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The Yen Carry Trade Situation - Calling Jonpo

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Jonpo,

You were talking about this on another thread and I see there's a piece in Moneyweek this about it too. Can you tell me if I have understood this right?

Many people have been borrowing Yen for next to nothing and using the loan to buy higher-yielding assets elsewehere, particularly US Govt bonds. But now the BOJ have said they are going raise interest rates, many will now want or have to pay back their loans. Which means capital invested worldwide in bonds, property, other currency, shares, even pms is going to be taken out and used to repay those loans. So anything in which has been bought with loaned Jap money could suffer basically. Is this right? And in order to pay back their loans a lot of people are going to have to buy Yen, which will push up the price of the Yen. Is this also right?

So one way to play this is to buy Yen - or go long on it - and we should see its value go up in the coming months?

Similarly we should see falls in what? The dollar, real estate, PMs? What else?

Cheers

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Yes, you have it correct people have been borrowing in yen in order to invest in other assets that they think will earn a better return for them.

e.g including but not limited to

Equities

bonds

high yeilding currencies

emerging market equities/bonds

metals copper GOLD

sugar

CDS

MBS

Corporate bonds

good article in the FT money section today on it..

now these trades will have been very profitable but as the yield advantage of these trades is eroded by the normalisation of rates by the bank of Japan these trades will become less and less profitable, the problem is that you are only going to manage to make money off your trade if only if you manage to liquidate it at a reasonable exchange rate. if you don't get out in time you are liable to loose huge amounts of money. the problem is if some large players start to liquidate their carry trades then they push the price of Yen up an that causes more prople to liquidate their carry trades and so on. and in these cases of large foreign exchange movments speculators are also liable to get in on the action and push the price of Yen even higher. at the moment though people are just jostleing for position if the BoJ makes an announcement this week!

Yes If you can take a 12month view long Yen might make a good strategy. although last month the yen was at almost 1 decade lows agaist the pound. however bear in mind the FX market can be very volatile and the Japanese have taken to open market operations to manipulate the Yen over the last few years, and that makes me nervous about taking a big long term bet on yen appreciation my fear is that they try to limit the appreciation of any rush to the exits by selling yen on the open market, if you want to leverage yourself you might find it easier to sell into some of the markets that have been proped up by 'easy money' it is certainly important to be vigilent about the correlation of certain markets. I mean since when was gold highly correlated with equity markets and emerging market bonds???

the important thing, is that assets worldwide look expensive because a rising tide of globab liquidity has caused nearly all markets to rise. when the tide goes out and it will then as warren Buffet would say "we will see who has been swimming naked"

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...however bear in mind the FX market can be very volatile and the Japanese have taken to open market operations to manipulate the Yen over the last few years, and that makes me nervous about taking a big long term bet on yen appreciation my fear is that they try to limit the appreciation of any rush to the exits by selling yen on the open market...

Yes, this is my concern too. I think the Japanese will hold on like hell to keep the Yen favourable to the USD. Not too sure how long they maybe able to manipulate the market though. BoJ has a meeting on IRs next week, but I don't expect much of a move. Will inflationary presuures on Japan reek as much havoc as the deflationary pressures?

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Jonpo -

Please could you polish your crystal ball and tell me what effect you think this will have on my invesco perpetual japanese smaller companies fund ?

Its fallen back quite a bit since the livedoor thing - should I read that as a time to take profits, or a good buying opportunity?

Cheers

:)

Edited by Flick

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well I'm not professing to have any crystal ball reading properties. but.

The Japanese economy has been through a bad 15 years during which time they have had long periods of asset price deflation. and gereral credit deflation, simply on a reversion to mean basis they look like a good bet to have gone through the worst of their Kondrateiff winter and look set to go through a period of non inflationary growth.

on a TA basis the 17000 level is a tough reistance line going back 10-15 years an on that basis alone I think we could see a big retrace back as low as the 12000 level if we did see it bounce off this level again I would want to top up my IJPN ishares. long term Japan smaller companies look like they have a bright future as of all the companies worldwide they have the potential to really play an important part in transforming the chinese economy. there could be a few speed bumps along the way though and the end of the Zero rates looks like it could be one of them. Yen appreciation hits exporters and the Japan economy is very export focused, but considering what is going on in Japan I would expect the funds to be more domestic damand focused so shouldn't be too effected. considering the costs of getting in and out of some of these funds it can be very difficult to get in and out of them quickly too in some cases, I would be tempted to stay put and ride out any storm that precipitates.

China and Japan do huge amounts of trade together (desipte hating each other) and that makes me think that eventually the China Japan trade relationship could eventually become as important as the US- Japan trade relationship. In short i'd probably keep em.

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  • 301 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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