NYSEArca:FXY), PowerShares DB G10 Currency Harvest Fund (NYSEArca:DBV), ProShares Ultra Yen ETF (NYSEArca:YCL), ProShares UltraShort Yen ETF (NYSEArca:YCS)

Best wishes,

Written By Jack Crooks From Money And Markets

Money and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Nilus Mattive, Claus Vogt, Ron Rowland, Michael Larson  and Bryan Rich. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance  returns cited are derived from our best estimates but must be considered  hypothetical in as much as we do not track the actual prices investors  pay or receive. Regular contributors and staff include Andrea Baumwald, John Burke, Marci Campbell,  Selene Ceballo, Amber Dakar, Maryellen Murphy, Jennifer Newman-Amos, Adam   Shafer, Julie Trudeau, Jill Umiker, Leslie Underwood and Michelle Zausnig.

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