As debate rages among economists and policy wonks over whether Japan should or should not raise interest rates, the yen has slipped and the carry trade has roared back to life. Once again, notes Lex, it has paid handsomely to follow the investment genius of Japanese housewives.
When currency markets gyrated to the hollering over carry trades at the end of February, Mrs Watanabe — the housewife who represents an increasingly yield-hungry breed of Japanese individual investor — used the yen’s temporary jump to top up on foreign currency-denominated assets.
Other investors followed and now the established trends in carry-affected exchange rates are back in force. Since the February wobble, the yen has risen 6 per cent versus the euro while the Aussie dollar – a popular high-yielding currency – has surged.
That is because conditions are still perfect for short-selling low-risk assets while buying risky ones: global growth is solid, inflation is moderate and volatility, in everything from equity markets to foreign exchange, has dropped again.
It is not just reinvigorating hedge funds: real money managers and individuals are adding to carry trade momentum. In the first week of April — the start of Japan’s new financial year — portfolio outflows exceeded inflows by Y761bn, 41 per cent above the previous week.
For now, little is likely to reverse these trends. Even if countries with low-yielding currencies, such as Switzerland and Japan, raise interest rates this year, differentials with destination currencies are wide enough to be attractive. And for investors using funding currencies to purchase assets such as emerging market equities or commodities, these also remain popular despite heady valuations.
The dark side of this heady mix, however, is the sobering thought that the further these positions are stretched, the sharper will be the snap back when something panics the markets. The last serious unwinding of yen carry trade positions, in 1998, drove the yen up almost 30 per cent against the dollar in two months.
If anything like that happens again, even Mrs Watanabe will be caught out. Before she gets to that point, though, a glance at the FT’s letters page shows that everyone seems to have a different opinion on whether she will close or open her purse in coming months.