Household yen selling, which has been attracting attention as a cause of the yen’s depreciation since the beginning of the year, is beginning to show signs of a shift. Since the issue is related to the medium- to long-term outlook for the yen exchange rate, I would like to summarize the current situation. Daisuke Karakama’s column. Photo taken in 2020 in Tokyo (2024 Reuters/Issei Kato)
[Tokyo 28th]- Household yen selling, which has been attracting attention as a cause of the yen’s depreciation since the beginning of the year, is beginning to show signs of a change. Since the issue is related to the medium- to long-term outlook for the yen exchange rate, I would like to summarize the current situation.
Foreign securities investment through investment trust management companies (hereinafter referred to as investment trusts), which has been attracting attention as a proxy variable for “household yen selling”, was announced in November as an increase of 393 billion yen, the first small increase in about 13 months since last September. The amount remains at the net purchase amount. By product, stocks and investment fund holdings increased by 271.7 billion yen, medium- and long-term bonds increased by 86.3 billion yen, and short-term bonds increased by 35 billion yen, all of which secured net purchases after the new NISA (Small Investment Tax Exemption System) became operational. However, it remained at an extremely small scale. The reason for this is not clear, but in October, expectations were high that Mr. Trump would win, and despite dramatically weak results such as the September employment statistics, the combination of rising U.S. interest rates, a strong dollar, and rising stock prices. The trend towards higher prices was becoming stronger. Under these circumstances, there is a strong belief that there has been a move to sell off (cut losses) from U.S. Treasuries, including investment trusts (related to household finances).
As far as medium- and long-term bonds are concerned, there was a historically large net purchase of around 400 billion yen in the August-September period, when the Federal Reserve’s interest rate cuts were a hot topic. The explanation that the loss cut was preceded is certainly persuasive, and perhaps we should appreciate the fact that the stock was able to maintain a net buy position rather than a net sell position.
＜Overall, largest net sales ever＞
Net selling of foreign bonds was also a theme in October. Overall foreign securities investment in October was minus 6,498.7 billion yen, the largest net sell-off ever. This was largely due to the largest net sell-off in medium- and long-term bonds, at minus 4,488.1 billion yen. However, it should be evaluated in conjunction with the fact that in August, there was an increase of 7.337 trillion yen, the largest net purchase ever. The above-mentioned story of “I bought it in August and cut my losses in October” is quite convincing.
On the other hand, if we look at inward securities investment, there was a positive net purchase of 6,593.4 billion yen, so the net total of foreign and domestic securities investment was an additional 13,092.1 billion yen (6,498.7 billion yen + 6,593.4 billion yen). There will be an excess of inflow. This is also the largest ever.
However, what actually happened in the foreign exchange market was a sharp rise in the dollar/yen exchange rate, symbolized by the dollar/yen pair settling at the 150 yen level. Because the volume of foreign exchange hedged flows in both domestic and foreign securities investment is correspondingly large, it is difficult to find a stable relationship between net capital inflows and market exchange. In particular, since most inward securities investment currently consists of stocks and investment fund interests, it is highly likely that this portion is a foreign exchange hedged flow.
Under such circumstances, trends in investment trusts have been attracting attention, as many of the “household yen selling” associated with the operation of the new NISA does not have currency hedging, and has become a huge outright yen selling entity. It has been pointed out that there is a suspicion that
In fact, there is a strong suspicion that this flow contributed to the yen’s depreciation in the first half of 2024. Although the market stalled in September and October, net purchases of investment trusts in the first 10 months of the year reached an additional 10,104.5 billion yen. Even if we cannot predict the pace of net buying for the remaining two months, we cannot help but link the fact that investment trusts have already sold more than double the amount of yen sales compared to last year (plus 4.5 trillion yen) to the weakening yen market. That is why it is worth paying attention to whether “household yen selling” will continue to decline.
Considering that speculative yen selling has increased since November in response to interest rate differences, and the Dow Jones Industrial Average has continued to seek record highs, the household sector’s desire to invest in foreign currency-denominated assets is probably recovering. I believe that this will come to an end, but it is possible that decisions that seem prudent in the short term, such as “selling while the price is high” while keeping the experience of August etched in one’s mind, will be prioritized. If that happens, it is important to keep in mind the risk that the buying and selling trends via investment trusts will turn into net selling. This in itself is a change in the tide that will contribute to suppressing the yen’s depreciation, and can be said to be a positive story for Japan, where growth has been restrained in recent years in response to the deterioration of the real income environment. On the other hand, some people may view this as a stumbling block from the perspective of a nation built on asset management.
In addition, even in the UK, which has the original form of the new NISA, ISA, British stocks are being avoided, and capital is reportedly fleeing to foreign assets such as US stocks. The situation can be said to be similar to Japan. In the end, if the transition from saving to investment is not completed in tandem with the growth of the domestic economy, it will lead to capital flight.
In this regard, in March of this year, the then British Sunak government (Conservative Party) added 5,000 pounds to the current 20,000 pounds per year tax-exempt limit as part of an ISA reform plan from the perspective of resolving the situation. They had proposed a proposal (hereinafter referred to as the Sunak proposal) that would be limited to British companies. However, the Starmer government (Labour Party), which took office after the general election in July this year, has expressed reluctance to encourage people to use specific assets, saying that it is unsupportable from a risk diversification perspective, and there are concerns that this will become a reality.
In conclusion, the Starmer government’s argument is correct. Policy guidance that gives consideration to specific assets is not theoretically sound. In this column, in May of this year, I proposed the idea of establishing a domestic priority quota in response to the growing trend of “household yen selling” through the new NISA, but from the same point of view, I have not heard that it is inappropriate. It looked appropriate.
