Japan's legions of retail foreign-exchange traders, popularly known as Mrs Watanabe, are turning into sellers of yen.
They have shifted from playing the dollar's range against the yen to betting against the Japanese currency after it slumped to six-year lows recently, market participants and data show.
Portrayed as a fictitious housewife margin-trading on her laptop at the kitchen table, these retail investor have a large presence in yen trading and often take contrary positions. This time, they are trading on the market's momentum and positioning for further yen weakness as the Bank of Japan prints money.
For most of this year, Mrs Watanabe and like-minded Japanese retail players "had a prevailing psychology of buying the dollar around 101 yen and selling around 104 yen," said a dealer at a local bank. This strategy worked nicely while the dollar hewed a reliable 100-105 yen range since January.
The market - and Mrs Watanabe's behavior - changed at the beginning of this month, when the dollar tested, then broke decisively above 105 yen on the divergent prospects for Fed and BOJ policy.
The Mrs Watanabe retail traders became big players in currency trading in the past decade, seeking to beat the paltry returns from Japan's near-zero interest rates through such tactics as selling low-yielding currencies like the yen to fund the purchase of high-yielding assets like U.S. government debt.
Ditching the yen now pits them against large foreign hedge funds who have begun buying the currency just as the country's authorities and firms start to question the currency's slide.
If Mrs Watanabe keeps trying to chase the dollar higher against the yen, she could contribute to a market overshoot if the U.S. currency is making a near-term peak. She may also be at odds with the government, which is no longer cheer-leading a weaker yen, and with Japan Inc, which is starting to find the local currency weaker than it would like.
On the other hand, she could be a winner if expectations continue to grow that the Federal Reserve is moving steadily toward raising U.S. interest rates, making the dollar more attractive, while Japan's central bank comes under pressure to cheapen the Japanese currency to bolster a faltering recovery.
CHANGE OF HEART
Ryo Otomura, a margin trader in his 30s, said that as markets reacted to such factors as news of pending portfolio shifts by Japan's mammoth public pension fund, "big capital flows have supported the trend of a weaker yen and stronger stocks, and this has created an environment that's easier to trade."
And as the dollar rose from 102 to 109 yen, he said: "I repeatedly took profits and then chased the dollar higher, with the results that I managed to make some profits."
Riding the dollar's gain, retail investors on Gaitame.com, a major Japanese margin-trading platform, increased their long-dollar/short-yen positions to 57.0 percent at Wednesday's close from 51.5 percent on Sept. 2.
"This year's strategy of selling rallies and buying dips failed" when the dollar broke higher, said Takaaki Kaburagi, a prominent investor who runs seminars for retail FX investors. "They're now taking the stance of chasing the dollar higher."
The dollar rose last Friday to 109.45 yen, its highest since late August 2008, the outset of the global financial crisis. Against a basket of currencies, it logged 10 weeks of gains to a four-year high on the dollar index .DXY.
The dollar retreated a bit against the yen this week, helped by Prime Minister Shinzo Abe's comments to Japanese reporters in New York that he would carefully watch the impact of recent yen weakness on the nation's regional economies.
Around 7.10 p.m. ET on Thursday, the dollar fetched 108.57 yen.
As the dollar rose, Japanese retail traders "got squeezed at the 104 yen handle and again on the 105 yen handle," as they were forced to buy back dollars they had sold at a higher price, said Takuya Kanda, senior researcher at Gaitame.com Research.
"After the dollar rose above 106 yen, they finally gave up on contrarian dollar-selling," he said. "They are ready to buy the dollar on any dips."
By contrast, some nimble players globally are taking money off their bets against the yen, with market participants citing U.S. hedge funds among those buying back the pummeled currency.
Speculators' net short-yen positions on the U.S. Commodity Futures Trading Commission fell 17 percent in the week through Sept. 16 to 83,182 contracts, data show.
To be sure, it is hard for the little guy to have an impact in the $4 trillion-a-day global currency market, but retail investors have outsized importance in Tokyo. They account for 19 percent of domestic spot FX volume, said Citibank senior currency-market strategist Maki Ogawa, versus just 3.5 percent globally, according to Bank for International Settlements data.
Japanese authorities for decades have fought a strong yen, which crimped the value of overseas earnings and exacerbated deflation by making imports cheaper. Now, though, Abe and his government are making more balanced comments about the yen, as its fall pushes up the price of imported energy and raw materials with inflation outpacing wage growth.
Even BOJ Governor Haruhiko Kuroda, who said the yen's fall was a welcome consequence of global monetary policy divergence, has changed his tone slightly saying he sees no problem with the yen's recent slide but declined to comment whether it was good for the economy or had proceeded too fast.
The yen's rapid descent is starting to push beyond comfort zones for three-quarters of Japanese firms, the Reuters Corporate Survey found last week.
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