Challenges with Shorting the Yen for the Retail Investor

It’s been almost a year since our write up on Mindspeed, (they did get taken out and the calls were a great return), but with summer coming, we’re going to try to post more frequently.  We’ve been reticent as well because we were still building a position in a certain security, in which we were the only ones buying for months.  We speculate that that we were buying from an investment bank who was hedging their own positions, hence the reason why the opportunity even existed.

A lot of investors today are vocal on being short the yen; however we haven’t come across a single retail investor that has provided a strong way to profit from the widow maker prophecy.  It’s interesting to note because youtube videos and chat rooms have people commenting on gloom scenarios, but why talk the talk if you’re not going to profit from it? Bergdorf’s doesn’t accept street cred. 

For those who may need a background as to why to short the yen in the first place, there are plenty sources online that can walk you through it.  To sum it up, Abenomics is trying to reach 2% inflation with 10 year JGBs trading around 60bp.  No one is going to hold, let alone buy an instrument where you’re losing 140 bp in a 2% inflation environment.  The Bank of Japan is the only buyer of JGBs and when they stepped away from the market in April, not a single bond traded for a day and a half.  Should JGB rates rise to 200bp, Japan can’t service its debt.  With a current account structurally going negative and an aging population, it’s not looking good for Japan.

Upon requesting our brokers for a way to short the yen, we were provided with two ETFs, FXY and YCS. At a first glance they seemed like they were good plausible ideas, but upon further inquiry we discovered structural problems with ETFs in general.

Briefly, with FXY the sponsor has the ability to close the fund at any time, and should the yen have a dramatic decline, the fund could be liquidated before the bad kind of inflation fully materializes.  We inquired about it to the sponsor and didn’t receive a word back, but they have closed funds tied to currencies before, and should the sponsor not be able to service the fees associated with the fund, we imagine they’d have an incentive to liquidate.

Secondly, YCS is tricky because it is a leveraged ETF and daily re-balancing is deceiving.  If you look at returns over a period of time, the yen may weaken and YCS could still have declined in value.  For more information on leveraged ETFs we recommend reading this:

So with ETFs out of the way, what is a retail investor supposed to do?  Well there are more esoteric securities that one could buy, however it requires the right broker, and the experience required to get approved for trading.  The best bet is to short a Japanese company with a lot of JGBs on their books, or whose main source of revenue is in yen, preferably both.  We’re not going to specifically name a company, because there are plenty out there and they will all be affected.


  The purpose of this post was to inform those who may have ETF positions that there are vulnerabilities in the products. We hope we reached a few readers before they become disappointed with their results so they can adjust their positions accordingly.  As always, we’re happy to hear anyone else’s views on the subject.

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