Yen Carry Trade by Unlikely Candidates

Speculators appear to be playing the yen from the long side. (Read more about the yen carry trade here.) The Commitment of Traders data showed near-historically extreme net long position prior to the middle of last week when the yen was sold off hard. Even if some of the speculative longs were cut, they likely remain net long yen.

Over the last couple of week the BOJ has provided more monetary support and the government has unveiled a larger than expected supplemental budget. At the same time, Q3 growth was revised to 1.3% from 4.8% and officials recognize that deflationary forces will retain a grip on the economy in the year ahead.

Ironically, Mexico has become an early user of the yen as a financing currency. Earlier today it priced a JPY150 bln (~$1.7 bln) 10-year Samurai bond yielding 80 bp on top of the yen swap rate, according to reports. The Japanese government is encouraging the issue. State-owned Japan Bank for International Cooperation will guarantee the principal and the bulk of the interest payments. All told some this Samurai issue will be 95% backed back the JBIC.

Reports suggest the issue is being marketed to institutional investors. It is the first Samurai being issued by Mexico since 2000 when it issued a JPY50 bln 4-year noted.

Indonesia appears to have been the last sovereign to issue a Samurai bond. It issued a JPY35 bln Samurai in July. It was also 95% backed by JBIC. Indonesia, which was rated 4 levels below Mexico by Moody's paid 135 more than yen swap rates for its 10-year bond.

It would not be surprising to see others, especially weak credits (high yielders) issue yen-denominated bonds in Tokyo in the period ahead.