Dollar-based investors get a free carry trade sweetener for chasing Japan’s hot stock market.
(Bloomberg) — Dollar-based investors get a free carry trade sweetener for chasing Japan’s hot stock market.
For these investors, they get a 5.8% return from swapping their in-demand dollar for yen, near the highest level since 2000. And if they then buy stocks with the Japanese currency, they’ll also have the 2.3% dividend yield offered by the Topix index.
Stock investors do not typically shield against currency risks as fluctuations in equities are generally larger than currency swings. But the Bank of Japan’s negative-rate policy makes it profitable for currency hedging that involves yen shorts.
Read: BOJ’s Ueda Likely to Hold With Bond Market on His Side for Now
International investors were net purchasers of Japanese equities in April and May, during which time the country’s currency weakened about 5%. They bought a net ¥2.74 trillion ($19.6 billion) in May, adding to the largest purchases in a decade of almost ¥5 trillion in April, according to official data.
The Topix index climbed more than 6% in the same period, and is currently trading at the highest level since 1990.
On top of dividend returns, “investors holding the dollar will benefit solely by yen funding and if you get that much return with somewhat limited risks, you would prefer to buy them, rather than T-bills for instance,” said Koichi Sugisaki, a strategist at Morgan Stanley MUFG Securities Co. in Tokyo.
–With assistance from Hideyuki Sano.
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