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Get started in the yen carry trade!

An advert actually seen - on this very website, no less!

Yen Carry Trade in Japan
Learn how to put your yen to work! Get started in the yen carry trade.

Better get started today, before you fall behind the housewives!

The Nikkei Gives Us the “Told Ya So” Piece We’ve Been Waiting For

From the Nikkei:

When the yen shot up to the 113-114 range to the dollar soon after breaking the psychological mark of 115 on Thursday, it was not U.S. and European hedge funds that were seen desperately buying yen but Japanese housewives and other individual investors…

…[I]ndividual traders continued to sell yen even when hedge funds were unwinding their carry trade positions. When the yen rose sharply, they were forced to buy back the Japanese unit at a loss.

Trading systems broke down at two margin trading firms because of a sharp rise in order volume. Some firms were even temporarily unable to display cross forex rates on their electronic boards because of market volatility.

Those who were unable to execute their desired transactions might come to distrust the market system as a whole. And it remains to be seen whether individual investors, many of whom have now suffered significant losses on margin trading, will resume selling yen right away.

Of course people got burned. But so did the Nikkei by not backing up this piece with some numbers that actually relate to the conclusion in the first paragraph.

There were plenty of housewives out shopping and spending money today in Omotesando, that’s for sure. Let’s see how this effects August retail figures when they come due…

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

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…

Carry Trade Watch: Tokyo-based Forex Trading up 19.2% in April

This just in from the Nikkei: In April, average daily forex trades in Tokyo surged to 240.3 billion dollars, up 19.2% from a year ago. Of that total, trades executed by non-Japanese entities accounted for 167.1 billion dollars, which was up 31% against April 2006.

Trading in the South African Rand, which provides far better interest rate and bond yields than the yen, was up 50% year on year.

Despite the boost in the amount of Tokyo-based forex trading, the Nikkei tells us that, “Tokyo trading still pales in comparison with Europe and the U.S. In London and New York, the figures came to 967 billion dollars and 487.9 billion dollars as of October 2006.”

Retail flows having impact on yen rates; housewives to blame?

But you already knew about the first part of that headline, right? It’s been all around the news for a while now, with the Nikkei telling us that individuals are keen to sell yen even at 120 on May 22, and IHT/Bloomberg telling us that the yen’s retail outflows are putting the Bank of Japan in a “bind” on June 11.

Both of these are signs of an overheating; once the average investor is on to the trend, that usually means it about to change direction (according to bullish lines of thought). Yet, we’re aware that the ultra-low interest rates in Japan are helping feed the carry trade, so individuals might be protected for now. The danger is if the BOJ does make a slight rise and there is a panic - but not a trend reversal - that wipes out (or spooks) heaps of unsavvy individual investors.

That’s neither here nor there. What is here is an article published yesterday by the Financial Times entitled, “Yen absorbs ‘Japanese housewife effect’.” This is the blame twist we’ve been waiting for: the weak yen is due to housewives sitting around selling yen. Brilliant. How do we stop them? Here’s my favorite quote from the article:

The gnomes of Zurich were accused in their day of destabilizing markets. The housewives of Tokyo are apparently acting to stabilize them.

That’s from none other than Bank of Japan board member Kiyohiko Nishimura.

The article gives us a rough estimate that exposure from margin trading could currently be at 20,000 billion yen, but does not say how much of this is driven by housewives.

Given the amount of capital tied up in yen-selling, Derek Halpenny, an economist at the Bank of Tokyo-Mitsubishi UFJ, is of the opinion that Japanese authorities might be reluctant to intervene in the foreign exchange market in order to strengthen the yen given the potential financial consequences for the general population.

I wonder if a Cabinet member will go on record with this?

Yen/Dollar Swings: All About the Carry Trade?

Are the headlines making your head spin yet? Back on Tuesday (June 26), Finance Minister Koji Omi told reporters, “Foreign exchange markets should reflect Japan’s economic fundamentals…We will keep a watchful eye on foreign exchange rates…The weak yen symbolizes the shrinking presence of the Japanese economy. It is obviously bad news.”

