Large-scale yen carry unwind yet to come-ADB's Kuroda
Tuesday, March 13, 2007 12:11:00 PM (GMT-06:00)
Provided by: Reuters News
(Adds market reaction, more quotes, background)
By Natsuko Waki
LONDON, March 13 (Reuters) - Investors have trimmed exposure to risky assets in recent weeks but large-scale unwinding of yen carry trades is yet to come, Asian Development Bank President Haruhiko Kuroda said on Tuesday.
Speaking to Reuters on the sidelines of a conference, Kuroda, who is a former top financial diplomat at the Japanese Ministry of Finance, also said problems in the U.S. housing sector including subprime mortgage needed close monitoring but were unlikely to damage personal consumption.
A jump in risk aversion triggered by a fall in global stocks late in February has prompted investors to unwind risky carry trades where they borrow in low-yielding yen to fund purchases of high return assets.
"There was some unwinding of yen carry trades but a real-scale unwinding of carry trades is yet to come. If that was real-scale then moves in the FX market would have been bigger, which wasn't the case," Kuroda said, speaking in Japanese.
Kuroda said carry trades are not easily to unwind but possible changes in economic fundamentals -- which are yet to happen -- could prompt a reversal.
"Carry trades are not easily unwindable. It cannot go on forever either. The U.S. economy might slow down further, or Japan, where inflation is near zero, might see interest rate changes. In these cases carry might be unwound," he said.
The dollar extended losses against the yen after Kuroda's comments, hitting the day's low of 116.37 yen <JPY=>, down more than one percent on the day.
The FX market saw a sharp rise in volatility in recent weeks after a jump in risk aversion, triggered by a global equities sell-off, prompted investors to unwind risky carry trades, financed in low-yielding currencies like the yen.
The yen was under upward pressure again on Tuesday as investors grow concerned about the U.S. mortgage market and its possible impact for the U.S. economy.
Kuroda cited market estimates that yen carry trades are worth $200-250 billion to $1 trillion, adding that he thought the size was likely to be in the lower part of this range.
MONITORING SUBPRIME
From late February to March, the yen made its biggest weekly gain against the euro since Aug 2003 and hit a three-month high versus the dollar.
The global equities sell-off began on Feb 27 when Shanghai stocks fell nearly 9 percent, erasing about $140 billion in their biggest fall for a decade.
The tumble came a day after the main index jumped to an all-time high, bringing its gains for this year to 14 percent. The market soared 130 percent last year, making it the world's best-performing major market.
Kuroda said the decline was no surprise as Shanghai stocks were bound for adjustment. He added the uncertain outlook for some parts of the world economy also prompted investors to review their positions on risky assets.
"The euro zone has the issue of unemployment. In the U.S., the economy is slowing," he said.
"But there will be no recession. There are some problems in the housing sector, including sub-prime mortgage. It needs close monitoring but I don't think it will impact personal consumption or influence the financial sector."
Policymakers and regulators are taking an interest in the widening crisis in the once-booming subprime industry built around providing mortgages to borrowers with weak credit.
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