The Japanese Retail Trading Force
Retail investors, participating in the over $6 trillion forex market, come from all around the globe. But, interestingly, Japanese forex traders are such a powerful force that they have a special label: Mrs Watanabe. The moniker comes from a popular surname in Japan and it became popular during the 1990s when the country experienced an economic slump. At the time, the Japanese economy bubble literally started to burst, and investors started to flock away from traditional investment vehicles, such as stocks and bonds, into currency speculation.
The Birth of Mrs Watanabe
The inherent culture in Japan is that wives control household purse strings, and with dwindling fortunes, they bore the biggest brunt of economic woes. To top it off, when Japan’s Foreign Exchange and Foreign Trade Control Law was amended in 1998 to allow ordinary retail traders to participate, Mrs Watanabe became more prominent. One of the most notable cases of a ‘Mrs Watanabe’ was a Tokyo flower arranger who joined the forex market to bolster her income. She would later earn a suspended jail term for failing to declare earnings of over 400 million yen (about $4 million) to the relevant authorities.
The Forex Boom in Japan
There are over 800,000 forex trading accounts in Japan and ‘Mrs Watanabe’ now refers to any Japanese retail trader, regardless of gender. In the early days, as much as 25% of Japanese retail traders were women, but estimates now suggest that 85% are men, mostly in their 30s, 40s and 50s. The specific demographics of Mrs Watanabe may be changing, but their core strategy has largely remained the same. To bolster its economy, Japan has, for a long time, implemented a rate cut regime, maintaining a near-zero interest rate. Thus, for many Japanese traders, their core strategy has been the ‘carry trade’. Simply put, the carry trade strategy involves borrowing a low-interest currency to buy a high-interest currency. You will eventually be paying the low-interest rate on the borrowed currency, while collecting the higher interest on the currency you bought. Carry trade investors, therefore, seek to collect interest rate differentials between different currencies.
The Carry Trade
For many years, the carry trade was very attractive to Japanese traders as the Bank of Japan regularly intervened to weaken the Japanese yen (JPY) by slashing rates. Traders sought to borrow the yen and buy high yielding currencies, such as the Australian dollar and even exotics like the Turkish lira. However, following the 2008 global financial crisis, many nations pursued low-interest-rate policies, which consequently reduced carry trade opportunities. Still, economies experience cycles of boom and bust, and Japan has maintained one of the lowest rates in the world. This means that there will always be opportunities to churn out profits using this strategy at any given time.
Fundamentally, the carry trade strategy is ideal in a low-risk aversion environment; this is when investors feel like taking on more risk. During high-risk aversion moments, investors prefer to buy low risk, low return currencies like the Japanese yen. The major risk of carry trade is currency fluctuations. Typically, it is exotic currencies that offer the best carry trade opportunities due to their high-interest rates. Ironically, these are also the currencies with the widest fluctuations. This means that although you may buy a high yielding currency and earn the interest rate differential, the underlying currency may also rapidly decline in value and result in an overall loss-making position.
The traditional ‘Mrs Watanabe’ was a patient trader who looked for carry trade opportunities, but the modern Japanese trader has become hungrier and more aggressive in seeking profits out of the market. They are actively speculating on the daily fluctuations of forex rates on various trading platforms that support leveraged trading, where with a small margin, they can make compounded profits. You can check out the most popular trading platforms comparison here. Who knows, maybe you could take advantage of carry trade opportunities too.