Japanese Investors and the Yen Carry Trade

Japanese retail investors have become very active in the Yen Carry Trade, helping to keep the value of the Yen suppressed for now. Here are some interesting quotes from a Bloomberg article:

Trading of currencies in Japan using borrowed funds rose 41 percent in the first quarter to 109 trillion yen ($896 billion), exceeding 100 trillion yen for the first time, the Financial Futures Association of Japan said.

Japanese individuals' trading volume accounts for 20 percent to 30 percent of the interbank foreign-exchange market in the Tokyo time zone,'' Fukaya said. "They are also active in London time after going home. They are becoming a rival to be reckoned with for institutional investors.''

The rise of the carry trade among Japanese retail investors is a good indication that it won't continue much longer. When retail investors arrive on the seen it provides cover for the bigger players to exit. To the average retail investor what's been working lately will probably always work. They here their friends boasting about their easy profits and they hop aboard the train, not realizing the risks they face if their highly leveraged bets go bad from a rising Yen. Just as marginated Nasdaq investors got cleaned out quickly in the sharp decline of early 2000, I expect that many japanese retail investors will have their accounts purged early in the game when the Yen Carry Trade starts to unwind. When it does, over a hundred trillion Yen could potentially be subtracted from the money supply to pay off margin debt. In the meantime, it's the YCT is providing a lot of interest income and trading fees for Japanes banks and brokerages.

Lately the YCT has been working espeicially well for anyone playing it, with the Yen falling against the dollar adding to gains from interest rate differentials: