Japanese Housewives Lead $125 Billion Bet Against Yen

By Ron Harui and Yasuhiko Seki

May 13 (Bloomberg) -- Individual investors in Japan increased bets to the highest in six months that the yen will weaken as the economy stabilizes, jumping back into a trade that was all but wiped out last year.

Businessmen, housewives and pensioners held 153,326 margin contracts at the end of last month that will make money if the yen declines against currencies ranging from the euro to the Australian and New Zealand dollars, according to the Tokyo Financial Exchange. All told, they may have as much as $125 billion in yen so-called short positions, RBC Capital Markets strategists said.

“Investors believe the worst of the global recession is over and higher-yielding currencies are bottoming out,” said Yoshisada Ishide, who oversees $1.8 billion as a Tokyo-based fund manager at Daiwa SB Investments Ltd., a unit of Japan’s second-biggest investment bank.

Individual investors, called housewives after the women who traditionally managed finances in Japanese families, have 1,434 trillion yen ($14.9 trillion) of savings, according to the Bank of Japan. They’re seeking higher returns after the central bank cut its benchmark interest rate to 0.1 percent. Investors who sell the yen against the euro would earn 3.4 percent by year-end, compared with 0.25 percent in one-year yen-denominated deposit accounts, data compiled by Bloomberg show.

Carry Trade

Investors are returning to the so-called carry trade, where they borrow funds in countries with low interest rates and invest the proceeds in ones with borrowing costs that are 10 percentage points higher, or more.

The strategy contributed to the yen’s 18 percent slump against the dollar between January 2005 and June 2007. Investors abandoned the trade last year as losses and writedowns on securities tied to subprime mortgages exceeded $1 trillion and the September bankruptcy of Lehman Brothers Holdings Inc. froze credit markets.

Money managers retreated from higher-yielding assets to the safety of government debt and the currencies that are easiest to trade. The yen has strengthened 19 percent against the dollar since the Federal Reserve began cutting interest rates on Sept. 18, 2007.

Now, investors are growing more optimistic. Finance ministers from the Group of Seven industrialized nations said on April 24 that they see “signs of stabilization” in the world economy and expect a recovery to take hold later this year. The U.S. Labor Department said May 8 that America’s employers cut 539,000 jobs in April, the fewest in six months.

Housewives Return

“Individual players, though they lost sizable amounts of money after Lehman went under, are beginning to reinvest in higher-yielding currencies thanks to the stabilization of global financial markets,” said Masahiro Suzuki, a businessman who has speculated in foreign-exchange markets for seven years.

Suzuki, who works for a trading company in Kobe, western Japan, said he plans to increase bets that the Australian dollar will appreciate compared with the yen.

At the end of April, individuals held the most contracts betting on a yen decline compared with those expecting gains since October. The difference as 35 times more than this year’s low on March 4, according to data from the Tokyo Financial Exchange.

The yen is this year’s worst-performer of the 16 most- traded currencies tracked by Bloomberg. It depreciated 17 percent against the South Africa rand, where the benchmark rate is 8.5 percent. Versus the Brazilian real, where the key rate is 10.25 percent, it’s down 16 percent. The bulk of the losses have come since Japan’s individual investors began increasing their bearish bets.

Currency Forecasts

Japan’s currency traded at 73.98 per Australian dollar as of 8:11 a.m. in London, from 73.78 in New York yesterday. It dropped to 76.18 on May 11, the lowest level since Oct. 6. The yen was at 58.37 versus New Zealand’s dollar from 58.44, and bought 96.49 per U.S. dollar from 96.45.

The yen will probably weaken to 100 against the greenback by year-end, according to the median estimate of 49 analysts surveyed by Bloomberg.

The Japanese currency’s advance to a 13-year high of 87.13 per dollar on Jan. 21 this year wiped out almost all of the yen short positions. The housewives remained net sellers from Aug. 18 to Dec. 30, even as Japan’s currency rallied 22 percent versus the dollar. That resulted in a 17 percent loss.

Too Small

Carry trades may fail to bring the returns investors expect because the extra yield offered over Japan is too small to compensate for possible currency losses, said Akira Takei, a fund manager in Tokyo at Mizuho Asset Management Co., a unit of Japan’s second-largest bank.

“There is almost no currency that we can call higher- yielding across the globe given the shrinking interest-rate gap between Japan and the rest of the world,” Takei said. “This is especially the case if investors have to hold these positions without any chance to hedge.”

The yen may gain to 91.50 per dollar based on recent trading patterns if ‘the green shoots of economy recovery “are not a flower but a short-lived weed,” strategists at Brown Brothers Harriman & Co. in New York said in a report yesterday.

Japan’s 0.1 percent benchmark rate compares with 3 percent in Australia, 2.5 percent in New Zealand and 1 percent in the euro region. In August 2007, New Zealand’s official rate was 8.25 percent and Australia’s was 6.5 percent.

The number of bets by individual investors against the yen started to accelerate in early April, according to data compiled by the Tokyo Financial Exchange and RBC Capital.

‘Tentative Return’

The $125 billion in net yen short positions calculated by RBC is derived by taking the U.S. dollar-equivalent amount of each margin contract, which represents 10,000 units of foreign currency. While down from the April 27 peak, the shorts still stood at 64,274 on May 11.

“A very interesting dynamic is developing,” said Sue Trinh, a senior currency strategist at RBC in Sydney. “Leveraged yen short sellers are making a tentative return.”

The favorite bet is for the Australian dollar to strengthen versus the yen. Wagers on the Aussie more than tripled to 64,293 contracts in the five weeks to April 27, while those on the kiwi -- named after a flightless bird native to New Zealand and depicted on the one dollar coin -- rose to 36,454.

Japan’s economy will shrink 6.2 percent in 2009, compared with 1.4 percent for Australia and 2 percent for New Zealand, the Washington-based International Monetary Fund said last month.

The third-biggest carry trade is to buy the euro against the yen, Tokyo Financial Exchange data show. Bets on the single European currency’s gain reached 21,598 contracts on April 27.

Bolster Earnings

A weaker yen may bolster earnings at exporters such as Toyota Motor Corp., which on May 8 reported its first annual loss in 59 years and cut dividends. Japan’s automakers sell about half of their vehicles overseas. Exporters said they can remain profitable as long as the yen trades at 97.33 per dollar or lower, a Cabinet Office survey showed on April 22.

Traders’ expectations of fluctuations in major currencies are at the lowest level in eight months, indicating a smaller risk of exchange-rate fluctuations eroding carry-trade profits.

“When the markets start calming down and volatility moves less, the Japanese will come back and start investing abroad again to earn a higher yield,” said Rajeev De Mello, the Singapore-based head of Asia investments at Western Asset Management Co., which manages $513 billion.

Implied Volatility

Implied volatility on seven major currencies has fallen to 13.8 percent from a peak of 26.6 percent in October, a month after Lehman Brothers collapsed, according to a JPMorgan Chase & Co. index. The decline from an average of 15.4 percent over the past year has encouraged investors to resume carry trades.

“We have argued for more than a month that one of the best risk-reward ratios is currently offered by carry trades, in particular long positions in high-yielding emerging-market crosses, funded in low-yielding majors,” Thomas Stolper, an economist at Goldman Sachs Group Inc. in London, wrote in a research report to clients on May 8.

“Interest has been picking up in this theme and there is good anecdotal evidence of more risk taking in this area,” he wrote in the report.

To contact the reporter on this story: Ron Harui in Singapore at rharui@bloomberg.net; Yasuhiko Seki in Tokyo at yseki5@bloomberg.net.