How to Profit from Bank of Japan’s Aggressive Money Printing
Last week, the new governor for the Bank of Japan (BOJ), Haruhiko Kuroda, announced a game changer for that nation’s quantitative easing policies. The BOJ now plans to initiate monthly bond purchases in the amount of 7.5 trillion yen (US$77.8 billion) per month in an attempt to increase inflation to two percent within the next two years.
When it comes to creating an investment strategy based on this quantitative easing policy, there are two initial takeaways. The first is that this will put pressure on the Japanese yen to weaken its value; the second is that stocks will rise within that nation, since many firms are exporters and will benefit from this quantitative easing plan.
This investment strategy has already begun, as large institutional investors have started front-running this announcement, starting with the election of the new Prime Minister of Japan last fall. However, the country is just about to embark on this new aggressive quantitative easing plan that will last approximately two years—if not longer. There is still plenty of time to profit from an investment strategy using this quantitative easing announcement as a catalyst.
The Japanese yen has already weakened, but it’s poised for additional decline with such an aggressive quantitative easing policy. One investment strategy is to consider the possibility of shorting the yen. Recently, George Soros and Bill Gross stated that this quantitative easing policy could significantly push the yen down further than most people believe.
Soros commented, “If the yen starts to fall, which it has done, and people in Japan realize that it’s liable to continue and want to put their money abroad, then the fall may become like an avalanche.” (Source: Goodman, W. and Hu, B., “Soros Joins Gross in Warning Kuroda Plan Risks Yen Rout,” Bloomberg, April 5, 2013.)
While shorting the Japanese yen as an investment strategy has already begun, there is the possibility for significantly more decline over the next couple of years.
An additional investment strategy that will benefit from quantitative easing is higher Japanese stock prices. As we’ve seen in America, quantitative easing by the Federal Reserve has significantly pushed up stocks since their bottom in 2009, more than doubling the S&P 500.
Investing in Japanese stocks without a currency hedge is a poor investment strategy, as the gains from stocks will be reduced by the loss in the currency market.
One investment vehicle to consider is the WisdomTree Japan Hedged Equity (NYSEArca/DXJ) exchange-traded fund (ETF). This is an index of Japanese stocks that is hedged by shorting the Japanese yen through forward and futures contracts.
Chart courtesy of www.StockCharts.com
Once the new Prime Minister of Japan was elected last fall, many institutional investors began creating an investment strategy that would benefit from quantitative easing by buying Japanese stocks. Already this investment strategy is profitable for investors who began accumulating Japanese stocks and shorting the Japanese yen since last fall.
The question: what would I do at this point? Considering the relative strength index (RSI) is significantly overbought, a pullback is certainly in order. However, since this quantitative easing policy has only just begun, there is a lot of possible upside left in the trade.
Much like the S&P 500 moved up sharply by the end of 2009, there was still substantial upside left over the last few years. The investment strategy based on quantitative easing should last for a much longer time; however, I wouldn’t rush into this trade immediately, considering the substantial move already in the market. But it is something for which I will keep my eye out for a more attractive entry point.