Punters Help Carry Japanese Economy

The Age

Friday March 9, 2007

Vanessa Burrow, markets reporter

THE health of the Japanese economy has been boosted by what has come to be known as the carry-trade as strong demand keeps the currency weak, according to a Japan-based economist.

In Australia to meet clients, Brian Rose of UBS Securities Japan said the term carry-trade, which classically refers to people borrowing the low-yielding yen to buy higher-yielding currencies or securities, had come to mean anyone who was selling the yen short or betting it would fall.

"The number of short-yen positions are huge," he said.

"Even individual Japanese investors have bought a lot of overseas bonds, for example, or have set up foreign currency deposits. Instead of getting .1 per cent interest on their yen they can go to just about any bank in Japan now and get US dollar or euro deposits and get much higher interest rates."

Dr Rose said it was this positioning that was keeping the yen weak, although last week in a panic-spurred short unwinding of the carry-trade the Japanese currency strengthened against the dollar, which was as low as $1 to Y89.2 on Monday.

The Aussie was buying Y90.69 at 7pm last night.

"The good news is that Japan in some senses needs a weak yen - this is one reason the Japanese economy is doing better," Dr Rose said.

"The yen is finally weak and the effect is that Japanese corporate profits are much better and you see Japanese industrial production picking up."

The Japanese economy, as measured by gross domestic product, grew by 4.8 per cent in 2006, adding 1.2 per cent in the December quarter. It was the eighth consecutive quarter of growth.

But Dr Rose said the carry-trade and short yen positions, despite helping growth along, had some risks attached to them.

"The real fear from Japan in terms of the carry-trade is that it might end very quickly," he said.

"If all these short yen positions were unwound too quickly the yen could strengthen very dramatically and this could push the economy back into deflation."

Turbulence in equity markets worldwide convinced some carry-trade dabblers to pull out last week and the yen did strengthen against the Australian dollar for six consecutive days. It made similar moves against the US dollar and the euro.

But even with recent increases, Japanese interest rate stands at 0.5 per cent, more than 5 per cent less than Australia's at 6.25 per cent. And the yen weakened again as investors returned to their positions. "In any case the effect is that the yen is extremely weak," Dr Rose said.

But Japan still faces challenges to its economic growth, as baby boomers reach retirement age and demand for expensive services increases.

Dr Rose said the average age of the population was rising by about three tenths of a year per annum, while the number of people of working age was falling by about 1 per cent a year.

"The number of people over the age of 100 is going to almost triple in 10 years and its expected to reach more than half a million people in about 30 years," he said.

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© 2007 The Age

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