Currency-Linked Notes Miss Japan Demand Revival as Yen Rebounds

  • Japan uridashi bond sales rose 42% to $1.66 billion last month
  • Currency-linked note sales slumped 82% in same period

After staying on the sidelines for months watching the markets gyrate, Japanese household investors are heading back into so-called uridashi bonds. Well, except for such securities linked to currencies, which aren’t getting much love.

Sales of the notes that target Japanese individuals rose 42 percent from September to $1.66 billion in October, the first increase after four months of declines as equities rallied globally, according to data compiled by Bloomberg. While bonds tied to stocks and interest rates gained, those linked to foreign exchange rates slumped 83 percent to $21.8 million in October, as the yen’s rebound from 13-year lows reduces the likelihood Japanese investors will profit from gains in overseas currencies versus the yen, the data show.

Strategists surveyed by Bloomberg strengthened their median year-end yen forecast to 122 per dollar, from 125 expected in September after the Bank of Japan refrained from adding monetary stimulus last month. A recovering share market could encourage Japanese investors to take more risks, with the Nikkei 225 Stock Average seen rebounding 4.6 percent to 20,000 by the end of 2015, according to a Bloomberg poll last month.

“The change in interest away from investments tied to yen depreciation largely reflects the period of stability we have been seeing in the yen,” said Shane Oliver, a Sydney-based global strategist at AMP Capital Investors Ltd. “While I think the bulk of yen depreciation is behind us, it could still go a bit further to the extent that there is still a good chance that the BOJ will ease further.”

BOJ Effect

A total of $11.6 billion of uridashi notes tied to foreign exchange rates have been sold since 2013, the year the BOJ started its unprecedented bond-buying policy, compared with $7.1 billion before that, according to Bloomberg-compiled data going back to 1997.

More than half of these securities sold this year are tied to emerging market currencies like the Brazilian real and Turkish lira, and most profit when the yen weakens against those currencies.

Japan’s central bank will probably eventually boost stimulus as inflation slows, but even if it doesn’t, tighter monetary policy in the U.S. will put downward pressure on the yen, according to Marcel Thieliant, a Japan economist at Capital Economics.

A 623 million yen ($5.1 million) 10-year note offered by Societe Generale SA on Oct. 21 pays 8 percent for five years, and then returns are linked to any Brazilian real gains against the yen relative to the level set last month, with the coupon floored at 0.1 percent, Bloomberg-compiled data shows.

“There are always people doing the contrary of what the majority is doing,” according to Yugo Okumura, a financial engineer at Societe Generale in Tokyo. A lower foreign exchange spot level allows investors to buy the investments at a lower strike level, which is the same as buying a stock when its price is low, Okumura said.

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