Those Savvy Japanese Housewives
It has been a while since I have last reported on Japan so let us start with the basics which you may or may not already know. Last week the BOJ chose, as expected, to hold yet again on the continuing dim outlook for wages and inflation in Japan. Economic momentum as measured by investment and domestic demand seems to be doing fairly well but at the end of the day uncertainties remain the driver of the BOJ's reluctance to raise. However, SeekingAlpha reports that analists on a whole see the BOJ raising to 0.75% come August. This is all well and good of course but do remember here that the market sentiment is heavily biased at the moment riding on this 'global interest rate hike' narrative; especially since the yield on the 10 year treasury broke the magic 5% marker recently. All this of course could very quickly be deflated again if the data turns. As for the BOJ I expect it to data-driven as always with focus on wages and prices as well as domestic demand and it remains to be seen whether inflationary pressures will settle in Japan anytime soon, I have my doubts and I pretty much agree with Morgan Stanley's Takehiro Sato who sees Japan in deflation for the remainder of 2007. See also Sato's latest analysis on rising bond yields from a Japanese perspective. The continuous tightening of the labour market will be important here and of course the point at which the NAIRU actually is situated. The latest bid I saw was 3.5% and with unemployment currently running at 3.8% we will have to wait a little bit more it seems. Another thing would be to actually sit down and think about the whole situation in Japan and what the NAIRU actually 'means' in a Japanese context :).
Another point I want to highlight on Japan while I am here is this recent Bloomberg report on how Japanese housewives are increasingly joining the big institutional players on the carry wheel.
Of course, these are basically the only retail investors who are able to do this since they have easy access to the currency (Yen) in the short position of the bet*. All those leveraged bets from Japanese retail investors are of course keeping the Yen low much to the annoyance of forecasters persistingly looking for a pick up in the Japanese currency. The weapons of choice in terms of the long position ranges from the Kiwi (NZD), AUS, Real, GPD etc.
Japanese businessmen, housewives and pensioners betting against the yen in their spare time are wrecking the forecasts of the world's biggest currency traders.
The yen has slumped 4.6 percent to a 4 1/2-year low against the dollar this quarter, making it the worst performer among 72 major currencies and confounding predictions by strategists at Deutsche Bank AG and UBS AG for gains of about 1 percent.
The banks didn't reckon on the risk appetite of Japanese individuals, who are borrowing money like never before to buy currencies with higher yields. They tripled their trading in the year ended March to a record $11 billion a day, according to Tokyo-based Yano Research Institute Ltd., publisher of an annual report on the business. Globally, currency trading by retail investors rose 54 percent in 2006, according to research firm Greenwich Associates in Greenwich, Connecticut.
``Japan's interest rates are too low,'' said Hiroshi Ono, a 40-year-old sales clerk at a telephone company in Tokyo. Ono said he has made about $17,000 since March by borrowing $200,000 of yen and buying U.S. dollars to take advantage of the 4.75 percentage-point difference between Japanese and U.S. interest rates.
Japanese investors are borrowing yen at the central bank's 0.5 percent overnight lending rate and buying higher-yielding currencies in New Zealand, the U.K., Australia and even Brazil to increase returns on 1,536 trillion yen ($12.5 trillion) in savings. The strategy is called the carry trade.
All this is very interesting I think for two reasons. Firstly it will be interesting to how this affects short term consumption and saving patterns in Japan. At the end of the day this radical and rapid deterioation in the Japanese 'home bias' (see Stephen Jen) reflects a rigorous search for yield and to the extent that Japanese housewives keep on churning in on their FX market bets we should perhaps expect a pick up in consumption? Secondly, it raises obvious question on the nature of global capital flows and contrary to traditional textbook theory in which a large current account deficit should weigh on the currency some countries are almost sucking up too much capital from the point of view of macroeconomic stability. New Zealand and Australia are cases in point; who would have thought that a country with an external deficit would intervene in FX markets to actually depreciate its currency?!
As a friend pointed out to me in a mail:
This is financial globalisation really hitting home (another example might be the Austrian refi market in the
late 90s). So all this is going to be very important, it will now be much more difficult to refer to long-standing cultural differences.
Indeed, and it will be interesting to see what happens next especially bearing in mind the potential drivers of capital flows in the long run.
*Not exactly right. What I meant to say was that perhaps it is more profitable for Japanese retail investors since they after all are able to borrow at the lowest comparative rate (presumably) given it is the domestic currency, see also comments section and Wim's noteworthy observations.