Why Yen Repatriation Theory is All Wrong

The JPY has always tended to strengthen against USD due to their trade surplus against the US. That's why they persistently require Jap Govt intervention. The Jap govt was under pressure from their colonial masters the US not to intervene so that the US can dig themselves out of their economic hole, and so that Obama has a change of getting re-elected in 2012.

But with the earthquake and radiation leakage, there was an unprecendented intervention by G7 countries to intervene against the Yen strengthening. PLUS, the issuance of Japanese govt bonds to finance the rebuilding would have made bond investors jittery. As a result, whatever JPY that has been repatriated cannot outdo the immense monetary easing / quantitative easing that is to come.

Moral of the story: Never fight the governments. Never fight the Fed. You can never win. a weak JPY is "blessed" by G7. It means stock markets will rally.

Published April 5, 2011



Why yen repatriation theory is all wrong

Investors and insurance firms don't need to bring back assets in the wake of the quake





By TAISUKE TANAKA





FOLLOWING the devastating Tohoku earthquake on March 11, the markets assumed that Japan's vast need for financial resources during the reconstruction would bring about a significantly stronger yen. This would happen, the thinking went, because insurance companies and individuals would repatriate large amounts of money they had been investing overseas.







Irrational: Traders pushed the yen beyond 80 against the US dollar for the first time in 16 years on March17 and the G-7 intervened to stabilise the market. Repatriation by retail investors and insurers is unlikely to be sufficiently large to support the yen strength witnessed in the quake's immediate aftermath.

This belief became a self-fulfilling prophecy, as traders pushed the yen beyond 80 against the US dollar for the first time in 16 years on March 17, reaching a record 76.25. The G-7 launched a global currency intervention to stabilise the market.



The only problem is that this investment rationale is a myth. Financial repatriation by retail investors, non-life insurers and life insurers is unlikely to be sufficiently large to support the yen strength witnessed in the quake's immediate aftermath.



To understand why, look at each of the most affected investor classes in turn. The first class is the retail investor base. These investors hold around 25 trillion yen (S$376 billion) offshore. They haven't been repatriating those holdings in large quantities since the disaster, and are unlikely to start now.



History shows that retail investors are willing to send money abroad amid a wide variety of disasters. Of the 107 months since April 2002, only seven of those months have seen net selling of foreign currencies and purchases of yen, including during the most intense periods of global turmoil after the September 2008 collapse of Lehman Brothers. Japanese tend to view overseas investments as medium to long-term sources of income, not rainy-day funds for emergencies.



Early signs show this pattern will continue now. On March 23, a new investment trust managed by Nomura Asset Management raised 29.5 billion yen to invest in US equities, with options to take on separate currency exposure. Overall, Japanese investors were net buyers of foreign securities during the week of March 13-19.



Other factors also affect retail investor behaviour in the wake of the earthquake. Investors in the region most affected by the earthquake and tsunami - who would be most likely to repatriate money to finance reconstruction - have below-average holdings of foreign currency assets. The population of the devastated region has long been conservative in its investment choices.



Meanwhile, owners of foreign currency assets nationwide are unlikely to need to repatriate foreign investment capital to meet current needs for money. Ownership of foreign currency assets increases with income, and those with foreign assets generally have a significant amount of local savings already.



Then there are insurers. The burden facing non-life insurers is not as severe as might at first appear. True, they will face large payouts for policies on commercial properties. But their exposure in the residential market is limited by the government's Japan Earthquake Reinsurance (JER) programme.



In Japan, the majority of the insurance burden for residential property is transferred to the government and to JER. Even if total insured losses reach one trillion yen as reported by the Nikkei on March 21 (and this would be 13 times bigger than the losses endured following the Kobe earthquake of 1995), insurance payments would have almost no impact on the foreign exchange market.



In this scenario, the government would absorb roughly 44 per cent of the losses and JER would pay around 11.5 per cent. Thus, the burden for non-life insurers would reach only around 442.5 billion yen. This is only slightly more than half the 787 billion in yen cash and deposits held by insurers, according to the General Insurance Association of Japan.



JER also holds plenty of liquid assets: 22.4 billion of cash and deposits and 457.3 billion of government bonds.



Reinsurance payments



Meanwhile, although reinsurance flows related to policies on commercial property could reach 891 billion yen, this is smaller than the two trillion anticipated by some offshore investors. Moreover, reinsurance payments are likely to be spread over several months. Hence, these flows will not be sufficiently large to affect overall yen trading dynamics.



Expectations of repatriation of assets by life insurance companies have also been overblown. Insurance payments following the 1995 Kobe earthquake were only 48.8 billion yen, smaller than the amount paid by non-life insurers (78.3 billion yen). While the death toll from last month's disaster may be higher, the balance sheets of life insurers also are much bigger than those of non-life insurers. Life insurers hold more than two trillion yen in onshore cash and deposits, making it unlikely they'll need to repatriate significant amounts.



The earthquake will have an effect on the yen, but it will be different than what is commonly expected. The disaster may make Japanese investors hesitant to expand overseas risk-taking at the same rate as before - net outflows may remain, but they won't be as big as before. By reducing a depreciation pressure, this will ease up one of the brakes on the longer-term appreciation trend.



Overall, then, the G-7 was right to intervene when it did to stabilise the market. Absent the repatriation myth, there was no reason for foreign exchange markets to behave as they did, and the instability was dangerous at a time when Japan's economy can least afford a further negative shock.



Japan's recovery will be helped by maintaining the yen at a more appropriate level.



The writer is chief foreign exchange strategist and head of foreign exchange research, Japan, for Nomura Securities