Yen Sales by Tokyo Individual Investors at Highest Since August

By Kosuke Goto

July 16 (Bloomberg) -- Yen sales by Japanese individual investors on the Tokyo Financial Exchange reached the most since August yesterday as gains in the yen made higher-yielding assets abroad cheaper.

Housewives, pensioners and businessmen accelerated purchases of foreign exchange as Japan's currency rose to a six-week high against the dollar. The highest yen sales in 11 months came as Bank of Japan policy makers unanimously voted to keep interest rates at 0.5 percent and cut their economic growth forecast, raising speculation the central bank will leave borrowing costs unchanged beyond this year.

``With Japan's interest rates expected to remain low for a long time, Japanese investors have persistent demand for higher- yielding currencies,'' said Takahide Nagasaki, senior currency strategist in Tokyo at Daiwa Securities SMBC Co., a unit of Japan's second-largest brokerage. ``Their yen sales help stem any sharp appreciation of the yen.''

Net short positions, or bets a currency will decline, on the yen against seven major currencies, including the U.S. dollar and euro, rose to 353,418 contracts among so-called mom-and-pop traders yesterday, the highest since Aug. 14, exchange data showed.

Investors increased net long positions on the U.S. currency to a four-month high of 105,990 contracts, and on the euro to a five-month high of 20,869 contracts. A long position is a bet that an asset price will rise.

The contracts are denominated in 10,000 units of foreign currency.

The yen traded at 104.84 per dollar at 10:50 a.m. in Tokyo from 104.73 in New York yesterday, when it rose to 104.16, the strongest since June 3. It was also at 166.84 a euro from 166.65 yesterday, when it climbed to 166.42, the highest since July 1.

Carry Trades

Japan's benchmark rate is the lowest among major economies, making assets outside of the country more attractive to domestic investors. Benchmark borrowing costs are 2 percent in the U.S. and 4.25 percent at the European Central Bank.

The BOJ may keep rates on hold at least until the first quarter, Daiwa Securities SMBC's Nagasaki said.

The exchange's data signals Japan's individual investors may be resuming carry trades after reducing their positions as some higher-yielding currencies depreciated in the past year due to the U.S. subprime mortgage crisis.

In carry trades, investors get funds in countries with low borrowing costs and buy assets in countries with higher rates, earning the spread between the two. The risk is that currency moves erase those profits.

So-called margin trading of currencies in Japan using borrowed funds rose 86 percent in the first quarter to a record 213 trillion yen ($2.03 trillion), figures from the Financial Futures Association of Japan showed in May.

Japanese households have 1,490 trillion yen in financial assets, according to the Bank of Japan.

To contact the reporters on this story: Kosuke Goto in Tokyo at kgoto2@bloomberg.net