If you’re Japanese, vacationing in the US has never been more expensive. The Japanese yen (JPY) has fallen 25% against the US dollar this year alone, making it one of the worst performers among the major G10 currencies. In fact, the yen’s weakness has been so severe that this week it prompted the country’s central bank to intervene – basically, buying up the crumbling yen to prop up its price – for the first time since 1998.
Mind you, it’s not pure chance that the yen has depreciated against the dollar. See, a currency’s relative strength or weakness is usually determined by interest rates. All else being equal, the higher the interest rates in a country, the more attractive its currency, since investors can expect a higher return.
And that’s what sets Japan apart. While the rest of its advanced economy peers are hiking interest rates to try to tamp down sky-high inflation, Japan’s central bank has been happy to keep interest rates low. After all, deflationary pressures have been a persistent concern for Japan and some inflation is good news there, even if it comes in at a 30-year high of 2.8%.
A weaker yen might not be welcomed by import-reliant Japanese consumers, but it’s great news for Japanese conglomerates that sell abroad. The weaker yen has helped increase Japan’s corporate profits to their highest levels since 1954, benefitting the TOPIX stock index. And that yen weakness is likely to persist for some time, with the Fed already forecasting more rate hikes. To ride that trend, you might consider investing in the USD-hedged Amundi ETF Japan Topix UCITS ETF (ticker: TPHU; expense ratio: 0.48%), which offers exposure to Japanese companies with global sales.
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