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Yen Carry Trade Data Suggest Cautious Return of Retail Investors

By Daisuke Sakai
A Japanese 5,000 yen banknote in a cup, arranged for a photograph, in Tokyo, Japan, on Friday, May 10, 2024. The Bank of Japan offered to purchase a smaller amount of government bonds in a regular operation on May 13 than it did on April 24 as it seeks to reduce its presence in the country’s debt market. Photographer: Noriko Hayashi/Bloomberg (Noriko Hayashi/Bloomberg)

(Bloomberg) -- Japanese individual investors have been slowly getting back into high-yielding currencies such as the Mexican peso and Turkish lira amid signs the yen’s surge is pausing.

Net short positions in the yen against the Mexican peso and Turkish lira recovered to levels last seen on Aug. 2 , according to data on the Tokyo Financial Exchange’s Click 365 platform as of Monday. Those positions betting on the yen’s drop versus the peso rebounded 19% to 67,808 contracts from Aug. 5, when positions sank 47% in a single day after the Japanese currency surged around the start of the month. 

Positions wagering on the lira’s rise against the yen also recovered 4% to 655,539 contracts from Aug. 5, when those contracts plunged 17% from the previous day, the Click 365 data show. The yen has weakened about 3% from its recent high reached on Aug. 5.

Japanese retail investors had poured into carry trades involving borrowing yen to buy higher-yielding currencies, until the Bank of Japan raised interest rates for a second time this year on July 31, helping spark a jump in the yen against the dollar. That likely caused many of their yen-bearish positions to be loss-making, and due to leverage being involved, possibly resulting in margin calls.

The return of retail investors into the carry trades suggests that their “wounds have healed with the passage of time,” though the rebound has been slow as “investors are returning to the market cautiously, keeping leverage low and risk under control,” said Yoshio Iguchi, head of the market department at Traders Securities Co. in Tokyo.

The Mexican peso has been popular with Japanese individual investors because of its steep yield advantage: the central bank’s policy rate is 10.75% compared with the BOJ’s 0.25%. It also tends to benefit from a strong US economy, and as a resource-rich country it gets a boost from rising energy prices.

Turkey’s policy rate is a whopping 50%, reflecting policy measures aimed at restoring confidence among foreign investors. The top three currency pairs in terms of cumulative trading volume from January to July by Japanese individual investors were the dollar-yen, Mexican peso-yen, and Turkish lira-yen, according to data from the Tokyo Financial Exchange.

(Updates with chart and details about the Mexican and Turkish currencies.)

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