Buy yen? James Grant on why it’s worth a thought

March 19, 2007
By Ken Worsley

Thanks to Seeking Alpha’s John Bethel (who writes the very well done controlledgreed.com blog) for picking up on this one:

James Grant at Forbes has just published a piece saying why the yen is a good buy right now, despite the “consensus of expert opinion” against doing so (being a sucker for contrarian views, Grant caught my attention right away). His argument is good, and well worth thinking about, especially in terms of what may happen as the ‘carry trade’ begins to unwind. As he puts it:

The yen, because it costs next to nothing to borrow and because it so reliably loses value against the dollar and euro, is the world’s favorite funding currency. People use it to finance investments in a host of higher-yielding assets…

The size of these borrowings–the “yen carry trade,” they’re called–is nowhere computed but must be immense. Yen short sales stand at a record high, according to the Commodity Futures Trading Commission…

Because nothing is so unstable as a widespread belief in the certainty of peace and quiet, the buildup of yen short sales presents a risk to every investor, Japanese or otherwise. Without exactly knowing, one can be mortally sure that the world is more highly leveraged than even the fretful central bankers suspect. If so, a bear market in any of the popular classes of investment assets would likely turn today’s rush to borrow yen into an even faster race to repay it. Maybe it’s already started.

If so, the yen-dollar exchange rate could soar. You may recall that in only three days during the crisis surrounding the 1998 crackup of Long-Term Capital Management, the yen rallied by 18%.

(Bold added) I like that he brings up the LTCM fiasco, since that’s not been mentioned as much as it probably should be these days, and helps put things in an historical perspective. At any rate, that’s not what really caught my eye. What really got my attention was this passage:

…If only Japan’s famously shareholder-unfriendly corporate managements would wake up to the best practices of the 20th century, never mind those of the 21st.

But more and more, they are. Late in February, for example, a Japanese fund manager did the heretofore impossible. Ichigo Asset Management, with all of $25 million under management, solicited more than 42% “no” votes to oppose the proposed acquisition of Tokyo Kohtetsu Co. by Osaka Steel, a union blessed by the two corporate managements and therefore, under the old rules, a done deal. But the rules have changed, and the merger is off.

I’m sure that Mr Grant is aware that the ‘Japanese fund manager’ at Ichigo who pulled off this feat is actually Scott Callon. Perhaps Mr Callon is a naturalized Japanese citizen, in which case the phrase ‘a Japanese fund manager’ would be correct. Nonetheless, I wonder if it would have been worth mentioning that this shareholder revolt, although done by a Japanese firm, was led by a foreigner (if he is in fact one).

Nothing against Mr Grant’s piece; he obviously knows what he’s talking about and has an invaluable viewpoint and expertise that he’s willing to share with us. I’m just wondering if that small bit of information might be relevant to Forbes’ readers.

Filed Under Exchange Rates, Finance