Stocks around the world have rallied hard since last March, except for stocks in Japan. Why were they rallying most places and not in Japan?

Japanese stocks had one “thorn in the side” that the other countries didn’t have: the ultra-strong yen.

Each year, Japanese exporters like Toyota, Sony, Panasonic, Mazda, Honda, etc. all have to essentially make bets on where their currency will go and how far it could strengthen against them.

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They attempt to take care of this by placing hedges that keep the yen’s gains from affecting them. Many times, the yen stays within their hedges. When this happens, it doesn’t eat into their profits. However, this year, the yen has been one of the strongest-performing currencies of the year.

That’s when it became a problem. For instance, the average hedge on the yen is at 90 to the dollar. So when the USD/JPY exchange rate drops below that level, these exporters start losing money. How much? Some companies like Toyota have said that they lose millions of dollars in profits for each 1 yen that the yen trades away from their hedges.

Toyota was one of these companies that had their hedges at 90 to the dollar. Well, the yen got down to around 80 to the dollar in early November. So when you multiply millions of dollars in losses times the 10 yen that it was outside of their hedges, then you’re talking about a ton of money that they were losing.

The strong yen kept taking these companies behind the woodshed and causing them to have an uphill battle in their earnings. This was also reflected in their stock prices. Low earnings equals low stock prices over time.

However, I believe the tables are finally turning. The yen has started to weaken and the stocks in Japan’s Nikkei have begun to rebound.

I believe that the pendulum has started to swing the other way now with yen weakness and Nikkei strength. This move is in its early stages and I don’t think that most traders have taken note of it yet.

However, I’ve said for many years now that those that understand where a country’s currency is going will do much better in trading stocks than the stock trader that doesn’t have a clue as to where the country’s currency is going.

You see, the direction of the currency either creates a headwind for the stocks or it creates an opportunity to where they have their wind at their back, The trader that knows which way the wind is blowing will know how best to trade the currency and their stocks.

About the Author: Sean Hyman
Sean Hyman is a member of the Moneynews Financial Brain Trust. Click Here to read more of his articles. He is also the editor of Money Matrix Insider. Discover more by Clicking Here Now.