January 23, 2013 / 2:41 PM / 5 years ago

Japan's "Mrs Watanabe" to ride weak yen back to emerging markets

LONDON, Jan 23 (Reuters) - 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 repatriated.

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 government action.

“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.


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 carry plays.

Bonds in emerging market currencies, by contrast, yield 5.5 percent on average. Some countries such as Turkey and Brazil pay even more.

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