Best of the Week
Most Popular
1. TESLA! Cathy Wood ARK Funds Bubble BURSTS! - 12th May 21
2.Stock Market Entering Early Summer Correction Trend Forecast - 10th May 21
3.GOLD GDX, HUI Stocks - Will Paradise Turn into a Dystopia? - 11th May 21
4.Crypto Bubble Bursts! Nicehash Suspends Coinbase Withdrawals, Bitcoin, Ethereum Bear Market Begins - 16th May 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.Cathy Wood Ark Invest Funds Bubble BURSTS! ARKK, ARKG, Tesla Entering Severe Bear Market - 13th May 21
7.Stock Market - Should You Be In Cash Right Now? - 17th May 21
8.Gold to Benefit from Mounting US Debt Pile - 14th May 21
9.Coronavius Covid-19 in Italy in August 2019! - 13th May 21
10.How to Invest in HIGH RISK Tech Stocks for 2021 and Beyond - Part 2 of 2 - 18th May 21
Last 7 days
Netflix - FAANG a Buy, Sell or Hold?, CME Black Swans Chasing Value in Biotech Stocks - 5th Aug 21
We Will See SPX 4600 In 2021 - 5th Aug 21
Revisiting The Excess Phase Stock Market Peak Pattern - 5th Aug 21
Dramatic Divergence between US and European Stock Markets - 5th Aug 21
Budgie Clipped Wings, How Long Before Flight Feathers Grow Back After Clipping, 4 Week Update - 5th Aug 21
Lisa Su's AMD Stock Price Rockets to the Moon! $200 Target, How to Buy for Under $78 - 4th Aug 21
Gold Jumps for Joy Only to Hit the Ceiling… Hard - 4th Aug 21
Is Wise Really The King of Online Money Transfer Services? - 4th Aug 21
Tips for Investing Your Money in Stocks - The Ultimate Guide - 4th Aug 21
Gold is the Key to Financial Wisdom - 4th Aug 21
How to Trade Binance Vanilla Options for the First Time on Bitcoin Crypto's - 2nd Aug 21
From vaccine inequality to economic apartheid - 2nd Aug 21
Stock Market Intermediate Top Reached - 2nd Aug 21
Gold at a Crossroads of Hawkish Fed and High Inflation - 2nd Aug 21
Bitcoin, Crypto Market Black Swans from Google to Obsolescence - 1st Aug 21
Gold Stocks Autumn Rally - 1st Aug 21
Earn Upto 6% Interest Rate on USD Cash Deposits with Binance Crypto Exchange USDC amd BUSD - 1st Aug 21
Vuze XR VR 3D Camera Takes Near 2 Minutes to Turn On, Buggy Firmware - 1st Aug 21
Sun EXPLODES! Goes SuperNova! Will Any planets Survive? Jupiter? Pluto? - 1st Aug 21
USDT is 9-11 for Central Banks the Bitcoin Black Swan - Tether Un-Stable Coin Ponzi Schemes! - 30th Jul 21
Behavior of Inflation and US Treasury Bond Yields Seems… Contradictory - 30th Jul 21
Gold and Silver Precious Metals Technical Analysis - 30th Jul 21
The Inadvertent Debt/Inflation Trap – Is It Time for the Stock Market To Face The Music? - 30th Jul 21
Fed Stocks Nothingburger, Dollar Lower, Focus on GDP, PCE - 30th Jul 21
Reverse REPO Market Brewing Financial Crisis Black Swan Danger - 29th Jul 21
Next Time You See "4 Times as Many Stock Market Bulls as There Are Bears," Remember This - 29th Jul 21
USDX: More Sideways Trading Ahead? - 29th Jul 21
Waiting On Silver - 29th Jul 21
Showdown: Paper vs. Physical Markets - 29th Jul 21
New set of Priorities needed for Unstoppable Global Warming - 29th Jul 21
The US Dollar is the Driver of the Gold & Silver Sectors - 28th Jul 21
Fed: Murderer of Markets and the Middle Class - 28th Jul 21
Gold And Silver – Which Will Have An Explosive Price Rally And Which Will Have A Sustained One? - 28th Jul 21
I Guess The Stock Market Does Not Fear Covid - So Should You? - 28th Jul 21
Eight Do’s and Don’ts For Options Traders - 28th Jul 21
Chasing Value in Unloved by Markets Small Cap Biotech Stocks for the Long-run - 27th Jul 21
Inflation Pressures Persist Despite Biden Propaganda - 27th Jul 21
Gold Investors Wavering - 27th Jul 21
Bogdance - How Binance Scams Futures Traders With Fake Bitcoin Prices to Run Limits and Margin Calls - 27th Jul 21
SPX Going for the Major Stock Market Top? - 27th Jul 21
What Is HND and How It Will Help Your Career Growth? - 27th Jul 21
5 Mobile Apps Day Traders Should Know About - 27th Jul 21
Global Stock Market Investing: Here's the Message of Consumer "Overconfidence" - 25th Jul 21
Gold’s Behavior in Various Parallel Inflation Universes - 25th Jul 21
Indian Delta Variant INFECTED! How infectious, Deadly, Do Vaccines Work? Avoid the PCR Test? - 25th Jul 21
Bitcoin Stock to Flow Model to Infinity and Beyond Price Forecasts - 25th Jul 21
Bitcoin Black Swan - GOOGLE! - 24th Jul 21
Stock Market Stalling Signs? Taking a Look Under the Hood of US Equities - 24th Jul 21
Biden’s Dangerous Inflation Denials - 24th Jul 21
How does CFD trading work - 24th Jul 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Japanese Yen The Biggest One-Way Bet of All Time

