Those Savvy Japanese Housewives
Monday, June 18, 2007 at 11:58AM 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.
Japan
Reader Comments (9)
Thanks for this ... I don't have much practical experience on this. But what kind of interest rate do you borrow at? I mean, this is after all the big issue since the differential is what determines the carry.
Having said that, what you point out makes sense ... it seems as a game which is being played universally. This makes the interesting thing here, I guess, the very rapid decline in the Japanese home bias.
http://www.interactivebrokers.com/en/accounts/fees/interest.php?ib_entity=uk
1.608% is of course laughable; however valuta risks certainly not. That's the reason I am interested in your weblogs. How and when will this insane interest rate in japan end?
'That's the reason I am interested in your weblogs. How and when will this insane interest rate in japan end?'
First of all, thanks for your interest; I value your contribution very highly so please keep plugging away.
And then to the more serious thing, when will it end in Japan? Of course, your guess is as good as mine but in order to understand my position on Japan you need to think about demographics. I mean, this is basically it and since Japan is the oldest society in the world (in terms of median age) I think this has a very strong long term effect on capital flows and thus interest rates. At the end of the day I don't see how the fundamentals of the carry trade is going to change any time soon and really the only way it can stop (IMHO) would be for financial globalization somehow to kick into reveres and put a limit on how much/many leveraged short positions and FX crosses you can make with Yen and any given other currency. I don't think this will happen so this show will go on for some time I think.
Of course the BOJ might raise to 0.75% and even 1% but that would hardly budge the carry trade I think. Basically, I think that the interest differential between Japan as an old and ageing economy and a comparatively young economy such as for example NZ will remain pretty wide for some time ahead albeit not as wide as it is now. Incidentally, I think that it is much more likely that central banks (ex the BOJ) will go south rather than the BOJ continuing its normalization process.
Ok, enough for now I think ... I could go on for quite some time on this. On that note, you might want to keep a weary eye on the following blog Japan Economy Watch. Basically, it features my own posts, Edward Hugh's (http://edwardhughtoo.blogspot.com/) and Scott Peterson's (http://wasatchecon.blogspot.com/) on Japan ...
http://japanjapan.blogspot.com/
In my humble opinion you would be hard pressed to find anything more comprehensive as a one stop ressource on the Japanese economy even if it is slightly biased by 'our views.'
Also, you should go check out Edward's latest post on 'herd behaviour' in Austria in which he also notes your perspective.
By this you mean global financial authorities? But is it possible that other participants in the financial markets can act to stop these low yen rates? Let me explain what I do not understand:
From my reading I understood that Japanese exporters change their earnings in yen. The yen is than 'sterilized' by the Japanese CB by selling yen dominated bonds. Why are they doing this if deflation is such a big problem? Secondly who is buying these bonds while interest rates in Japan are so low? I understood that the Japanese Postbank was the main bond buyer with the saving deposits of the Japanese. If so, is it possible that these bond buyers change tack and start looking for yield like these savy Japanese housewifes? In that situation the Japanese government has to pay higher interest which is very difficult or even impossible for them due to their high debt.
If the above is possible, has the yen carry trade than not the characteristics of a one-way bet?
"The yen is than 'sterilized' by the Japanese CB by selling yen dominated bonds."
This has been a huge controversy about the whole Japanese situation. What you say certainly was the situation around the turn of the century, and Ben Bernanke in particular was very critical of such sterilisation in a 2002 paper, where he used the infamous "helicopter money" argument. Since that time the Japanese changed tack, and introduced what was known as "quantitative easing", which I don't fully understand, but basically they were not effectively sterilising during this period, and Bernanke conceded.
A variety of questions come up at this point.
a) I think Bernanke has had to modify his "inflation is entirely a monetary phenomenon" doctrine, since it would not appear to be symmetrical, ie deflation has proved to be far more resistant to increases in the money supply than many imagined.
b) One Japanese economist (whose name escapes me right now) raised the point that during quantitative easing the Japanese monetary authorities may well have created a form of financial "black hole". How does this work. Well think the standard monetary quantity equation (MV=PT), the only way massive increases in the money supply (which definitely where taking place, no one now doubts this I think) is compatible with rising volume of transactions AND falling prices is if the velocity of circulation slows proportionately. This is what seems to happen in Japan.
c) "If so, is it possible that these bond buyers change tack", exactly. But if there is a "black hole" over there this can all go on a lot longer than most can even vaguely contemplate.
d) What I don't know at this point is how the sterilisation issue has evolved following the ending of quantitative easing (spring 2006). But the whole point is that if they are sterilising again, and if the yen should ever stop moving down (as I imagine it will at some point), then deflation will again become a serious issue (remember, deflation is only as weak as it is at present due to the substantial fall in the yen). So the carry trade would seem to have a sort of inbuilt automatic stabiliser mechanism at this point. If the Japanese authorities are really tightening monetary conditions then this will produce more deflation, and this will then force them to loosen again.So the thing is, if they ever find it hard to sell JGBs, they just loosen liquidity, they have very little danger at this point of generating inflation. Meantime it is "carry on Japanese housewives", and full steam ahead.
"Japanese finance companies will market more than 1.5 trillion yen ($12.1 billion) of foreign-currency investment trusts before month-end, according to data compiled by Bloomberg. The funds are aimed at individuals seeking higher yields."
Bloomberg this morning.
e) Basically, to be able to make the kind of assertions Claus and I are making, you need to understand some modern (ie not old style 20th century) macroeconomics, simply knowing about financial markets is not enough here.
For the time being I will follow these 'Japanese housewives'.
Thanks for yours explanations
And please do follow those Japanese housewives :)