LONDON Jan 23 Japan's brigade of mom-and-pop
investors, once connoisseurs of the most far-flung emerging
markets, look set to ride the newly weakening yen back to more
exotic climes again.
Assets of Japanese emerging market-dedicated investment
trusts, or "toshin", have risen by more than $4 billion since
autumn, according to JPMorgan.
With Japanese households sitting on savings of 1,500
trillion yen ($17 trillion) the potential for more is immense.
New flows have been locked at home until recently by years
of excessive yen strength, which eats into returns abroad when
But the new Japanese government's drive to weaken the yen
could transform this. Even as foreign cash rushes into Japanese
shares, pushing Tokyo's Nikkei index to 32-month highs,
the JPMorgan data point to local capital flowing the other way.
It is motivated in part by the yen weakening 10 percent
against the dollar and 17 percent versus the euro
in just two months, in anticipation of aggressive
"The push (now) will be to put money to work in currencies
that will strengthen against the yen. In our view that is going
to be emerging currencies," said Philip Poole, head of global
and macro strategy at HSBC Global Asset Management.
Less than 5 percent of household savings cash is currently
overseas and only a fraction of that is in emerging markets -
even if it does amount to more than $100 billion, equal to
around a fifth of the cash in the world's largest emerging
market benchmark indices.
It includes toshin investment trusts, overlay funds which
are used to hedge currency exposure, and uridashi, foreign
currency bonds issued specially for Japanese buyers.
"Even a small proportion of (new) money will represent
significant flows for emerging markets," Poole said.
The Mrs Watanabe brigade have gained a reputation in the
past decade as canny players of yield and currency arbitrage,
fanning out from New Zealand to Brazil in search of returns.
For years prior to the 2008 crisis, Mrs Watanabe and her ilk
were pivotal to yen carry trades, selling the yen to buy
high-interest rate currencies.
Australian and New Zealand dollars dominated portfolios
initially but emerging currencies such as the Brazilian real,
with even higher yields, rose into favour.
Appetite for overseas investment can be gauged by the demand
for new toshin and uridashi.
A toshin launched at the end of 2012 garnered the highest
subscriptions for a single fund in six years, reaching $2.3
billion, while several toshin launches, focused on high-yield
Asian bonds, are scheduled for next week.
Bill Diviney, currency strategist at Barclays in Tokyo says
new uridashi issuance is overwhelmingly weighted to emerging
currencies. Uridashi in Mrs Watanabe's old favourites the
Australian and New Zealand dollar on the other hand are
experiencing net redemptions.
"We are seeing net positive uridashi issuance in the
Turkish, Brazilian, Mexican and Russian currencies and that
clearly shows the shift in currency allocations," Diviney says.
Turkey received some $3.5 billion in uridashi flows in 2012.
PUSH AND PULL
Aside from the currency policy shift within Japan, there are
external factors too for Japanese investors' cash - world
economic growth is ticking up and Europe's crisis is subsiding.
This reduces the possibility of safety-seeking capital
inflows into the yen which have often in the past saddled Mrs
Watanabe with losses.
"With that risk (of yen strength) greatly reduced, the
higher yield of overseas assets is likely to make them more
attractive to retail investors," Diviney says.
A growth pickup also means emerging market currencies are
likely to strengthen, with analysts forecasting an average 3-5
percent appreciation against the dollar in 2013.
"On (purchasing power parity) basis, the yen is still
overvalued and all emerging currencies look undervalued except
maybe the Brazilian real," says Poole of HSBC.
Bond yields are also playing their part.
Australian interest rates, once at 7 percent before the 2008
crisis, are now around half that level while 10-year Aussie
bonds pay around 3.3 percent - making them less attractive for
Bonds in emerging market currencies, by contrast, yield 5.5
percent on average. Some countries such as Turkey and Brazil pay