Currencies / Japanese Yen Aug 24, 2007 - 10:25 AM GMT

By: Money_and_Markets

Currencies Best Financial Markets Analysis Article

Jack Crooks writes: Since Mike Larson is off today, he's asked me to fill in for him. And his request couldn't have come at a better time: My specialty is foreign currencies. Foreign currencies have been surging against the dollar. And we're on the verge of a very specific currency explosion that could generate one of the greatest profit opportunities in a quarter century.

Here's the scoop:

The world's largest hedge funds and the world's richest institutions have been borrowing massive amounts of cheap Japanese money to fund some of the riskiest bets of all time. And now, that whole mountain of debt and risk is starting to crumble.

Mind you, this is no overnight phenomenon. It's been building up virtually nonstop for over 14 years!

Because of a 14-year recession in Japan, their interest rates have hovered close to zero — the longest period of the lowest interest rates of any major industrial nation in memory.

As an investor, imagine what you could do with that much "free" money offered continually for so many years …

Even if you just bought U.S. Treasury bonds, you could sit back and earn a couple of extra percentage points a year …

Or, you could plow the money into stocks and play for double-digit returns every year …

Or why stop there? You could go whole hog and leverage your bets with all kinds of fancy derivatives to aim for returns that would put the stock market gains to shame.

This is precisely what has helped hedge funds get so rich so quickly. This is the "Big Game" U.S. major banks and Wall Street brokerage firms ran to for what they thought were "easy" profits. With this "yen carry trade," as it's called, they essentially borrowed money in yen, converted it back to their own currency (e.g. the U.S. dollar), and then used the proceeds to place their big bets.

Just how much money is tied to the yen carry trade? Some estimates put the total value of yen-denominated borrowing at more than one trillion U.S. dollars! And those estimates don't account for the hundreds of billions in loans that are linked to these investments via margin credit and derivatives.

Indeed, I think it's fair to say that this is the biggest one-way bet in the history of the financial markets . And yet, too many investors have assumed for too long that it's a "risk-free ride."

How quickly they forget!

Back in 1998, in a Very Similar Credit Crunch Like Today's, the Yen Carry-Trade Came Unglued! Result: A Sudden Explosion in the Value of the Yen

In 1998, the yen staged a massive rally as hedge funds were forced to unwind big carry trades. The trigger was different — the Asian financial crisis. But the consequence — a sudden credit crunch — was very similar to what you see happening today.

The yen skyrocketed, jumping in value against the dollar by about 20% in a little over a month. Then, as you can see in the chart, even after the initial surge, it continued rising for almost an entire year.

Now it's about to happen again, and this time around, the trigger will be the credit crunch that is unfolding right before our very eyes, but with two critical differences:

First, the size of the one-way bet against the yen today dwarfs the amount of money that was involved back in 1998.

In 1998, it was estimated there was about $137 billion in Japanese yen carry trade borrowing. Today, as I just told you a moment ago, that number is estimated at $1 trillion!

Second, the level of investor complacency is far greater than it was in 1998!

