Don't Show Me the Money: Currency Hedging the Yen

Don’t Show Me the Money: Currency Hedging the Yen

Lately, the land of the rising sun has been the land of the falling yen. While single-country equity exposure to Japan has provided investors with relative outperformance year-to-date (YTD), they appear to be better off shedding the currency drag. That strategy is more enticing given the yen has been mired in a 40-year low recently. It’s a phenomenon known as the international investor’s paradox, which is the desire to capture overseas equity growth and portfolio diversification. However, it comes paired with the volatility tied to foreign exchange (FX) fluctuations. In essence, unhedged international investing forces individuals to make two distinct bets—one on the underlying corporate fundamentals, and another on the direction of a foreign currency relative to the U.S. dollar (USD). There’s an easier solution to this: currency-hedged ETFs.

Key Takeaways: Unhedged international investing forces individuals to make two distinct bets—one on localized corporate fundamentals and another on the direction of foreign currencies relative to the U.S. dollar. Japan’s export-driven economic renaissance benefits from a weaker yen, but this currency drag dilutes returns for unhedged investors unless they utilize currency-hedged strategies. Because major domestic U.S. indexes are already heavily exposed to a weakening dollar through multi-national revenue streams, adding unhedged international equities simply doubles down on that existing currency risk.

Japan’s Economic Renaissance Japan’s economic renaissance is fundamentally an export-driven story. Based on the International Monetary Fund (IMF), Japan is the fourth-largest economy in the world though its corporate engine doesn’t derive its fuel from spending by the domestic consumer. Instead, it relies on international buyers purch...