It caught my eye, but I knew it wasn’t policy. Nonetheless, we saw these headlines start to pop up on June 27:

Yen Rises Most in 10 Weeks as Investors Scale Back Carry Trades (Bloomberg)
Yen Rises for a Third Day as Investors May Unwind Carry Trades (Bloomberg)
Yen climbs on risk aversion, carry trade unwinds (Reuters)
A Meltdown From The Yen-Carry Trade? (Forbes)
FOREX-Yen rises on risk aversion, carry trade worries (Reuters)

Then, a day later:

Yen Weakens on Speculation Investors Are Restoring Carry Trades (Bloomberg)
FOREX-Yen’s rise fizzles as risk-aversion eases (Reuters)
BOJ’s Inoue Sees `Huge Amount’ of Capital Flows Leaving Japan (Bloomberg)

The writers must be having a ball. Once they have software to write these articles automatically, the news firms will save a quite a bit of money.

Meanwhile, the human beings will continue to do analysis. On June 26, writing at Seeking Alpha, Jordan Kahn (author of the excellent In the Money blog) published a piece entitled “The Yen Carry Trade is Alive and Kicking.”

As Mr Kahn put it:

The Yen has actually slid to a 4 1/2-year low versus the dollar. This indicates that the Yen Carry trade is alive and well…At some point, the Yen is likely to rally, and concerns about the unwinding of this massive trade will resurface.

It’s a short piece, but to the point: The trend is still there and still very alive, despite the major media’s panic over a swing down to 122.20 and up to 123.35 over two days (and we have to wonder if they’re forgetting about those low 121s earlier in the month - better chance to sell yen on ‘discount’).

The carry trade still has legs.

Bank of International Settlements: Yen’s Value is ‘Anomalous’

In its annual report, the Bank of International Settlements expressed the opinion that the yen’s weakness is out of line with where it should be, stating, “There is clearly something anomalous in the ongoing decline in the external value of the yen.” The BIS recommended that the Bank of Japan tighten its monetary policy.

The problem, according to the BIS, and reported this morning by the Nikkei, appears to be that investors see no sign that the yen will be allowed to appreciate in value any time soon. At a news conference this morning, Finance Minister Koji Omi told reporters, “Exchange rates should reflect economic fundamentals and the Japanese economy remains in good shape on a recovery track.”

That’s not the first time we’ve heard this line. After giving his standard line, Omi was asked whether or not the yen’s current rate reflects economic fundamentals, but refused to comment.

How much of the carry trade seems to be psychological? This interesting tidbit was buried in the BIS report:

Given that Japanese retail investors hold the bulk of their wealth in yen, they are not as sensitive to the risk of a sudden rise in the value of the yen as leveraged investors who short the currency. They are therefore less likely to unwind their foreign currency investments during episodes of exchange rate volatility. Indeed, market commentary suggests that Japanese retail investors took advantage of the yen appreciation associated with the most recent rise in volatility to increase their exposure to high-yielding overseas assets. - Chapter 5, page 6

In other words, despite comments from Bank of Japan Governor Toshihiko Fukui that the bank may raise interest rates even when consumer prices show no rise, investors still don’t see interest rates, and by extension, exchange rates, moving much any time soon. They’re buying on discount, thinking the stronger yen is a better buy point because it can only get weaker. They’re catching on.

Steven Towns on Japanese exporters and the weak yen

With the yen recently hitting all-time lows against the euro and trading at its lowest levels since December of 2002 against the dollar, one has to start wondering what effect this will have on Japan’s large exporters. Seeking Alpha’s Steven Towns has done just that in an article published today entitled “Japanese Exporters Look Poised to Profit from Weak Yen.”

The article takes a look at “nine ‘blue chip’ exporters with ADRs trading on the NYSE/Nasdaq” and stresses, “It is hard to say if the expected gains from forex have been factored into their stock prices.”

Anyone have any thoughts on how share prices might be/have already been affected?

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