Yen Carry Trade: How Much is Too Much?

How much Yen Carry Trade is considered "excessive"?

As of March. the numbers of the Yen Carry Trade are equivalent to US $800 Billion, according to a Wall Street bank. (Estimates do range from 300-1000 Billion, all huge numbers).

The question is then how much is too much? Consider this:

Japanese don't trade the yen to invest in Australian$ or Brazilian bond, or Chinese stocks. They need yen to buy food, housing, cars, and the good things in life. Their business quarterly repatriates hundreds of billion dollars back into yen. So business and public demand of yen is, mildly speaking, far from zero.

A real crisis can happen when speculative yen demand interferes with the real economy demand of yen.

Take the M2 supply: deposit, cash, and quasi money - that number is 700 Trillion Yen, or 6 Trillion US$, or 6000 billion US$. A rule of thumb would suggest that a crisis could be in the making if the business/public suddenly compete with speculators to get Yen.

Currently we are at about 10-15% Yen money supply in terms of the amount being speculated. Common sense suggests to me that there is beginning to be a competition of demand for yen not just among speculators, but businesses as well. I would say if we ever reached 100% of the money being loaned for speculation, there will be serious consequences in terms of regional monetary stabilities.

It's up to the Japanese government to determine whether there should be a stampede today or a monumental stampede later. A colleague joked that it would be funny if as the Japanese man stood in front of an ATM he got Google stocks or Brazilian bonds instead of yen notes.

Comments

[Darrel Whitten:]

Dear John;

According to the IMF's attempt to measure the yen carry trade, the bulk of this carry trade is not "speculation" but individual Japanese investors buying offshore investments denominated in high yielding currencies. In Asia, for example, a Japanese investor can earn 6.8% on demand deposits while also enjoying an appreciating Auzzie dollar against the yen. Japanese fund management companies are creating mutual funds with monthly payouts that have various bells and whistles to be able to make the monthly payouts, which is also contributing.

I found this attempt to get a balanced view of the carry trade a bit refreshing.
tmcgee.wordpress.com/2.../

2007 Apr 24 08:18 AM