Yen Gains Deceptive, Traders Most Bearish in 3 Years (Update1)
By Ron Harui, Yasuhiko Seki and Yoshiaki Nohara
March 23 (Bloomberg) -- Japanese households are sending funds overseas at the fastest pace since 2007 in search of higher yields as currency strategists predict the yen will slump 8 percent versus the dollar by the end of the year.
Households are buying Chinese stocks and record amounts of Brazilian bonds as they reinvest the biggest sum of maturing Japan Post Bank Co. deposits in nine years. That will help push the yen down to 98 per dollar by Dec. 31 after it gained this year against all but eight of 155 currencies tracked by Bloomberg, the median of 39 strategists’ forecasts shows.
The flight of capital is being driven by 15 years of benchmark interest rates below 1 percent, a sluggish economy, deflation and increasing numbers of retirees in need of better investment gains than they can get at home. The annual rate on Japan Post’s teigaku, or “fixed amount,” time deposits of three years or longer is 0.11 percent, compared with yearly returns of 6 percent from money-market accounts at Itau Unibanco SA, Brazil’s biggest private bank.
“The number of elderly people considering a financial exodus from Japan is on the rise,” said Soichiro Mori, a strategist in Tokyo at FXOnline Japan Co. “They’re preparing for the future by shifting money away from their home turf.”
Housewives Dollar Bulls
Japanese housewives are the most bullish on the dollar since at least June, when the research unit of Gaitame.com, the nation’s biggest currency-trading firm, began surveying them monthly. Last year’s most accurate yen forecaster, National Australia Bank Ltd., sees Japan’s currency falling 10 percent to 100 per dollar, from its March 19 close of 90.54. The premium charged for rights to buy yen in three months over options to sell narrowed to 0.72 percentage point on March 19, signaling the least confidence it will gain since 2007.
Holdings of foreign-currency denominated assets at mutual funds in Japan increased 31 percent in January and 25 percent in February from a year earlier, reaching 27.3 trillion yen ($302 billion) last month, data from the Investment Trusts Association of Japan show. The pace in January and February is the fastest since the first two months of 2007.
Japanese mutual funds’ holdings of Brazilian real- denominated bonds surged to a record 1.34 trillion yen in February, from 431 billion yen a year earlier.
Japan Post Deposits
About 40 trillion yen in Japan Post deposits mature this year, more than double 2009’s total and the most since 2001, Bank of America-Merrill Lynch data show. Firms including Kokusai Asset Management Co. and Societe Generale SA are marketing overseas funds to grab bigger shares of Japan Post’s 195.7 trillion yen in deposits, a larger pool than at any other bank in the world.
Japan Post, which traces its roots to the 1870s founding of the government-owned mail-delivery system, holds 14 percent of the financial assets owned by Japanese investors, whose 1,400 trillion yen of savings exceeds the U.S. gross domestic product. The government began selling off the postal service and its bank in 2007.
“Large amounts of maturing postal savings and expectations of potential shifts of the redemption money” overseas “will probably be yen negative,” said Tomoko Fujii, a foreign- exchange strategist in Tokyo at Bank of America-Merrill Lynch.
The Japanese economy shrank 1 percent in the last quarter of 2009 from a year earlier as Brazil and China grew 4.3 percent and 10.7 percent, respectively. The Bank of Japan last week doubled a program that provides three-month loans to banks, a move that may undermine the currency by pouring another 10 trillion yen into economy. The decision came after Finance Minister Naoto Kan pressed the central bank to do more to fight the decline in prices.
Forced Abroad
“With ongoing monetary easing, those who have a good chunk of money have nowhere to invest in Japan,” said Naoyuki Ichikura, a manager at the Investment Trusts Association of Japan. “Money is poised to move out of Japan because investors don’t have a choice.”
The flow of funds will be mitigated by concerns that inflation elsewhere may hurt returns on overseas assets, as measured by so-called real yields. In the U.S., inflation reduces the effective yield on 10-year Treasuries to 1.59 percent, from 3.69 percent before accounting for costs in the economy. In Japan, falling prices increase the rate on similar- dated government bonds to 2.66 percent, from 1.36 percent.
“We will continue to focus on domestic debt securities, but if the need to reshuffle the portfolio emerges, we will consider doing so with other domestic products,” said Shinichi Horikawa, who helps to manage the equivalent of $11 billion at Mitsui Sumitomo Kirameki Life Insurance Co., a unit of Japan’s second-largest non-life insurer.
Real Yields
Japan loses its real-yield advantage when it comes to shorter maturity debt from higher-yielding economies. The yield on Brazil’s two-year note was 11.97 percent yesterday, compared with 0.15 percent for Japan. The South American nation’s consumer prices rose 4.83 percent in the 12 months through February, the fastest pace in nine months, so its real yield was 7.14 percent, compared with 1.45 percent in Japan.
The Bank of Japan’s target rate for overnight loans is 0.1 percent, compared with benchmarks of 8.75 percent in Brazil and 4 percent in Australia. The central bank, which first cut its target below 1 percent in 1995, likely will keep borrowing costs unchanged through June 2011 as the country lags behind in the global recovery from the worst post-World War II recession, median estimates in Bloomberg surveys show.
The U.S. Federal Reserve will begin raising its rate from a record low of between zero and 0.25 percent this year, and the European Central Bank likely will increase its benchmark from an all-time low of 1 percent in the fourth quarter of 2010, median predictions show.
Australian Advantage
The yield advantage of Australia’s two-year government bonds compared to similar-maturity Japanese government debt rose to 4.77 percentage points today, the most since September 2008.
Borrowing costs for yen loans between banks fell below those for dollars this month for the first time since August. That makes the yen more attractive for carry trades, in which investors borrow at low rates to invest at higher yields elsewhere.
Kokusai Asset Management, which runs Asia’s biggest bond fund, plans to market 450 billion yen in mutual funds targeting debt in Australia, Brazil, China, Indonesia and the U.S. on April 16. That’s almost 5 percent of total net assets held by Japanese bond-investment trusts.
Rakuten Investment Management Inc. on March 30 plans to sell 13 billion yen in mutual funds focused on Chinese companies’ A shares, yuan-denominated stocks available only to Chinese investors and select foreigners.
Higher Returns
“Elderly people who have some leeway in cash have a reasonable interest in investing in higher-yielding or riskier assets, including foreign currency-denominated assets, to get better returns,” said Kuniaki Kito, an analyst at the research unit of Rakuten.
China is forecast by the International Monetary Fund to surpass Japan this year as the world’s second-largest economy. The Shanghai Composite Index has advanced by 4.3 percent since Jan. 31.
“Mutual funds focusing on such nations as China, where economic dynamics are strong, are selling well,” said Akio Yoshino, chief economist in Tokyo at Societe Generale Asset Management (Japan) Inc., a unit of Amundi, a venture Societe Generale formed with Credit Agricole SA that oversees 650 billion euros ($880 billion) worldwide. “With Japanese citizens having suffered from low interest rates for some time now, elderly people, especially those who are retired, now show a decent interest in buying foreign asset-focused mutual funds.”
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