Japanese investors dumping the Yen
Japanese investors dumping the Yen, Investors in Japan are increasingly turning to foreign currency deposits as a way to diversify their portfolios and take advantage of higher yields.
Topics
Benefits of Foreign Currency
Yen Weakness Impacting Japan
Against the Dollar
What the future holds for the yen?
Benefits of Foreign Currency
Bank of Japan data shows that foreign currency deposits at domestic banks surged 8.3% in the first eight months of this year, to 26.58 trillion yen ($182.38 billion).
This is the highest level since 2015, suggesting that investors are becoming more comfortable investing in overseas markets.
One key reason for this shift is that interest rates remain low in Japan, despite increases by other major central banks around the world.
This has made Japanese government bonds less attractive, especially compared to bonds from countries with higher yields.
For example, 10-year U.S Treasury yields are currently around 4 percentage points higher than equivalent Japanese government bond yields.
Investing in foreign currency deposits offers investors a chance to both diversify their portfolios and earn greater returns on their investment than they would by keeping their money in yen-denominated assets.
In addition, with the Bank of Japan unlikely to raise interest rates any time soon, the appeal of these investments is likely to continue.
The yen has weakened about 7% against the dollar this year and is trading near a two-year low.
Yen Weakness Impacting Japan
Some Japanese investors have been turning to foreign exchange margin trading to bet on further yen weakness.
The value of outstanding margin loans in yen terms hit a record high of $40.3 billion in August, up from $37.6 billion at the end of last year, according to data from the Tokyo Stock Exchange, “Foreign-currency deposits, a focus for relatively long-term investment,
increased along with yen depreciation this year and may have contributed to an extent to this year’s decline in the yen,”
said Lhamsuren Sharavdemberel, Barclays Bank analyst.
Foreign currency deposits have risen in popularity in recent months as the yen has fallen to 24-year lows.
Because retail investors may borrow up to 25 times their funds as leverage, margin trading volume increased to a record 1,229 trillion yen in June.
Given the current context of low-interest rates and prolonged yen weakening, analysts anticipate a significant rise in foreign currency deposits. At the end of June, households had a record 1,102 trillion yen in cash and savings, indicating that there is plenty of idle capital available for investment.
The increase in interest rates comes at a time when Japan’s central bank is attempting to arrest the yen’s slide with harsh interventionist measures.
Japan’s foreign reserves declined to $1.238 trillion at the end of September as a result of these measures, “Most of the increase, of course, is attributable to the change in valuations due to the weaker yen,” he said. But there was a big increase even after adjusting for nominal exchange rate changes in the yen”, said Lhamsuren.
Against the Dollar
The yen has been one of the biggest casualties of the dollar’s surge.
It is down 6% against the greenback this year and is now trading at its weakest level since early 2017.
While the yen originally rose following the intervention, it has now fallen back to roughly 145 against the dollar,
back to where it was before Japan’s major currency move.
The Japanese currency had recovered somewhat following intervention by the Bank of Japan in late September,
but it has since given up those gains and is back to where it was before the central bank’s move.
There are a few reasons for the yen’s weakness.
One is that Japan relies heavily on exports, so a strong dollar makes its products more expensive overseas and hurts demand.
The US dollar has been on a tear this year, thanks mostly to interest rate rises by the US Federal Reserve.
As a consequence of a dramatic market decline that has seen the S&P 500 drop 24% since the beginning of 2022, investors have sought refuge in secure assets such as dollars.
Additionally, with interest rates in Japan still near zero, there isn’t much incentive for investors to hold onto yen-denominated assets.
And finally, as China’s currency reserves have declined, there has been less demand for the yen as a funding currency.
The Chinese foreign currency declined from $3.055 trillion in August to $3.029 trillion in September.
Chinese officials blamed the drop on declining asset prices driven by the rising dollar.
What the future holds for the yen?
All things considered; it looks like the yen could continue to weaken against the dollar in the near term.
However, given that Japanese officials are likely to intervene if they feel that further depreciation would be harmful to their economy,
investors should keep an eye on developments in this situation.