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ETFs to Watch on Japan's First Yen Intervention Since 2022

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Japan's Ministry of Finance revealed that the country has conducted its first currency intervention since October 2022, aimed at stabilizing the yen following its decline to a 34-year low in April. The ministry reported that from April 26 to May 29, Japan spent 9.7885 trillion yen (approximately $62.25 billion) in this intervention effort. With this move, Japan’s Finance division seeks to "smooth out" excessive fluctuations in the currency market.

Historical Context and Recent Yen Fluctuations

Following the end of negative interest rates by the Bank of Japan in March, the yen has faced persistent downward pressure, trading at 157.25 against the U.S. dollar by late May. Yen had dramatically fallen to 160.03 against the U.S. dollar on Apr 29, then improved to around 156 in the same trading session (read: BoJ Ends Negative Rate Era: ETFs to Win).

This recovery was probably fueled by speculation of government intervention. At that time, analysts from Bank of America Global Research had estimated that the initial intervention might have been between 5 trillion yen and 6 trillion yen, based on data from the Bank of Japan, as quoted on CNBC.

The last instance of intervention prior to the recent effort was in October 2022, when the yen weakened to about 152 per dollar. That year, the government intervened three times, spending a total of approximately 9.2 trillion yen to help stabilize the currency.

Impact on the Market

Japan's recent intervention to support the yen is an important economic event that impacts both the currency and equity markets in multiple ways:

    Strengthening the Currency: The primary immediate effect of such intervention is to strengthen the yen against other currencies. By buying yen and selling foreign currencies, the Japanese government increases demand for yen, which helps to boost its value.Invesco CurrencyShares Japanese Yen Trust (FXY - Free Report) should gain in value in the near term.

    Impact on Exporters: On the flip side, a stronger yen can be a challenge for Japanese exporters as it makes their goods more expensive and less competitive abroad. This could have a negative impact on the profits of export-oriented companies that Nikkei consists of. Several Japanese automakers have extensive foreign exposure for revenue generation.

Hence, the broader equity market may come under pressure for a while. Even if investors want to bet on large-cap Japanese stocks, they should avoid currency-hedged ETFs like WisdomTree Japan Hedged Equity Fund (DXJ - Free Report) (which performs better in a falling yen environment) for a while and rather bet on regular ones like iShares MSCI Japan ETF (EWJ - Free Report) (read: Worries About US Growth Slowdown? 3 Asia ETFs Look Appealing).

    Influence on Small-Caps: Small-cap stocks are occasionally tied to the domestic economy. These stocks have a lesser foreign exposure and perform better in a rising currency environment.  iShares MSCI Japan Small-Cap ETF (SCJ - Free Report) and WisdomTree Japan SmallCap Dividend ETF (DFJ - Free Report) , both of which have a Zacks Rank #2 (Buy), can thus prove to be gainful in the current scenario.

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