Three types of JPY carry trades
Let’s assume that there are three types of ‘JPY carry trades’: (1) Japanese borrowing in JPY and investing in higher-yielding foreign assets; (2) Japanese or foreign investors borrowing in short-term JPY funds and investing in longer-term JPY assets; and (3) foreign investors could have had massive borrowing in JPY from Japanese banks and held foreign securities as a carry trade.
Type 1 carry trades: Capital outflows from Japan. Since the adoption of QE in early 2003, total Japanese portfolio outflows have been around US$170 billion a year. Compared to the US’ gross annual securities inflows of US$7 trillion a year, Japanese outflows should not be so important that they have supported US or global asset prices. However, with cumulative flows since the first introduction of ZIRP in early 1999 totalling close to US$1 trillion, there are reasons to be concerned about the JPY crosses and the prices of smaller markets, if Japanese repatriation were to become an issue. In any case, I believe that the BoJ’s policy per se should not dictate the trend of global asset prices, unless it triggers a wholesale repatriation by Japanese investors, which is unlikely.
Type 2 JPY-carry trades: JPY-JPY carry trade. The biggest investors of this type of carry trades, I suspect, are the Japanese banks: their taking short-term deposits (borrowing short) and holding JGBs (lending long) is the type of JPY carry trade in question. After the introduction of QE in spring 2003, we indeed saw a massive rise in JGB holdings, as Japanese commercial banks not only took maximum advantage of the zero short-term deposit rate, but, more importantly, also reacted acutely to the virtual guarantee by the BoJ that interest rates would remain low for a long time. However, what is more important for our discussion here is that, during the last two years when asset prices in the world really took off, and the Fed began to tighten, there is no indication that Japanese banks bought more JGBs to drive the yield lower so as to offset the liquidity withdrawal by the Fed.
Type 3 JPY carry trades: Foreign investors running JPY carry trades by borrowing from Japanese banks. On further inspection of the scant data I could find, in my view, evidence is not supportive of the claim that there has been an increase in Type 3 JPY carry trades in recent years.
Source: Morgan Stanley
:) Falkor
Let’s assume that there are three types of ‘JPY carry trades’: (1) Japanese borrowing in JPY and investing in higher-yielding foreign assets; (2) Japanese or foreign investors borrowing in short-term JPY funds and investing in longer-term JPY assets; and (3) foreign investors could have had massive borrowing in JPY from Japanese banks and held foreign securities as a carry trade.
Type 1 carry trades: Capital outflows from Japan. Since the adoption of QE in early 2003, total Japanese portfolio outflows have been around US$170 billion a year. Compared to the US’ gross annual securities inflows of US$7 trillion a year, Japanese outflows should not be so important that they have supported US or global asset prices. However, with cumulative flows since the first introduction of ZIRP in early 1999 totalling close to US$1 trillion, there are reasons to be concerned about the JPY crosses and the prices of smaller markets, if Japanese repatriation were to become an issue. In any case, I believe that the BoJ’s policy per se should not dictate the trend of global asset prices, unless it triggers a wholesale repatriation by Japanese investors, which is unlikely.
Type 2 JPY-carry trades: JPY-JPY carry trade. The biggest investors of this type of carry trades, I suspect, are the Japanese banks: their taking short-term deposits (borrowing short) and holding JGBs (lending long) is the type of JPY carry trade in question. After the introduction of QE in spring 2003, we indeed saw a massive rise in JGB holdings, as Japanese commercial banks not only took maximum advantage of the zero short-term deposit rate, but, more importantly, also reacted acutely to the virtual guarantee by the BoJ that interest rates would remain low for a long time. However, what is more important for our discussion here is that, during the last two years when asset prices in the world really took off, and the Fed began to tighten, there is no indication that Japanese banks bought more JGBs to drive the yield lower so as to offset the liquidity withdrawal by the Fed.
Type 3 JPY carry trades: Foreign investors running JPY carry trades by borrowing from Japanese banks. On further inspection of the scant data I could find, in my view, evidence is not supportive of the claim that there has been an increase in Type 3 JPY carry trades in recent years.
Source: Morgan Stanley
:) Falkor
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