Yen Carry Trade

 

According to financial industry sources, the won-yen carry trade earnings rate index based on the currency values and market opportunity rate reached 191.30 on Nov. 3 and 190.87 on Nov. 5. These are the highest ever since the global financial crisis in 2008, which means the investment of yen in won-denominated assets has become more attractive than before.

These days, the widening interest rate gap between Korea and Japan and the weak yen are providing opportunities for Japanese investing in won-denominated bonds. According to the Financial Supervisory Service, Japanese investors continued their net purchase in the Korean stock market between April and September of this year. The cumulative net purchase amounted to 3 trillion won (US$2.8 billion) for the half-year period. The amount can be divided into 1.002 trillion won (US$919 million) for the second quarter and 1.991 trillion won (US$1.8335 billion) for the following quarter.

In addition, the buying streak is likely to continue for a while, as the Japanese Government Investment Pension Fund (GPIF) is planning to raise its foreign shareholding from 12 percent to 25 percent. “Approximately 1.8 trillion won [US$1.6 billion] can additionally flow into Korea if the percentage is increased to 25 percent as scheduled,” Daishin Securities predicted, adding, “Then, 4.8 trillion won [US$4.4 billion] of it will be spent in the stock market.”

“Now that the GPIF’s asset rearrangement and benchmark change plans are fixed, it seems that its overseas investment will be adjusted according to the new benchmark until April 2015, when the new ratio becomes effective,” said research analyst Oh Seung-hoon at Daishin, continuing, “Japanese investors are expected to focus the most on Korean stocks from now to March 2015.”

Concerns are present as well in that the bullish Japanese stock market benefiting from the weak yen could lead to weaken the yen carry trade. Empirically, call money showed no increase at all last year, when the Japanese stock market enjoyed a rare boom. The call money accounts of foreign banks in Japan have been a sort of yardstick for past yen carry trade trends.

Copyright © BusinessKorea. Prohibited from unauthorized reproduction and redistribution