Yen: Speculation, Repatriation and More

There seems to be a general consensus among observers that contrary to the talk of repatriation that the yen's rise is largely speculative in nature. This is very much in line with our assessment from the get-go. Subsequently, data strengthened out conviction. At the same time, there are a couple of other elements that we have mentioned but are worth reiterating given the pace of the yen's rise.

First, Japanese retail accounts for upwards of 20% of the yen turnover in Tokyo. We have looked at the positioning and found little change thus far. However, if these short yen positions are unwound it would not be speculation, but rate the unwinding of previously established speculative positions.

Second, Japanese official data shows foreign investors bought roughly $20 bln worth of Japanese equities in Jan-Feb. Some equity fund managers hedge some of all of their currency exposure. Given the slide in Japanese equity prices, and the proximity of month end and quarter end, some yen buying could be related to hedge adjustment. Essentially, a currency hedged equity fund would find themselves over-hedged.

Third, press reports interviewing officials at top US mutual funds with the largest allocation to Japan do not appear to be panicking, with the general sense that it is too early to assess the impact. Company-by-company impact needs to be determined and this will take time.

Fourth, there are some indications that despite the deluge of liquidity the BOJ has pumped into the Japanese banking system, for various reasons Japanese banks have been reportedly reluctant to make this yen fully available to foreign counter-parties. This may be particularly important for foreign banks who have been using yen to fund (in part) their balance sheets.

This suggests that in addition to possible intervention, outside of the psychological support Japanese officials seem to want from the G7, activating yen swap lines would be another course for officials to consider.