Strong Yen Hurting Japanese Economy

Bank of Japan governor Masaaki Shirakawa warned on Monday that a surging yen and the European Union's sovereign-debt crisis were slowing Japan's post tsunami economic recovery. The strong yen and the European financial crisis are related because as investors dump the euro, they look for what they feel are safe haven currencies like the Japanese yen and the Swiss franc. The Japanese are growing weary of the safe haven label because it has caused the Japanese currency to reach post-war highs compared to other currencies. The strong yen makes Japanese exports more expensive at a time when consumers in the United States and Europe are increasingly looking for bargains. To deal with the rising yen, the Bank of Japan plans to increase its asset buying program by 5 trillion yen to a total of 55 trillion yen ($708 billion). The Bank of Japan relies on the asset buying program as its main economic policy tool because Japanese interest rates are already near zero percent. The Japanese economic recovery is being further hampered by flooding in Thailand, which has had a negative impact on the operations of many of its automakers' and electronics firms' overseas operations. Although most of Thailand's capital Bangkok has avoided flooding, many of the Japanese factories based in Thailand are still under water and it could take months before some of them are fully operational again. ACTION ITEMS:

Bullish:
Traders who believe that the Bank of Japan will be successful in its efforts to reduce the value of the yen might want to consider the following trades:

• If the yen falls, investors might choose to move funds into Swiss francs. If traders drive up the price of the Swiss franc, the CurrencyShares Swiss Franc Trust FXF will climb higher as well.

• Japanese stocks should benefit from a falling yen as well. If the yen falls, the iShares MSCI Japan Index Fund EWJ should climb higher as Japanese exports become more price competitive.

Bearish:
Traders who believe that the situation in Europe is too severe for the Bank of Japan to halt the flow of funds from Europe may consider an alternate position:

• If the yen stays at its current levels or moves even higher, Japanese stocks could suffer. If this scenario plays out, the ProShares UltraShort MSCI Japan EWV should climb higher as Japanese stocks fall.

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