Day Traders in Japan Bet the World is Wrong About a Weak Yen

(Bloomberg) — Japan’s day traders are making record bullish bets on their home currency, just

(Bloomberg) — Japan’s day traders are making record bullish bets on their home currency, just as the world turns against it.

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As the yen slumped to a six-year low against the dollar last week, retail investor net-long aggregate positions in the currency climbed to 258 billion yen ($2.1 billion) — an all-time high — according to a Bloomberg analysis of Tokyo Financial Exchange Inc. data going back to 2006. A bulk of the yen positions versus 14 peers were against the dollar and the euro, while investors are bullish the Mexican peso, South African rand and Turkish lira.

The data show mom-and-pop traders have traditionally held net-short positions against the Japanese currency, as they seek higher yields abroad than the near zero at home.

The yen has been the worst-performing Group-of-10 currency this year, down almost 6% against the dollar on a widening yield gap with Treasuries. Soaring oil prices have also put pressure on Japan as a net importer. While its fall may have spurred some contrarian bets, the war in Ukraine, rise in inflation and the Bank of Japan’s persistently dovish stance all complicate the yen’s outlook.

“It seems that the latest bout of FX market volatility, on the back of stagflation angst and geopolitical risks, has made FX carry trades less appealing for retail investors,” said Valentin Marinov, head of G-10 research and strategy at Credit Agricole CIB in London. “This could suggest that these investors could return to selling yen vs higher-yielding currencies once the FX volatility and the yen undervaluation have both abated.”

The sense of shock among retail investors in the face of the currency’s slide this month was seen in a recent email sent by Shinsei Bank Ltd to its customers. “Because of a continued decline in the yen in the foreign exchange market, there are currently a very large number of foreign-currency transactions and telephone lines are crowded,” it said.

Retail margin trades are a big part of Japan’s currency market, accounting for 78% of Tokyo foreign-exchange transactions by one measure last year, according to the latest report from an industry body.

Bearish Calls

Margin traders’ net bullish bets stand in contrast to bearish calls from strategists such as Societe Generale SA’s Albert Edwards, who said the yen may slump to 150 per dollar. That would be the weakest since August 1990, some 18% below the 122.44 level the currency reached in Tokyo trading Friday.

Speculative institutional traders have held net short positions in the yen for about a year, data from the Commodity Futures Trading Commission show.

Contrarian stances from retail traders have backfired on them in the past. As recently as last October, they held bullish bets on the Turkish lira just before that currency slumped more than 30% in the following two months.

Day Traders in Japan Bail Out of Bullish Lira Bets Amid Plunge

The investors have broadly stuck with that trade, with long lira positions still the most popular among the currency pairs studied by Bloomberg. The prospects for near-zero interest rates at home continue to support demand for higher-yielding emerging market currencies such as the Mexican peso and rand — which have been winning bets for the cohort this year.

The Japanese currency rebounded as much as 1% in Asian trading Friday amid a broad dollar decline. Bank of Japan Governor Haruhiko Kuroda reiterated that a weaker yen remains positive for Japan’s economy and policymakers would stick with easing measures, though added he is continuing to watch currency moves carefully.

Kuroda Insists Inflation Will Trigger Policy Change, Not the Yen

“Japanese retail investors are finely tuned to the global macro backdrop and the tensions within the BOJ,” said Vishnu Varathan, head of economics and strategy at Mizuho Bank Ltd. “The yen positions are a reflection of investors safeguarding and hedging their positions offshore as the global shift in policy gets underway.”

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