Monday, August 6, 2007 0 comments ++[ CLICK TO COMMENT ]++

Japanese Retail Investors & the Yen Carry-Trade

I came across a two-week old article from by Daniel Harrison talking about the Yen carry-trade. Apparently so-called "Japanese housewives" (BTW, this does not necessarily refer to stay-at-home women; It is a general term applied to retail investors it seems) are betting on foreign currencies and sectors like gold. They seem to be moving into the South African Rand, pushing it up and hurting export-oriented goldminers such as Harmony (HMY) and Gold Fields (GFI). Net income is down 50% in some of these companies because the Rand has appreciated much more than their their sales in US$.

I have always known most of what was said in the article but I didn't realize how big the Yen carry-trade speculation was. It seems like the speculation on currencies has taken on some bubble-like proportions:

In Japan, the carry trade is reminiscent of the dot-com bubble in 2000, he explains, in which foreign-exchange speculators include Japanese housewives, cab drivers and hairdressers. "This decline in the value of the yen has become some kind of speculative bear market," he says. "There's a bubble characteristic to it. In ordinary bookshops in Japan, there are books on options and swaps. People are beginning to take advice from cab drivers."

The above situation, assuming it is true and widespread, means that one may be able to benefit by going contrarian by betting on the Yen. I am bullish on the Yen, and have opened up a brokerage account denominated in Yen (unfortuately you earn no interest on the account since the rate is so low but I'll be using this to buy stocks anyway). As for what can reverse the carry-trade:

Currency traders say the catalyst that may begin to ease the bearish yen bubble would be positive CPI figures in Japan, although consensus is that this won't happen for at least another two quarters, despite recent strength in Japanese retail numbers.

Still, others, including Sean Darby, head of Asia Strategy for Nomura, are skeptical about the strength of the yen carry trade. "We see an increased risk that the carry trade has once again overwhelmed financial assets," he writes in a research report issued last week to Nomura's clients. "As we have pointed out before, the carry trade remains at risk from a change in overall capital flows induced by a bout of risk aversion."

My view is similar to the above. Namely, I think the Yen carry-trade will unwind if there is a market correction. If you are bearish on the markets, it may be profitable to go long with the Yen or Yen-denominated assets. If one is looking at Yen-denominated stocks, make sure that the companies aren't export-oriented or else their sales can decline due to Yen strength (eg. companies like Toyota and Sony, not that I would consider them right now, are probably not safe).

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