We’ve left her alone for long enough and now we think it’s time to see what Mrs Watanabe (for those who still believe the yen carry trade is driven by this iconic and possibly mythical Japanese housewife investor) is up to.
The Times seems convinced she’s pulling the pin on her carefully built-up foreign currency investments and the whole yen carry trade is about to implode.
In an article headlined: “Analysts issue warning of imminent collapse in yen carry trade”, The Times Asian business editor Leo Lewis warns on Monday that the “yen carry trade investment gambit that has driven highly leveraged hedge-fund bets around the world may be on the brink of collapse and could trigger months of extreme currency volatility”.
Analysts, reports Lewis, are telling markets to prepare for a massive surge in the yen as small investors, hedge funds and other speculators join a “potential stampede” out of positions that rely on the weakness of Japan’s currency.
This surge, he says, is “expected initially to hit small Japanese investors hardest – pensioners and housewives who have embraced the yen carry trade as a lucrative alternative to poor returns from their post office savings”.
He cites Toru Umemoto, chief Japan economist at Barclays Capital, who predicts the yen will surge from its current range of Y115-Y116 to the US dollar to Y109 between now and the end of the year. His estimate is far higher than consensus forecasts that it will end the year in the Y116-117 range.
Well, we’ve examined the ins and outs of the carry trade and Mrs Watanabe’s behaviour (in investment terms, that is) more often than she’s probably comfortable with.
On Monday, the yen put on a robust spurt, briefly touching about Y112.85 against the dollar in Tokyo, up from more than Y115 on Friday in New York. By midday London time, however, it seemed to settle around the Y113.70 mark.
Implosion? As far as predicting the outcome of the carry game, it all depends who you believe. At the moment, there are as many analysts in Tokyo who take a sanguine view as there are of the “chicken little” variety.
One of the most seasoned yen-watchers, Tohru Sasaki, currency strategist at JPMorgan in Tokyo, notes on Monday that Japanese retail investors remained net sellers of the yen for the third consecutive week, although the magnitude of net yen sales diminished to just Y108bn (about $950m) from Y400bn in the previous two weeks.
Similarly, he says, inflows into newly launched foreign-currency denominated investment trusts were very low in the past week. However, he notes, there has been an “unusually high number” of these investment trusts launched in the past couple of months, with a total of about 27 to be launched in September alone.
This is a higly pertinent fact in tracing the yen’s recent up-down-mid-range trajectory, and Sasaki uses it to highlight the impact of a new law coming into force at the end of September in Japan, which he believes has boosted yen sales in the past few months, and will depress them in October and November.
The Financial Products Exchange Law will set more rigorous standards for sales of financial products with active investment features to general investors, he notes. “This has prompted financial institutions to try to get in below the bar and launch a large number of investment trusts (selling foreign currency products to Japanese investors) in August and September.”
Also a result of the law, Sasaki expects launches of new investment trusts to be sluggish in October and November; but he predicts that a “usual flow” will emerge thereafter.
This is not least because of the comparatively cumbersome requirements of the law, which calls for “greater detail and clearly stated information with regards to fees for and associated risks of investment trusts (including foreign-currency-denominated ones) sold to retail investors,” notes Sasaki.
Furthermore, he says, “financial institutions are required to explain a wider scope of important matters in a manner understandable to customers, taking into account customers’ knowledge, experience, assets, and the purpose of purchase of financial products. Also, advanced delivery of the prospectus and a written transaction
outline will be made compulsory”.
In other words, it seems to us, all the rigmarole required by the new law is going to take a lot of fun out of flogging foreign currency-denominated products to Mrs Watanabe.
Meanwhile, Richard Jerram, chief economist at Macquarie Securities Japan, in a note issued Friday says that markets “seem concerned” about Japanese households selling foreign assets and repatriating the proceeds, leading to a burst of yen strength.
History, he says, suggests that the much-vaunted “burst of strength” is not very likely. However, financial market turmoil and yen strength have raised two interesting issues, notes Jerram.
The first is whether Japanese retail investors might stop or reverse the flow into overseas financial assets. The second is whether such a change would be positive for domestic assets.
In our view, a repatriation of foreign assets is unlikely. History argues against it. Moreover, the yield differential argument remains strong and there may be penalties from disposal.
And on another view gaining traction in Japan – that this coming “burst” of yen strength, as the Watanabes and others sell off their foreign assets, will put a rocket under Japanese equities – Jerram is similarly sceptical.
It seems more likely that if retail investors are selling foreign assets then this is part of a more general reduction in risk, and a retreat back into bank deposits, or other low risk alternatives. It seems unlikely that people would sell a foreign bond fund and put the proceeds into domestic equities.
As usual in Mrs Watanabe’s world, it really is impossible to predict where she’ll put her money next. But reports of the death of the yen carry trade are, we suspect, vastly premature.