How big’s the yen carry trade?
In recent days, the existential character of that question dawned on a lot of previously oblivious — or anyway uninterested — market participants who suddenly woke up to the structural nature of the positions in question.
About a month ago, the yen’s fortunes turned on a dime, presaging what would eventually crescendo in an 11% rally for the funding leg (i.e., the short leg) of what SocGen’s Kit Juckes called “the biggest carry trade the world has ever seen.”
The fallout only began to make headlines late last week, when an escalating US rates rally tied to soft macro data stoked the already-raging yen fire just three days on from the Bank of Japan’s second rate hike of the year. By the time the “average” market participant was awake to the problem, it was far too late: The Nikkei was down 12% for its worst day since 1987 and the VIX was trebled.
A common refrain over the past 72 hours goes like this: There’s no way the carry unwind’s complete. The trade’s too pervasive and too large. So, to restate the big question, How big’s that trade?
The generally accepted answer puts it somewhere between $3 trillion and $4 trillion. In a Wednesday note, JPMorgan’s Nikolaos Panigirtzoglou broke it down by components, starting with the smallest: Currency-hedged foreign buying of local equities. The figure on the left, below, shows the cumulative increase in foreign investors’ holdings of Japanese stocks since the end off 2022.
If you assume a majority of that has a yen short leg, you’re left to conclude that about $60 billion in positions were imperiled of late. “As the short leg backfired, investors were forced to unwind the whole package, i.e. to unwind the Japanese equity leg also,” Panigirtzoglou wrote.
The figure on the right shows another, larger component: In simple terms, that’s a proxy for foreign investors borrowing in yen to buy other assets. Those loans stand (or stood, past tense) at around $400 billion.
Finally, there’s domestic (i.e., Japanese) investors buying up higher-yielding foreign assets, mostly stocks and bonds. That’s the largest component of the trade. “Japan’s net international investment position, excluding banks, showed portfolio investments into foreign equities and bonds were worth around $3.5 trillion before the correction, 60% of which reflected foreign equities,” Panigirtzoglou went on.
Put it all together and you get about $4 trillion. That’s pretty big. And, according to Panigirtzoglou anyway, additional BoJ rate hikes would very likely induce “more unwinding.” In remarks to Bloomberg this week, his colleague Arindam Sandilya, the bank’s co-head of FX, was blunt. “We are not done by any stretch,” he said, putting the unwind at “somewhere between 50%-60% complete.”
On Wednesday, BoJ deputy governor Shinichi Uchida suggested the bank’s reconsidering the relative wisdom of raising rates again this year.
I wonder how much of these positions, and especially the third, will be unwound.
If you’re a Japanese investor holding ex-Japan equities or fixed income, and haven’t already been forced to liquidate by your risk managers, seems more likely you have a mandate that requires that you to hold that exposure, or are a longer-term holder for whom the past weeks’ losses are irritating but not game-changing.
Yeah. It’s very difficult to get a read on this. So much of what’s “on” at any given time is a carry trade, implicit or otherwise, and more to your point, domestic (Japanese) investors aren’t a monolith. If you didn’t get a shoulder tap in a VaR shock of that magnitude, then no one’s looking over your shoulder.