Fundamentals To Drive the Yen?
Hot in on the heels of my paper on carry trade and risk aversion it seems as if the Yen is now reverting to those famous fundamentals. Consequently, we learned a few days ago how JPMorgan were telling their clients and the rest of us how the Yen is likely to decline to 114 as Japanese investors buy debt which is not denominated in Yen (i.e. depreciation due to outflows).
The yen may weaken to 112 per dollar by March 2009 as Japanese individual investors shift money into foreign-currency bonds from investment trusts, said Tohru Sasaki, chief currency strategist in Tokyo at JPMorgan Chase & Co.
Investors have purchased 5.1 trillion yen ($47.1 billion) of so-called Uridashi, bonds for Japanese small investors denominated in currencies other than the yen, at an annualized rate this year, according to JPMorgan calculations based on Finance Ministry data. That would be the most since government records began in 1996 as Japanese avoid foreign stocks after the U.S. subprime mortgage collapse, Sasaki told reporters at a briefing in Tokyo yesterday.
Another story was how the Yen approached 170 to the Euro as investors speculated that summer bonuses would be used to pile into high yielding foreign currency assets. And with an ECB on the hiking trail the Euro seems a sound bet.
The yen fell to an 11-month low against the euro on speculation Japanese investors will use summer bonuses to buy overseas assets offering higher yields than at home. The currency also declined toward a four-month low against the dollar as Japanese finance companies seek to raise more than 1 trillion yen ($9.2 billion) for funds investing abroad by June 30, according to data compiled by Bloomberg. The dollar was little changed against the euro as an industry survey may show U.S. consumer confidence slumped, reinforcing expectations the Federal Reserve will leave interest rates on hold tomorrow.
``Capital outflows should weigh on the yen,'' said Hideo Shimomura, who oversees the equivalent of $4 billion as a chief fund manager at Mitsubishi UFJ Asset Management Co., a unit of Japan's largest publicly traded lender. ``Funds focused on infrastructure of oil-producing and resource-rich nations are doing well.''
These two small snippets are interesting indeed. They consequently mark a second trend driving the Japanese Yen apart from risk aversion in the market place. The point here would be that the prospects of a weaker Yen is coming at a time when a Bear market decisively seems to have hit equities. Moreover, this effect is more structural and fundamental in nature as it latches on to Japan's demographics and the subsequent decline in home bias amongst Japanese investors. Quite simply, and as I detail here, Japan's savings will need to go for yield in the future and this means going abroad.
As I also noted in the accompanying post to my paper investors should keep in mind two driving forces. One is the point about carry trading currencies as risk sentiment gauges and another is the one described briefly here. In the long term I would expect the latter tendency (which is really the fundamental thrust) to be the most important but my paper clearly shows that there will be periods in which the arrows of causation are reversed.