Japanese mom-and-pop investors’ penchant for seeking high-yield investments overseas is well known. Mrs Watanabe (as the canny player of currency and exchange rate arbitrage has come to be known) invests billions of yen overseas every year via so-called uridashi bonds, debt denominated in currencies with high yields. Data shows the lira has suddenly become the red-hot favourite with uridashi investors this year.
In a note entitled Welcome Mrs Watanabe, Barclays analysts estimate $2 billion in lira-based uridashi issuance this year, ahead of old favourite, the Australian dollar.
So far, Japan’s exposure to Turkey is negligible at just 1.2 percent of their emerging market portfolio investments (Brazil is 4 percent, Korea 3 percent and Mexico 2 percent). But Turkey’s high yields (almost 8 percent on one-year bonds) and the lira’s resilience mean the figure could rise to $5-$6 billion a year. That is almost half of total portfolio flows to Turkey in 2011, Barclays says.
Its analysts note that Brazil has fallen from favour with Mrs Watanabe as the central bank there has cut rates sharply, taxed foreign inflows and pushed the real down almost 10 percent to the dollar. In contrast, the Turkish lira is up 5 percent this year. The central bank has signalled it will not countenance a weaker lira and kept monetary policy tight. It has also not stood in the way of flows to local bond markets which have received almost $8 billion this year from foreigners. Barclays write:
Turkey and some other high-yielding EM countries such as Russia may find themselves beneficiaries of investor interest previously directed at Brazil and the real….If Turkey succeeds in attracting more and more of these flows, the lira exchange rate is likely to benefit, as well as the Turkish bond market where these flows could end up.