Sunday Reading: Morgan Stanley’s Stephen Jen on Risk and the Yen

August 19, 2007
By Ken Worsley

If you’re in there trading yen right now, you will most likely be interested in what Stephen Jen has to say in a piece entitled Risk Reduction and the JPY over at the Morgan Stanley Global Economic Forum. Here are two quick bits:

Reduction of the ‘JPY carry trades’ may continue for a while, we concede. We have long argued that the primary type of outflows from Japan’s retail sector are not ‘carry trades’ – trades whose key motivation is interest rate differentials – per se, but investors’ desire to diversify their portfolios and take on more risk.

…[W]e still believe that Japan’s preference for risk has gone through a structural shift. With US$13 trillion in liquid financial assets and 50.5% of this in cash deposits, the scope for Japanese retail investors to diversify into risky assets is immense. (Note: If Japan reduces its cash deposits by 1% of total financial holdings a year, this translates to US$130 billion worth of ‘conversion’ from cash to risky assets a year, or a little more than US$10 billion a month.

It’s too bad we don’t have any numbers to stick on those, but the piece is somewhat of a summary. I think it would be important to look at the demographics behind those liquid assets and cash deposits. There will be a certain chunk of them that will never, ever be anything other than cash deposits, as they are held by older retirees who would never, ever risk even a single yen of their hard-earned capital.

It seems as though this considerably reduces the amount of money that we should consider as ‘cash deposits’ for the purpose of possible investment capital, as a hefty percentage of that amount is simply inheritance tax to-be.

At any rate, get over there and read Jen’s piece…

Filed Under Carry Trade, Exchange Rates, Forex