Global financial markets have been so calm for so long, and global growth has been so strong, investors are really not that worried about any of this right now … even after the market's recent choppiness.

See, the hedge fund "pros" seem to have convinced themselves that the yen won't rally until Japanese interest rates go up.

Baloney! In my opinion, the rally in the yen will be first and foremost tied to risk coming to the fore of global financial markets. That's SURPRISE #1 .

SURPRISE #2 will come as the Bank of Japan actually goes ahead and hikes interest rates more aggressively, catching most investors off guard.

I'm not talking about a huge increase, mind you. But it doesn't have to be huge. All you need is a minor hike to change the profit picture for many of the borrowers.

These borrowers will be squeezed from both sides. They'll be forced to close out their bets because of the sudden increase in risk. And they'll come under even greater pressure to close them out because of the higher financing costs.

But remember: BEFORE they can pay back all those loans to Japanese lenders, they first have to convert their dollars (and other home currencies) back into yen.

You can probably see where this is going: The unraveling of all these bets against the yen would trigger a massive yen rally.

Together These Two Surprises Mean the Yen Could Rocket Faster And Farther Than It Did in 1998!

Back then, Japan was locked in the grips of deflation … interest rates were kept low … and despite all that, the currency still rallied for more than a year.

This time, Japan's economy has solid growth momentum … the deflation is gone … and it's almost inconceivable that the Bank of Japan could hold interest rates down.

The undeniable reality:

Japan's Economy Is Steadily Emerging from a Prolonged Hibernation

Until recently, Japan was still recovering from a period of deflation, which began in 1989. So Japan's central bank was reluctant to hike interest rates very much, fearing that the deflation bear would grab hold again.

That's why, so far, all they've done is to enact two quarter-point rate hikes, bringing the current rate to a paltry 0.5%. That's more than zero . But it's still far lower than the equivalent rates in all other major countries.

And now, all that's changing. As the country kicks into overdrive, the Bank of Japan will have no choice: It will have to raise rates to keep inflation at bay.

Look: Even after its extended slumber, the country still boasts the world's second-largest economy. Only one economy in the world is larger — the U.S.

And among the world's largest economic powerhouses, there's none other that's better positioned to take advantage of the Asian boom. That's why …

Japanese exports were up 11.7% for the year ended July 2007, which tells us that business is cranking.

Japanese exports to China jumped a whopping 21%, and they're poised to rise further.

Japanese imports were up 16.9% over the same period, indicating that consumers are back in the game and spending money.

Profits at Japanese corporations have grown to the highest level in four years.

Even better, Japanese companies have reinvested those profits back into their business, opening up the door to even stronger growth down the road.

All these signs point to blue skies ahead for Japan, and most importantly, for the Japanese yen. Bottom line …

Even WITHOUT the Explosive Buying From the Huge Payback of Borrowed Yen, It's the Most Undervalued Major Currency In the World

Measured in terms of purchasing power parity (PPP*), the yen is more than 30% undervalued against the dollar, and even more undervalued compared to the world's other major currencies.

I've been following this indicator ever since I started specializing in currencies decades ago, and I can tell you flatly: When a currency becomes undervalued by 20%, it's a telltale sign of an imminent surge.

So with the yen now lurching into the 30% undervalued range, that tells me it's got built-in spring-action of massive force.

My conclusion: If you're searching for long-term value in the currency market, your search should end with the yen. I repeat: It's by far the most undervalued major currency in the world.

And that's without considering any other factor! Plus …

Rate hikes from Japan's central bank will only make it more attractive to investors …

And the possibility of massive yen carry trades unwinding could spark a rally of epic proportions.

The best part of all this is that there are terrific ways for you to capitalize on any move in the yen. In fact, profiting from currency shifts is much easier than ever before.

You no longer need a massive bankroll to get started. You no longer have to expose yourself to unlimited risk. You no longer even need a special brokerage account. You can profit from currency surges with tiny investments, strictly limited risk and peace of mind.

My recommendation: Learn as much as you can about this as soon as you can . Then move swiftly.


By Jack Crooks

This investment news is brought to you by Money and Markets . Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit .

Money and Markets Archive

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


29 Aug 07, 22:35

The problem with saying the yen is 'undervalued' is there is no one good way to determine what that value should actually be.

The yen has stayed relatively weak against the dollar compared to the euro, but if the yen increases by 30% against the dollar, the economy here in Japan TANKS, for sure.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in