The Japanese yen fell to a 40-year low on the 27th, with the yen/dollar rate approaching 163.69 yen, as yen-related exchange-traded funds (ETFs) posted negative returns. The weakness stems from Japan's low growth (the International Monetary Fund forecasts 0.6% for this year) and prolonged low rates. The Japan-US rate gap of 2.5-2.75 percentage points drives yen carry trade, where investors borrow yen for higher-yielding foreign assets, pressuring the currency downward.
Yen-Related ETFs Record Negative Returns with Performance Gaps
According to KOSCOM ETF Check, TIGER Japan Yen Futures recorded a 1-month return of -5.13% (based on dividend reinvestment) as of the 27th, continuing negative returns since the beginning of the year. PLUS Japan Yen Ultra-Short-Term Government Bonds (Synthetic) also maintained negative returns.
Yen-exposed ETFs showed lower returns even when tracking the same index. RISE US S&P500 Yen Exposure (Synthetic H), which invests in the S&P500 in yen without dollar exposure, posted a 3.01% return since the beginning of the year. During the same period, RISE US S&P500 returned 11.11%, an 8.1 percentage point difference from the yen-exposed product.
SOL US S&P500 Yen Exposure (H) returned 3.18% since the beginning of the year, 7.66 percentage points lower than SOL US S&P500 (10.84% return). RISE US 30-Year Treasury Yen Exposure (Synthetic H) and ACE US 30-Year Treasury Yen Exposure Active (H) underperformed other products without yen exposure by 4.69 percentage points and 7.07 percentage points respectively.
Japan-US Rate Differential Drives Yen Carry Trade Activity
The yen's decline resulted from Japan's falling economic growth rate and prolonged low-interest-rate conditions. The International Monetary Fund recently forecast Japan's economic growth for this year at 0.6%, lower than the April forecast of 0.7%.
The interest rate gap between Japan and the US has not narrowed significantly. Japan's current policy rate stands at 1%, 2.5-2.75 percentage points lower than US rates. When Japanese rates remain low, investors engage in "yen carry trade," borrowing yen to invest in other countries' assets. This process continuously releases borrowed yen into the market, creating downward pressure on the yen.
The Bank of Japan (BOJ) continues to raise rates at a slow pace. Recently, the Takaichi Sanae cabinet released its basic economic and fiscal policy guidelines, inserting language encouraging the BOJ to maintain low rates. This has led to speculation that the BOJ will struggle to proceed quickly with rate hikes. Concerns about Japan's fiscal soundness and trade deficits also depress yen value. Meanwhile, inflation concerns from the Iran war raise the possibility of further US rate increases.
KB Securities Analyst Forecasts Continued Yen Weakness
Financial investment industry experts forecast continued yen weakness. Ryu Jin-i, a researcher at KB Securities, stated, "For the yen to reverse to strength, resolution of Iran war uncertainty, easing of US rate hike concerns, or an early rate hike signal from the BOJ is necessary."
Ryu analyzed, "Japanese financial authorities have already implemented strong verbal intervention and actual dollar-selling intervention," adding, "The accumulated short position size on the yen is quite burdensome for the BOJ to take a hawkish stance, making a short-term stance shift appear difficult."
FAQ
What caused the Japanese yen to fall to a 40-year low on the 27th?
The yen fell due to Japan's low economic growth (the International Monetary Fund forecasts 0.6% for this year), prolonged low interest rates, and a 2.5-2.75 percentage point rate differential with the US. This gap fuels yen carry trade activity, where investors borrow yen to invest in higher-yielding foreign assets, creating persistent downward pressure on the currency.
How did yen-exposed ETFs perform compared to regular ETFs tracking the same index?
Yen-exposed ETFs significantly underperformed their non-exposed counterparts. RISE US S&P500 Yen Exposure (Synthetic H) returned 3.01% since the beginning of the year, while RISE US S&P500 returned 11.11%, an 8.1 percentage point difference. SOL US S&P500 Yen Exposure (H) returned 3.18%, 7.66 percentage points lower than SOL US S&P500's 10.84% return.
What conditions does KB Securities say are necessary for the yen to strengthen?
Ryu Jin-i of KB Securities stated that yen strength requires resolution of Iran war uncertainty, easing of US rate hike concerns, or an early rate hike signal from the Bank of Japan. Ryu noted that the BOJ faces difficulty taking a hawkish stance due to the substantial accumulated short position size on the yen, making a short-term stance shift appear difficult.
