Who is Mrs. Watanabe?

“Mrs. Watanabe” is the designation used to describe the typical Japanese woman, and she is killing the professional forex market right now.  Currency analysts at places like Deutsche Bank and Goldman Sachs predicted USD/JPY to end this year around 115, or even lower.  But until the catastrophic events of this past week or so, the yen has not been able to do much better 120/dollar.  And much of the reason for that is Mrs. Watanabe.

Fundamentally, the yen should be rebounding.  The Japanese economy is starting to emerge from its decade-long slump, and the currency should rise with it.  But the overnight lending rate in Japan is still only 0.5%, making the currency an attractive borrowing option for the carry trade.  And retail investors are (or at least have been, before this week) in love with the carry trade.

The Japanese retail forex market is especially important because it is bigger than the retail markets in the rest of the world combined.  You can even get savings accounts in Japan denominated in something other than yen.  And in Japan, the investment decisions of the household are made by the wives.  Those wives are as enamored with the carry trade as anyone else.

In July, Bank of Japan board member Kiyohiko Nishimura made a speech praising these Japanese housewives for steadying the forex market.  Historically, the carry trade has always ended disastrously (although it has always rebounded from that crash) with investors across the board rushing to get out of the trade all at once.  Mrs. Watanabe does not act that way, however.  Every dip in USD/JPY is a buying opportunity, and as such, she reduces currency swings.  It looks like the carry trade is near its end.  But it was a good ride while it lasted, thanks to Mrs. Watanabe.  A gnome of Zurich, she is not.

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