The Watanabes are coming

December 28, 2012

With Shinzo Abe’s new government intent on prodding the Bank of Japan into unlimited monetary easing, it is hardly surprising that the yen has slumped to two-year lows against the dollar. This could lead to even more flows into overseas markets from Japanese investors seeking higher-yield homes for their money.

Japanese mom-and-pop investors — known collectively as Mrs Watanabe –  have for years been canny players of currency and interest rate arbitrage. In recent years they have stepped away from old favourites, New Zealand and Australia, in favour of emerging markets such as Brazil, South Africa and Turkey. (See here  to read Global Investing’s take on Mrs Watanabe’s foray into Turkey). Flows from Japan stalled somewhat in the wake of the 2010 earthquake but EM-dedicated Japanese investment trusts, known as toshin, remain a mighty force, with estimated assets of over $64 billion.  Analysts at JP Morgan noted back in October that with the U.S. Fed’s QE3 in full swing, more Japanese cash had started to flow out.

That trickle shows signs of  becoming a flood. Nikko Asset Management, the country’s third  biggest money manager, said this week that retail investors had poured $2.3 billion into a mutual fund that invests in overseas shares — the biggest  subscription since October 2006. This fund’s model portfolio has a 64 percent weighting to U.S. shares, 14 percent to Mexico and 10 percent to Canada while the rest is split between Latin American countries.

And what of currency wars? The yen has slumped 12 percent against the dollar this year while currencies from emerging economies Korea, Philippines, and Mexico have  risen 6-7 percent. JP Morgan predicts the yen, currently trading around 86 to the dollar,  will trade between 80 and 90 next year ( previous estimate 75-85 yen) But some in the new administration want more — Abe’s special advisor Koichi Hamada says only a 95-100 per dollar level would be proof that monetary easing is working.

So emerging central banks may have a hard fight to keep a lid on their currencies if outflows from Japan gather momentum. Look at the Korean won — it is trading at a 2-1/2 year high against the yen, having risen 21 percent in 2012, the largest annual gain since 1998. That’s painful for an economy that sends around 6 percent of its exports to Japan; its companies from carmakers to electronics manufacturers compete against Japan for other export markets and all that should eventually force the central bank to step in. The Singapore dollar meanwhile has appreciated 19 percent versus the yen this year.

Japanese citizens have 1,500 trillion yen in personal assets and the mutual fund industry is worth $720 billion. Once the yen debasement gets fully under way, more of this cash will be hunting for yield overseas.



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