Weak Yen Likely to Weaken Further Ahead of Bonus Payouts

So much for the buzz a few months ago about the yen carry trade unwinding and wreaking havoc on global assets, especially on equities. A Bloomberg report yesterday explains how Japanese investors are eager to send funds overseas in search for higher yield.

The following extracts are from the Bloomberg article.

• June is one of two bonus payout months for Japanese workers.
• Toyota (TM) is reportedly set to pay approx. ¥13 trillion ($106.8 billion) of bonuses, the single largest payout among all Japanese companies.
• Tohru Sasaki, former chief currency trader at the BoJ and current chief currency strategist at JP Morgan in Tokyo, says large outflows are expected next month from retail investors through investment trusts, which will likely put more downward pressure on the yen.
• Sasaki says the yen has fallen against major currencies in June, in three of the past four years. He forecasts a drop to 123 against the US$ and 165 against the euro by the end of June.
• Japanese financial institutions will market more than ¥2 trillion of investment trusts through June, targeting overseas securities -- per data compiled by Bloomberg.
• Foreign assets at investment trusts jumped a monthly record ¥1.8 trillion to ¥32.3 trillion in April, according to the Investment Trust Association of Japan.

I believe the yen carry trade lives on despite some minor bumps that will generate a lot of buzz/noise in the media, but not lead to an unwinding.

The BoJ's 0.5% target rate is significantly lower than the ECB at 3.75%, U.S. 5.25% and Australia 6.25%. On opposite ends we have Brazil at 12.5% and Switzerland at 2.25%. (See chart below, click to enlarge)

These are good times for big players in the carry and those retail investors in Japan who are in effect selling out their country, perhaps reasonably so, in search of yield.

For American investors (in terms of Japan investment funds), a weak or weakening yen as we face now, is more of a negative since it hurts the conversion value of funds bought in dollars. Granted the weak yen sparks buy interest in the ordinary shares of blue chip exporters, however, simultaneously there are sizable downside pressures on domestic stocks.

It seems safe to say the CurrencyShares Japanese Yen Trust (FXY) ETF (see chart below) will continue its downward trend.

iShares MSCI Japan Index ETF (EWJ) (see chart below) will seemingly continue a longer-term upward trend, but not make strong gains as we see in most of Asia, nor even the more modest gains we are seeing in the U.S.

An interesting comment in the Bloomberg piece was how retail investors are taking any gains from the domestic market and reallocating to higher yielding overseas securities. I don't expect this behavior to change, which means there will probably be swift profit-taking on any rally.

With the U.S. trading lower today, it seems to me the Nikkei comes under heavy selling pressure Friday; also since the U.S. market will be closed on Monday.

Nikkei 225 futures (June) in Chicago were last down 230 points, -1.3%, to 17,480. Osaka closed at 17,660 (Thursday).

Disclosure: The author does not own shares of any companies or funds mentioned in this article.

Comments

[burnsgk:]

Just a note to correct - according to the article: "Toyota will pay the biggest bonus amount, at ¥1.43 million" - not ¥13 trillion.

2007 May 25 10:48 AM

[huangjin:]

¥1.43 million is the amount of the individual bonus, the total is ¥13 trillion.

2007 May 25 10:57 AM

[ken:]

Good post, one of the better ones on Japan I've seen in a bit. I was also unconcerned about the media hype on the unwinding of the carry trade a few months ago, since the rates still won't go over 1% before New Year's, which is still plenty of time.

The OECD still weighed in with a report last week on how the carry trade is contributing to global asset price inflation, then followed that up today by warning Japan not to raise interest rates too soon. Someone has to figure out when to pull the goalie.

2007 May 25 12:54 PM