Tokyo: 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% to a four-and-a-half-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%.
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 (Rs45,100 crore) 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% 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 US dollars to take advantage of the 4.75 percentage-point difference between Japanese and US interest rates.
Japanese investors are borrowing yen at the central bank’s 0.5 % overnight lending rate and buying higher-yielding currencies in New Zealand, the UK, Australia and even Brazil to increase returns on 1,536 trillion yen ($12.5 trillion) in savings. The strategy is called the carry trade.
Japan’s overnight rate, the lowest among major economies, is 7.5 percentage points less than New Zealand’s key rate and 3.5 percentage points below that of the European Central Bank.
“Japan’s margin traders have the power to support currencies against the yen,” said Derek Halpenny, a strategist in London at Bank of Tokyo-Mitsubishi UFJ Ltd, a unit of Japan’s biggest lender. “We estimate they make up 15% of yen trading in Tokyo hours. Maybe even more.”
The yen slumped 1.4% last week, its biggest drop in five months, to 123.44 per dollar. It dropped 1.5% to 165.26 to the euro. Halpenny predicts the yen will reach 125 per dollar before ending 30 September at 123. “The yen carry trade is still alive,” said Koji Fukaya, senior currency strategist in Tokyo at Deutsche Securities, a Deutsche Bank subsidiary.
Unwinding carry trades
The Frankfurt-based bank, the biggest currency trader according to Euromoney magazine, forecast at the end of March that the yen would trade at 117 per dollar by 30 June, matching the median of 39 analysts, traders and investors in a Bloomberg survey. Zurich-based UBS, ranked second, predicted 116.
In late December, Deutsche Bank forecast the yen would rise to 113 by the end of the first quarter and UBS predicted 111. It fell to 117.83.
UBS and Deutsche Bank are sticking to their forecasts for a stronger yen, saying central bank curbs on money supply will starve the carry trade.
“Tighter global liquidity will contribute to increased volatility and enable the yen to strengthen as the carry trade is unwound,” said Ashley Davies, currency strategist in Singapore at UBS, which expects the yen to gain to 121 per dollar in a month and to 117 in three months.
Retail investors’ strategy of selling yen during rallies helped push volatility implied by one-month dollar-yen options on 5 June to 5.85%, the lowest since the Bank of Japan began compiling data in August 1992, compared with 10.15% on 5 March.
Lower volatility may encourage carry trades, as it implies smaller exchange-rate fluctuation risk.
“They are the bane of professional currency traders,” said Masanobu Ishikawa, general manager of foreign exchange at Tokyo Forex & Ueda Harlow Ltd, who has been trading in Japan’s capital city for 25 years. “It’s becoming hard to make money as the dollar-yen doesn’t move as it used to, because of their constant buying on dips.”
Global trading by investors other than banks, fund managers and companies surged 54% last year, said Peter D’Amario, a consultant at Greenwich Associates. The category, which includes retail investors, accounted for 16% of trades handled by 1,700 firms surveyed, up from 10% a year earlier. It grew 80% in Europe, 55% in Asia-Pacific and 30% in the Americas. In Japan, individuals have opened 600,000 so-called margin trading accounts at brokerages that lend money for currency bets, 80% more than a year ago, according to Yano Research.
When the yen rose to a two-week high of 162.20 against the euro on 25 May, Naoko Ogawa, a 34-year-old freelance writer, used a €1,000 ($1,300) deposit to buy €10,000. She sold four days later, close to a then-record high of ¥164.29.
“You just need to buy the dollar and the euro on dips, then sell them at a profit,” said Ogawa, who added that she has made a 20% return on her ¥1 million trading account since December. “It’s better than stock trading, as you can rely on daily interest.”
Deposits in margin trading brokerages have risen 60% to $4.9 billion in the past year, Yano Research found. While that’s about 2% of the $272 billion that Japanese individuals have put into mutualfunds that invest overseas, borrowing typically makes their positions 10 to 30 times larger.
Min Zeng in New York contributed to this story.