So there I was, thinking about the gold carry trade when out of one of the feeds drops Barnejeks blog:
Just like everyone else in the financial markets over the last week
or so I have become the world-famous specialist on Japanese flows (!)*. I
have heard a lot of more or less plausible stories and when I was
trying to digest all the noise, I couldn’t help but think about “Nothing As It Seems” by Pearl Jam:
Occupations overthrown, a whisper through a megaphone
It’s nothing as it seems, the little that he needs, it’s home
The little that he sees, is nothing he concedes, it’s home
And all that he frees, a little bittersweet, it’s home
It’s nothing as it seems, the little that you see, it’s home…
- Jeff Ament, Pearl Jam
I am not certain what is going to happen with the wall of money that
is seemingly coming from Japan, but I know that there’s a remarkable
amount of superficial analysis, which I would like to comment on.
1. The Japanese carry trade will continue as the BoJ prints more.
According to estimates by Daiwa net issuance of JGBs after stripping
BoJ purchases will be -26trn yen. This is around 5% of GDP, which is a
pretty monstrous amount. This naturally makes people’s imagination go
into overdrive, particularly as we’re talking about the country with
decent carry-trading history. But there is one problem with such an
approach. Carry trade was Japan’s response to the lack of returns in the
local market. Bond yields have been ridiculously low and the stock
exchange was still suffering as zombie-banks kept dragging it (and the
economy) lower. Now, do you think this situation has not changed even a
bit? We may be agreeing or disagreeing with what the BoJ is doing but
investors (particularly retail) could be excused for e.g. thinking that
the Nikkei will double this year. This is particularly the case as what
the BoJ seems to have orchestrated is a fantastic opportunity for the
Japanese banks to cash in on their available-for-sale JGB portfolios. So
answer yourself this question – is it so entirely obvious that Mrs
Watanabe continues buying AUDJPY (annual yield of 3.2%), ZARJPY (annual
yield 5.4%) or MXNJPY (annual yield 4%)? Granted, these and many other
currencies will continue to constitute a very important part of the
Japanese investment portfolio but pretending that the investment
backdrop in Japan has not changed is naive in my opinion.
2. The big yen move has only just begun.
Currently various forecasters are trying to come up with the most
bearish view for the yen. I have already seen 120/USD but admittedly I
do not pay much attention to that stuff. But try to think who has so far
made money on the yen debasement? If you don’t know then try to get a
hold of the HSBC hedge fund report to see that the vast majority of
macro funds have caught at least a part of this move. And because
selling the yen is seemingly such a no-brainer**, not being in the trade
is a big career-risk for many. In some sense, macro hedge funds cannot
afford to miss another leg in the yen move (if there is one). But in the
greater scheme of things this is just noise. Don’t forget that the
Japanese economy has just become at least 30% cheaper. And we are
talking about a bunch of historically deadly innovative companies who
have managed to keep their place in the global market place against all
odds.
Goldman has recently produced a study showing that the country with
the most similar exports composition to Japan’s is… Germany. It is
already very much visible it the underperformance of the DAX, in my
opinion. Personally I prefer Mercedes over Toyota but at a 25% discount I
know I would change my mind.
My thinking is as follows: if this yen depreciation and the crowding
out of the Japanese banks from the JGB market is persistent then Japan
has every chance to become the champion of the global trade again. And
if so, why on earth would I be buying GBPJPY or AUDJPY?...MUCH MORE
