Monday, June 18, 2007

Japanese small investors: 1

Masters of the Universe: 0

Guess what--when the stock market is a con game and the domestic bond market is a graveyard, you can still send money overseas!

Housewives Outmaneuver UBS, Deutsche Bank Trading Yen

June 18 -- 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.

Yep, that's what they call it.

For once, the Japanese small investor does not lose his/her shirt/blouse. Maybe it is because the Japanese small investor is betting his/her own money and doing everything he/she can to not listen to expert advice.

Ah, self-interest...and huge interest rate differentials, too.


Jun Okumura said...

What's mystifying about this article is how these housespouses and salarypersons manage to borrow money at the overnite rate. Individuals usually have to borrow and buy retail, which definitely shaves the margin available to them. Which means that anyone buying now may have his margin easily wiped out by a slight shift back up on the part of the yen. (Say, September, with BOJ in action, the aftermath of the July elections well behind them?)

Actually, I assume that many of these people are not borrowing, and if they do they are borrowing against their long-term yen deposits, which would limit both potential gains and losses.

I also assume that at least some of this money is not going directly to foreign bonds but is funneled through the so-called "shikumi-sai". This basically locks in high returns for a few years, in return for assuming risk further down the line. (Does, for example, the risk of holding on to those Swedish state bonds for the better part of thirty years excite you?)

If that doesn't daunt you, I have a friend who has to sell a bridge to someone who'll take good care of it. He'll make it cheap...

Oh well, if Bloomberg says, it, it must be true.

MTC said...

Jun -

I was going to direct you to the Brad Setser post where Andrew Rozanov explains how the carry trade is done:

However, RGE has put the vital part of the post behind the subscription wall.

If I remember Rozanov's full answer you zero out currency risk by setting up a triple trade that borrows against both currencies--a trick so elaborate and seemingly self-defeating I could not fathom its point.

Hence the title of my post on the subject at:

Jun Okumura said...


False: (Does, for example, the risk of holding on to those Swedish state bonds for the better part of thirty years excite you?)

True: (Does, for example, the risk of holding on to those Swedish state bonds at zero interestfor the better part of thirty years excite you?)

Anonymous said...

I have to agree with Jun here. Ordinary forex traders cannot get loans at overnight rates. They might be (surely are) trading on margin, but there's no way they're getting overnights.

The Commitment of Traders data pretty clearly shows where the large institutions have their dump positions set, and they're still betting on the yen getting weaker, which also makes me wonder about the article, since the Bloomberg writer should certainly know that FX 'projections' rarely reflect the actual behavior of in-house proprietary traders.