FX margining position data for Japanese individual investors shows ‘Mr and Mrs Watanabe’ are confident enough in their view that the yen will not break out of its current range to consistently take the opposite position to the market trend.
Japanese investors stopped out of short positions in the market turmoil following March’s earthquake and tsunami, before rebuilding those positions as volatility abated in April, in particular against the US dollar, says Yuki Sakasai, a strategist with Barclays Capital in Tokyo.
Implied volatility on one-month dollar/yen options was recently hovering around 10%, according to BNP Paribas, compared with more than 20% after the earthquake.
“Japanese investors have played the contrarian strategy since June last year – simply buying on dips and selling on rallies,” Sakasai says. “These investors believe the market is not going anywhere.”
Barclays calculated the contrarian play by regressing monthly changes in retail investor positioning with currency returns and reading the size of the negative beta on the regression as an indicator of contrarian trading style. Negative beta means less volatility than the market.
In the period following the earthquake the beta was briefly positive, but quickly turned negative again as investors returned to contrarian trading.
The Bank of Japan kept monetary policy unchanged on Friday, holding interest rates steady in a range of 0% to 0.1%, and maintaining a ¥30-trillion ($370 billion) credit programme and a ¥10-trillion asset-purchase stimulus package.
Deputy governor Kiyohiko Nishimura dropped a proposal to loosen policy further with an expansion of the central bank’s asset-buying scheme, disappointing those hoping that recent weak growth figures would prompt additional stimulus.
Aside from some extreme spikes after the earthquake, the dollar has traded between ¥85 and ¥80 since September last year.
“With the central bank not mentioning any loosening, sellers of the yen are unlikely to see much for the moment, while the yen upside against the dollar is likely to be capped if it happens too suddenly,” says Kiran Kowshik, a currency strategist at BNP Paribas. “Still, the BoJ might accept a slow weakening of dollar/yen if the move is matched by other currencies.”
| Dollar/yen, last 9 months |
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| Source: Bloomberg data |