Yen May Strengthen as Regulations Force Mrs. Watanabe to Curb Carry Trades

Yen May Strengthen as Regulations Force Mrs. Watanabe to Curb Carry Trades
By Yasuhiko Seki and Hiroko Komiya - Jul 25, 2010
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Business ExchangeTwitterDeliciousDiggFacebookLinkedInNewsvinePropellerYahoo! BuzzPrint The yen may climb next month as tighter regulations force Japanese households controlling about $76 billion in daily exchange trading to unwind bets on higher- yielding currencies, analysts said.

The government will cap debt used to boost trading bets, or leverage, at 50 times committed cash from August 2010, down to 25 times in 2011, the Financial Services Agency decided last year. Individual traders have started to prepare for the change, according to Japan’s biggest online currency broker which saw accounts with 100 times or more leverage fall by half last month.

“If margin traders decide to discontinue highly leveraged transactions, it will put upward pressure on the yen as those positions are unwound,” said Yuji Kameoka, senior economist in Tokyo at Daiwa Institute of Research Ltd., a unit of Japan’s second-biggest brokerage. “The Australian dollar, a favorite among margin traders, may feel the pinch in particular.”

The yen rose to an eight-year high of 107.32 per euro June 29, and climbed to 86.27 U.S. cents on July 16, near a 14-year peak of 84.83 set Nov 27. It gained to 72.69 per Australian dollar on July 1, the highest since May 25. Japan’s currency traded at 113.23 per euro, 87.62 U.S. cents and 78.36 to the Aussie as of 12:23 p.m. in Tokyo.

The FSA enacted the leverage standards to protect against excessive losses for customers and aid in risk management in the financial industry, according to a release by the agency last year. There was previously no official limit on leverage in currency margin transactions.

Traders who use margin accounts collectively came to be called “Mrs. Watanabe,” drawing upon the common Japanese surname and the fact that wives traditionally control the purse strings in Japanese families.

Housewives, Gnomes

Bank of Japan Deputy Governor Kiyohiko Nishimura said in 2007 “the housewives of Tokyo” had a stabilizing effect on currency markets, in contrast to the “gnomes of Zurich,” a term used by U.K. politician Harold Wilson to describe pound speculators based in Switzerland.

Benchmark interest rates are 4.5 percent in Australia and 2.75 percent in New Zealand, compared with 0.1 percent in Japan, attracting investors to the South Pacific nations’ higher- yielding assets. In carry trades, investors borrow money in countries with low interest rates to invest in higher-yielding assets.

The Australian dollar versus the yen "has historically been the most-favored play by leveraged Japanese investors,’’ said Sue Trinh, senior currency strategist in Hong Kong at Royal Bank of Canada. “Limits on leverage could therefore see reduced demand from August.”

Net Shorts

Trinh recommends selling the Australian dollar, saying it may retest the 72 yen level reached in May amid ebbing sales in Japan of overseas-focused mutual funds and a pattern of seasonal weakness for the Aussie in August.

Net short positions on the yen, equivalent to yen carry trades, stood at 1.89 trillion yen ($21.6 billion) at the end of June, up 59 percent from the previous month, according to the Financial Futures Association of Japan, which compiles data from 57 margin brokerages.

The average trading volume of foreign currencies in Tokyo stood at $254.2 billion a day in April 2009, the latest figure available from the Foreign Exchange Market Committee. Currency margin traders account for up to 30 percent of daily turnover, according to an estimate from JPMorgan Chase & Co.

“The new leverage regulation just sounds like harassment for individual traders,” said Nobuhide Suzuki, 42, a Tokyo- based private investor who leverages exchange trades by 100 times on average. “The reduced leverage limits will simply deteriorate the efficiency of investment.”

‘Preparatory Mode’

Gaitame.com, Japan’s largest foreign-exchange margin dealer, said 7 percent of its accounts were leveraged at more than 100 times in its latest survey conducted between June 16 and June 23, down from 13.6 percent the previous month.

“Individual investors were already in a preparatory mode ahead of the regulatory tightening, trimming highly-leveraged positions,” said Tsuyoshi Okada, managing director in Tokyo at Gaitame.com’s research unit. “The new regulations may spur intraday volatility at the start.”

Japan’s currency typically rises during times of financial turmoil as the nation’s trade surplus means it doesn’t have to rely on overseas capital. Global risk aversion in the wake of Europe’s debt crisis has spurred an 10 percent surge in the yen in 2010, according to Bloomberg Correlation-Weighted Currency Indexes, the most among 10 currencies tracked.

Yen-denominated margin accounts had deposits of 595.1 billion yen as of March 2009, according to private-research institute Yano Research Institute Ltd. That’s down from a record 696.4 billion yen a year earlier when the collapse of Lehman Brothers Holdings Inc. accelerated gains in Japan’s currency.

“Margin traders are likely to stay on the sidelines initially to adapt themselves to the new rules and see how things will develop before they return to the market,” said Toshiya