Japanese Yen Rises on New Budget

The Japanese yen made gains against the U.S. dollar and the euro on Wednesday, following a government approval of a new budget aimed at kick starting the reconstruction program in the Fukushima area. At the moment, the greenback lost 0.15% of its value to trade around ¥80.95. At the same time, the euro put up a bigger fight, falling 0.03% to ¥116.94. The yen was supported by an announcement of another budget, valued at $24.7 billion, whose aim is to support reconstruction and provide compensations to the victims of the Fukushima disaster. Japan's PM Naoto Kan has been heavily criticized for his handling of the crisis. In fact, due to the immense pressure, the PM has been forced to announce he will step down by August. The earthquake and tsunami disaster have caused a lot of damage to Japan's economy by creating power shortages and supply disruptions. The latest move by the government will appeal to investors, as it shows the government's determination to resolve the crisis. At the same time, however, the new proposal needs to pass through the Japanese parliament. With such a weak and unpopular PM, even within his own party, it does not seem impossible that the proposal fails to pass the parliamentary vote. Earlier today, the Japanese economy produced some good news that will encourage its politicians. In May, Japan's leading indicators index rose to 99.80, from 96.20. The rise was widely expected, however. The index is composed by combining different measures of overall economic health. Any values below 50 suggest most indicators are negative, while values above 50 suggest most indicators are positive. Japan's economic growth has been sluggish for the past two decades. Even though the Japanese economy seems to be very strong at the moment, as the reconstruction programs start to kick in and supply disruptions are resolved, it remains to be seen for how long the Japanese economy can maintain such a momentum. One possible brake on its strength will be commodity prices. Japan is a commodity poor country and relies heavily on importing raw materials. In today's trading, the prices of oil and copper rose. At the moment, crude oil rose 0.95% to $97.72, while copper edged 0.06% higher to trade around $4.34. Action Items Bullish: Some traders will find the latest government budget as supportive of Japan's recovery. The government has made a number of bad steps in resolving the crisis, but this might be the required step forward. Traders who believe the new budget will help Japan build its economic momentum will be interested in: • CurrencyShares Japanese Yen Trust ETF FXY is a long play on the yen. FXY might do well if the yen appreciates. • ProShares Ultra Yen ETF YCL is also a long play on the yen. YCL might do well if the yen appreciates. Bearish: Some traders will not be persuaded that a deeply unpopular government will be able to push through the new budget proposal. These traders might think that the political instabilities will take their toll on the Japanese currency and the best way to resolve them would be a new PM. Traders who find appeal in this scenario might be interested in: • ProShares UltraShort Yen ETF YCS is a short play on the yen. YCS might do well if the yen depreciates.