Excited talk about the catastrophic unwinding of the yen carry trade tends to conjure up images of slick hedge-fund types in Chicago and London frantically squaring their highly leveraged positions.
But fortunately for those worried about a massive unwinding of the carry trade, the truth might be rather more mundane. Far from being testosterone-fuelled 20-something traders, those with the most at stake are far more likely to be silver-haired Japanese retirees. And they don’t seem to be panicking.
By some definitions Japanese investors in their 60s and 70s – who have been venturing abroad in increasing numbers because of low domestic interest rates – do not count as carry traders at all. Rather than borrowing to invest in non-yen assets, they simply transfer yen savings into investment trusts with foreign portfolios or into so-called uridashi bonds, foreign-currency-denominated paper issued in Japan.
But the effect is the same. Their transactions have put downward pressure on the yen and upward pressure on the currencies and assets into which their investments flow.
Tohru Sasaki, the chief foreign exchange strategist at JPMorgan in Tokyo, says foreign bond investments by Japanese investors account for about Y30,000bn ($258bn, €197bn, £134bn) of what he estimates is a total carry trade of Y40,000bn.
Pictet Asset Management, a private Swiss bank that is the biggest manager of foreign mutual funds in Japan, says its investors have not been rattled by recent market turbulence. That is because most receive a monthly dividend in yen that is not affected by market volatility, even of the sort that has shaken global markets since last week.
“Far from seeing outflows, we’ve actually seen inflows at record levels,” says Stephen Barber, Pictet’s group managing director, adding that on one day this week a net Y10bn of investments came in. “If anything, these retired investors are saying: ‘It’s cheaper than it was last week. Let’s buy some more.’ ”
Peter Tasker, founding partner of Arcus Investment, a hedge fund, points to a sort of automatic stabiliser that prevents the yen from appreciating too rapidly. As the Japanese currency rises, the temptation grows to put money abroad into now cheaper assets. With overnight rates still at a mere 0.5 per cent – and considerably lower for bank accounts – a relatively small depreciation of the yen can be worth years of domestic interest to the Japanese.
That is what seems to have happened in the past few days. The yen’s sudden appreciation, from about Y121 to the dollar last month to near Y115, has stalled. On Wednesday it was back to Y116.35.
Ichizo Yamauchi, executive vice-president at Kokusai Asset Management, whose multi-trillion yen Global Sovereign Bond Fund is the biggest retail investment trust in Japanese history, says that, far from panicking, retail investors are bargain-hunting.
They “saw a big chance to invest”, he says, pointing out that the price of one unit in the fund, which offers a monthly dividend of about Y40, dropped below Y8,000 on Wednesday for the first time since August. Although inflows and outflows from the fund were evenly matched last week, on Tuesday investors put Y3bn more in than they took out, an unusually high figure for a single day.
Tomio Nakayama, a 40-something salaried worker living in Tokyo, has not been ruffled by recent events. About three years ago, he put about Y2m into an Australian dollar bank account. Yen accounts at the time were offering a pitiful 0.01 per cent interest rate, making the rate for Australian dollars, then 12 per cent, spectacularly attractive. Since then the Australian dollar has strengthened by about 20 per cent – in spite of recent moves in the opposite direction – giving him an extra windfall.
Mr Nakayama is considering taking profits by pulling his money out of Australian dollars. But he is more likely to put the proceeds into US dollars than bring them back to Japan.
Yen accounts remain unattractive because “Japanese interest rates are still low”, he grumbles. His faith in foreign investments has not been shaken by recent market gyrations. “I don’t think the Japanese yen is going to become strong again,” he predicts.
The role of private investors is expected to only get bigger. Most of those flocking to seminars touting overseas investment funds these days are “silver-haired investors” seeking higher-yielding funds for part of their retirement nest eggs.
Over the next three years, more than 8m retiring baby-boomers stand to receive an estimated Y50,000bn in lump sump retirement payments. If only a small proportion of that money starts to leave Japan, it will provide a powerful counterbalance to any trades that are currently moving in the opposite direction.