There’s been a lot of talk about how repatriation of funds will affect the yen in the weeks and months to come.
Most believe the flow of funds back into Japan will see the yen strengthen. There are, however, a growing number of analysts who believe the above trend might prove limited.
Amongst the latest to make this argument are Osamu Takashima and Issei Suzuki at CitiFX.
Here’s their reasoning (our emphasis):
We believe repatriation by Japanese investors in the wake of the earthquake will be limited. The first reason is very simple. The share of foreign assets among Japanese household financial assets is still quite low. According to BoJ’s statistics (Figure 1) Japanese households have roughly JPY 14 hundred trillion of financial assets but 55% is held in bank deposits.
On the other hand, the risk asset share, for instance equity or investment trusts, is very limited. In terms of foreign asset, the BoJ doesn’t show an exact figure, but it can be estimated to be only around JPY 42 trillion, roughly 3% of the total financial asset. This figure includes foreign currency deposits (JPY 5 trillion), foreign investment trusts (JPY 25 trillion), foreign securities investments including Uridashi bonds and Samurai bonds (JPY 9 trillion) and JPY short positions in FX margin trade (JPY 3 trillion).
So our very basic understanding is that Japanese retail investors may not be prone to repatriate foreign assets even though Japan has endured a serious national tragedy. Rather, we believe, they have been and still are in the long term process of diversifying their huge domestic asset base by accumulating foreign assets.
And note the chart below, which shows the proportion of Japanese funds tied up in pure bank deposits:
Furthermore even if there was to be a load of repatriated flow, CitiFX notes that due to the recent relative cheapness of hedging dollar and euro FX portfolios, much of Japan’s foreign bond investment is properly FX hedged. This means it’s very unlikely it would generate much yen buying pressure.
In fact, they add, there’s more chance of insurance firms raising cash by selling JGBs rather than Treasuries. After all, why would you want to unwind cheap FX hedges when you don’t have to?
Related links:
Japanese repatriation pressure points – FT Alphaville
Don’t compare Sendai quake to Kobe – FT Alphaville
What’s moving the yen? – FT Alphaville