For Japan, the pressure to support the weak yen may have abated, but the weak yen is still a headache.

The yen has fallen 9.4% against the US dollar so far this year, and appears to be falling for the fourth year in a row. The impact on the economy is two-sided: exports and tourism benefit from more competitive exchange rates, while households and small businesses are squeezed by rising import prices.

Four fund managers shared four ways to take advantage of the weak yen to trade. Their views do not represent suggestions or trading positions.

1. FLORIN COURT CAPITAL MANAGEMENT CORPORATION

Florin Court is a diversified systemic asset management company with an asset management scale (AUM) of 2 billion US dollars. It was founded in 2016. The main transactions it shares are shorting Asian currencies other than the yen.

Florin Court Chief Information Officer Doug Grenig said investors should not short the weak yen, but should short Asian emerging market currencies.

Greenig said, “Investors can consider shorting other Asian currencies, such as the Korean won or Thai baht. The actual interest rate of these currencies is also lower than other emerging market currencies, and you will not directly face the risk of intervention by the Bank of Japan.”

The Bank of Japan is believed to have intervened twice on April 29 and May 1 to stabilize the yen exchange rate. The exchange rate of the yen against the US dollar has fallen to a 34-year low of around 160, and is currently around 155.8.

The reason for the sharp depreciation of the yen is obvious: real interest rates are much higher outside of Japan. Greenig pointed out that loose fiscal policies and a strong economy have kept US interest rates high. By contrast, Japan cannot do whatever it wants in terms of raising policy interest rates.

He said that Japan's huge public debt accounts for 263% of GDP, but the Bank of Japan holds nearly half of it, so the situation may be more delicate than it seems.

Exchange rate trends of the Korean won, Thai baht, and yen against the US dollar

2. AQR Capital Management

AQR Capital Management is a system asset management company. AUM reached 108 billion US dollars. It was founded in 1998. The main transaction it shares is to go long on Japanese stocks.

Jonathan Fader, managing director of the macro strategy department at AQR Capital Management, said that the Bank of Japan's intervention made the situation of yen bears more complicated, but the main driver of the weak yen was still Japan's loose monetary policy, while interest rates in other regions remained high for many years.

He is optimistic about Japanese stocks that will benefit from weak currencies.

Fader pointed out that the close relationship between the yen and Japanese stocks broke down as authorities intensified verbal intervention. But there are still favorable factors in the stock market, such as improved governance and banks benefiting from the end of negative interest rates. The Bank of Japan raised interest rates for the first time in 17 years in March.

Fader said, “Once the fluctuation of the yen subsides, the Japanese stock market is likely to resume excellent performance.”

Although Japan's blue-chip Nikkei Index did not hit a record high earlier this year, it has risen about 16% so far this year.

Japanese stocks outperformed the yen against the US dollar

3. MOUNT LUCAS Asset Management

Mount Lucas Asset Management is a macro-hedge fund with AUM of $1.5 billion founded in 1986. The main transactions it shares are USD/JPY forward contracts.

For Mount Lucas partner David Aspell, the huge spread between the US and Japan means investors will continue to use the yen as a financing currency for arbitrage transactions.

He said that one way to take advantage of the weak yen is through currency forward contracts, which allow investors to hedge against foreign exchange risks.

Aspell said that buying a one-year USD/JPY forward contract traded at a price below current levels meant that the pair would need to depreciate within a year to cause losses. Investors will profit if there is no change or if the dollar strengthens against the yen.

Aspell said, “When interventions are truly unexpected and driven by fundamental factors, they are most likely to work in the medium term.”

Japanese yen arbitrage trading is still attractive

4. PINEBRIDGE INVESTMENT LLC.

Berry Investments is a global asset management company with AUM worth $168.2 billion, founded in 2010. The main transaction it shares is the purchase of high-quality, investment-grade short-term refinancing 2024 US Guaranteed Loan Certificates (CLO).

The Bank of Japan has abandoned the yield curve control policy (YCC) to limit long-term interest rates to near zero, but said it will continue to buy government bonds as widely as before. If yields rise rapidly, it will increase its purchasing efforts.

Since the policy began implementing YCC in 2016, Japanese investors have begun to seek other investments with higher returns. CLO's high yield has attracted many people.

Laila Kollmorgen, managing director of Berry Investments, added: “Currently, as CLO investors, they (Japanese investors) are our competitors because their demand for US fixed income assets is very strong.” She also added that the practices of Japanese investors will determine how Berry invests later this year.

The yield on Japanese treasury bonds has now reached the highest level in ten years, which may attract Japanese investors to return capital to the country. “We have to be flexible,” Kollmorgen said.

Although the typical CLO transaction period is 8 years, she will choose CLO, which was re-established in 2024. In these cases, trading hours have restarted. She will seek an extended three-year reinvestment period, refinance debt, and lender protection to prevent the bond from being fully repaid in the first year.

US Treasury and US Corporate Bond Yield