- The yen’s weakness persisted despite joint foreign-exchange intervention by U.S. and Japanese monetary authorities, leaving South Korea-listed yen-related ETFs with weak returns.
- Even when tracking the same index, yen-exposed ETFs and yen-exposed U.S. long-term Treasury products posted much lower year-to-date returns than comparable non-exposed products.
- Brokerages said there are limits to defending the yen’s weakness, citing expansionary fiscal policy, limits to additional Bank of Japan rate hikes, and the possibility that the rate-hike cycle is nearing an end.
Forecast Trend Report by Period
The yen has continued to weaken despite joint foreign-exchange intervention by U.S. and Japanese monetary authorities, weighing on yen-linked exchange-traded funds listed in South Korea. Brokerages say further intervention remains possible, but argue it has limits in defending the currency.
According to Koscom ETF Check on Aug. 15, TIGER Japanese Yen Futures posted a one-month return of minus 3.00% as of Aug. 14. Its year-to-date return was minus 3.51%. PLUS Japanese Yen Ultra Short-Term Treasury Bond (Synthetic) also posted a negative year-to-date return of minus 3.79%.
Funds with yen exposure lagged even when they tracked the same index. RISE US S&P 500 Yen Exposure (Synthetic H) returned 6.48% year to date, versus 11.85% for RISE US S&P 500. SOL US S&P 500 Yen Exposure (H) gained 6.25%, compared with 11.57% for SOL US S&P 500 over the same period.
The gap also showed up in U.S. long-term Treasury ETFs. ACE US 30-Year Treasury Yen Exposure Active (H) posted a year-to-date return of minus 10.44%, compared with minus 4.66% for ACE US 30-Year Treasury Active (H).
By contrast, exchange-traded notes designed to profit from a weaker yen delivered stronger returns. Meritz KAP Inverse 2X Japanese Yen ETN gained 10.00% year to date. That contrasted with returns of minus 2.78% for Meritz KAP Japanese Yen ETN and minus 8.46% for Meritz KAP Leverage Japanese Yen ETN.
At the end of July, the dollar-yen exchange rate climbed to nearly 164 yen intraday, the highest level since 1986. It later fell to the 155-yen range after the U.S. and Japan jointly moved to buy yen, but rebounded to the 159-yen range. A rise in the dollar-yen rate indicates a weaker yen against the dollar.
Park Sang-hyun, an analyst at iM Securities, said further intervention by the U.S. and Japan is highly possible given their determination to stem yen weakness. Funding for such operations has already been sufficiently secured through the Federal Reserve’s Foreign and International Monetary Authorities repo facility, he added.
Even so, Park said the main reason some investors doubt the authorities can successfully defend the yen is Japan’s fiscal risk tied to Prime Minister Takaichi’s expansionary fiscal policy, underscoring the country’s weak fiscal health. He added that further rate hikes by the Bank of Japan would also have only limited effect in supporting the currency.
He said the BOJ is expected to deliver another rate increase in September, partly because of pressure from the U.S. The bigger issue, he added, is that the BOJ’s rate-hike cycle is effectively nearing its end. If the central bank raises rates again in September, the foreign-exchange market may focus less on the hike itself than on the end of the tightening cycle, potentially giving the yen another reason to weaken.
Lee Su, Hankyung.com reporter 2su@hankyung.com
