Less Demand for Foreign Assets Limits Yen Losses, JPMorgan Says

By Ye Xie

Sept. 30 (Bloomberg) -- Japanese individuals' demand for foreign assets is ``receding,' as the global economy slows, making the yen less likely to depreciate, according to JPMorgan Chase & Co.

Japanese investors sold a net 66 billion yen ($630 million) of overseas stocks and bonds in the week ended Sept. 19, according to JPMorgan's data tracking 40 largest Japanese trust funds that exclusively invest in foreign assets. That was the second largest weekly net outflow since JPMorgan started to track the data in 2005. Net purchases of so-called Uridashi bonds, or debts denominated in foreign currency sold to Japanese investors, fell in August to lowest level this year.

``The appetite of Japanese retail investors for foreign assets appears to be receding across various asset classes,'' Junya Tanase, a currency strategist at JPMorgan Chase & Co. in Tokyo, wrote in a research note on Sept. 26. ``Continued softness in Japanese retail buying of foreign assets could start to limit'' downside risk of the yen, he wrote.


The yen rose 4.4 percent this month to 104.05 per dollar as growing U.S. mortgage losses prompted investors to reduce carry trades where they buy high-yielding assets funded by low- interest-rate loan made in Japan. The Japanese currency has gained 20 percent versus the Brazil real, 10 percent versus the Australian dollar and 8.1 percent versus the New Zealand dollar this month.

Mutual Funds

Japanese mutual funds boosted purchases of overseas assets to 36.89 trillion yen by the end of last year, from 3.06 trillion yen by the end of 2000, according to Japan's Investment Trust Association. The outflow helped push the yen 70 percent weaker versus the real since the end of 2002, 28 percent lower against the Aussie dollar and 22 percent versus the euro. Japan's 0.5 percent benchmark rate compares with 4.25 percent in European Central Bank, 13.75 percent in Brazil and 7 percent in Australia.

Japanese investors are turning ``cool'' on foreign assets also because wider price swings in foreign exchanges threaten the return on interest-rate spread, Tanase wrote. Implied volatility on one-month dollar-yen options rose to 18 percent yesterday. The gauge of price fluctuation averaged 12.60 percent this year.

``Risk-adjust return on yen carry trades has deteriorated sharply,'' Tanase wrote.

The yen will fall to 108 per dollar by year-end and decline to 111 by the end of next year, according to the median forecast of 41 analysts surveyed by Bloomberg News.

To contact the reporter on this story: Ye Xie in New York at yxie6@bloomberg.net;