Photographer: Kiyoshi Ota/Bloomberg

Once Bitten, Twice Eager: Japan Investors Mimic End-2015 Wagers

  • Leveraged funds boost bearish bets as margin traders cut them
  • Overseas investors come back to Japanese stock market

Foreign investors will be hoping Japanese assets deliver a kinder start to 2017 than they got this year, because they are back to shorting the yen and piling into Tokyo equities, two trades that brought savage losses at the start of 2016.

Hedge funds are turning bearish on the yen in the longest streak since 2007, putting them at odds with local retail traders who have pared back their wagers for declines in the Japanese currency. For equities, the return of foreign demand is reviving optimism the Nikkei 225 Stock Average will resume its climb toward 20,000 and above.

Read More on Japanese markets’ wild 2016 here

The following charts highlight the contrast between overseas yen bears and their more cautious local counterparts, the central bank’s ongoing role as the elephant in Japan’s bond market and foreign money piling back into the nation’s stocks.

Japanese retail investors trimmed yen short positions to 58,902 contracts as of Dec. 6, which was the least bearish positioning at least since 2013, according to data compiled by the Tokyo Financial Exchange. They cautiously brought them back up to 67,178 a week later. While leveraged funds boosted bearish yen bets to the most this year, the level is still low enough to allow for further positioning, said Takuya Kanda, a senior researcher at Gaitame.com Research Institute Ltd. in Tokyo.

“As long as optimism for Trump’s economic policies is alive, speculators will continue to build dollar-yen longs, but an unwinding of these positions would amplify any decline in dollar-yen,” Kanda said. “There is still sufficient room both for Japanese margin traders and overseas speculators to short yen.”

Monetary policy remains the biggest driver for the government bond market as the Bank of Japan continues to buy about 9 trillion yen of debt a month, leading to shrinkage of market transactions and spurring speculation the BOJ may have to slow purchases. The central bank is likely to refrain from cutting back buying drastically because such an action could trigger a yen gain, said Toru Suehiro, a senior market economist at Mizuho Securities Co.

However, a rising dollar is expected to prevent the Federal Reserve from raising the benchmark rate next year, driving dollar-yen down toward 100, Tokyo-based Suehiro said. As markets start to price in a cut to the BOJ’s policy rate, the yield curve is likely to bull-steepen, he said.

Global funds bought Japanese equities for a second consecutive month in November, which was the first back-to-back monthly purchases in a year. Foreign investors had been mostly net sellers this year because of the slowing momentum of corporate earnings and stronger yen, said Kiyoshi Ishigane, chief strategist at Mitsubishi UFJ Kokusai Asset Management Co.

Japan’s fiscal stimulus and a pickup in global economic recovery will be positive for the nation’s stocks and corporate earnings next year, he said. The Nikkei 225 Stock Average may rise toward 21,500 by the end of next year, he said. The gauge closed at 19,444.49 on Wednesday, close to a one-year high.

— With assistance by Hiroko Komiya

    Before it's here, it's on the Bloomberg Terminal.
    LEARN MORE