However, at the same time, we received an equal number of comments saying, “Maybe it’s worth considering.” The author believes that the reason for such support is that the concerns related to capital flight faced by the UK ISA and the new NISA are “similar and different.”
The reason behind the discussion of domestic priority allocation for UK ISAs is that there is a clear intention to “make adjustments to British stocks that are not being selected.” In the UK, as part of pension reform, a plan to direct asset management to the UK is being discussed, and the government has made no secret of its intention to support domestic stock prices through government intervention. Attempts to force new money from pensions and households to overcome the “slump in domestic stock prices” are not only unsound, but also probably not sustainable.
On the other hand, if Japan were to consider giving priority to the domestic market under the new NISA, the issue would be “controlling the depreciation of the yen” rather than “slumping domestic stock prices.” This is a big difference. A decline in stock prices is certainly a market phenomenon that should be suppressed, but the depreciation of one’s own currency, which is difficult to control, undoubtedly has a more direct impact on people’s lives. In recent years, the phrase “bad yen depreciation” has attracted attention, and in recent years Japan has taken countermeasures in terms of currency and monetary policy. Under these circumstances, even though we have the banner of being a nation built on asset management, since policies that encourage yen selling are being pursued in a different direction, I think it would be good to have a little more constructive discussion about the consistency of these policies. feel.
The concern in Japan is not that funds are not going to Japanese stocks, but the larger theme of chronic depreciation of the country’s currency. In other words, the question is what the basic policy should be, which issue to place more emphasis on, “controlling the depreciation of the yen” or “promoting internationally diversified investment.” If the latter is the case, then it would be right to reject the idea of domestic priority quotas on the grounds that “policy guidance that gives consideration to specific assets is unsound.” If instead, “controlling the depreciation of the yen” is a priority issue, then there are things that should be done, even if it means putting a damper on internationally diversified investment.
Due to space limitations, I will not conclude here which is correct. Above all, it is the government elected by the people that decides this. In the first place, no one really knows the causal relationship between this year’s depreciation of the yen and the yen selling related to the new NISA, so there is a view that there is no need to think about it so exaggeratedly. However, I think it is important to note that the reform discussions taking place in the UK’s ISA cannot be directly applied to Japan.
Edit: Erika Mune
(This column was posted on the Reuters Foreign Exchange Forum. It is written based on the author’s personal views)
*Daisuke Karakama is the chief market economist at Mizuho Bank. After graduating from Keio University’s Faculty of Economics in 2004, he joined the Japan External Trade Organization (JETRO). From 2006, he was seconded to the Japan Economic Research Center, and from 2007 to the European Commission’s Directorate-General for Economic and Financial Affairs (Belgium). Mizuho Corporate Bank (currently Mizuho Bank) since October 2008. When he was seconded to the European Commission, he was the only Japanese economist involved in preparing the EU economic outlook. His books include “European Risk: Japaneseization, Yenization, and Bank of Japan” (Toyo Keizai Inc., July 2014) and “ECB European Central Bank: From Organization and Strategy to Banking Supervision” (Toyo Keizai Inc., November 2017). month). Has appeared in many media such as newspapers and TV.
*The content such as news, trading prices, data and other information in this document is provided by the columnist for your personal use only and is not provided for commercial purposes. there is no. The content of this document is not intended to solicit or induce any investment activity, and it is not appropriate to use this content for the purpose of making decisions regarding trading or buying or selling. This content does not provide any investment, tax, legal, etc. advice that constitutes investment advice, nor does it make any recommendations regarding specific financial stocks, financial investments, or financial products. Use of this document is not intended to replace investment advice from a qualified investment professional. Although Reuters uses reasonable efforts to ensure the reliability of content, any views or opinions provided by columnists are their own and not those of Reuters.
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What specific policy mechanisms could the Japanese government implement to address the yen depreciation caused by increased yen selling by individual investors, while still encouraging international diversification of investment portfolios?
This column analyzes the impact of Japanese individual investors’ yen selling behavior on the foreign exchange market.
Here are the key takeaways:
* **Increased Yen Selling**: Japanese investors have been selling yen and buying foreign assets, mainly through investment trusts (similar to mutual funds). This trend accelerated in the first half of 2024 after the introduction of the new NISA (Similar to the UK’s ISA), a tax-advantaged investment program.
* **Impact on Yen Depreciation**: This yen selling is suspected of contributing to the yen’s weakening against the US dollar, particularly in the first half of 2024.
* **Debate on Policy Response**: This raises the question of whether a policy response is necessary. The author compares the situation to the UK, where the government is also grappling with capital flight but faces a different set of challenges.
* **Domestic Priority Quota**: The author proposes the idea of a “domestic priority quota” within the new NISA, encouraging investment in Japanese assets to counteract yen depreciation.
* **Balancing Priorities**: The column argues that
Japan needs to strike a balance between promoting internationally diversified investment and controlling yen depreciation. While encouraging investment in foreign assets is generally beneficial, the impact on the yen exchange rate needs to be considered.
* **Contextual Differences**: While the UK’s ISA reforms stem from concerns about underperforming domestic stocks, Japan’s issue is primarily currency depreciation. Therefore, solutions may differ.
**Further Points**:
* **Complexity of Market Factors**: The author acknowledges that the relationship between foreign exchange flows and market behavior is complex and not fully understood.
* **Future Outlook**: The article concludes that further discussion is needed to determine the most effective policy approach, taking into account both the benefits of international diversification and the potential downsides of yen depreciation.
The column provides a valuable perspective on the growing phenomenon of Japanese yen selling and its potential consequences for the Japanese economy. It highlights the need for a nuanced policy response that considers both the short-term and long-term implications.
