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Japanese Day Traders Try "Carry" Trade

by Christopher Chantrill
March 12, 2007 at 11:34 am

REMEMBER 1999-2000?  THAT was the heyday of the day traders, amateurs trying their hand at making money in the stock market during their coffee breaks at work.  It was an early warning of the NASDAQ meltdown: when the little guy gets in, it’s time to head for the exits.

It’s happened before.  In 1929 Joe Kennedy (yes that Joe Kennedy) reckoned it was time to get out of the market when his shoe-shine boy started giving him stock tips.

It’s deja vu all over again.  In Friday’s Wall Street Journal Yuka Hayashi writes about "Japanese Addiction: Currency Bets" (sub. required).  A lot of Japanese small investors are borrowing yen to buy foreign currency.  In other words, they are engaging in the "carry" trade just like the big boys in the hedge funds.

Only, of course, we are probably in the last days of the "carry" trade.  It worked so long as people could borrow yen at nearly zero percent interest and then use the proceeds to buy other currencies and get five percent on their money.

But notice what happens if the yen goes up.  That means that the other currency goes down.  If it goes down by five percent or more, the investor is under water.

Take the case of Naomi Kashiwazaki.  Hayashi writes:

She trades currencies from her small apartment in Tokyo’s suburbs.  She started about a year and a half ago to supplement the income from her online store... In recent months, she has earned an average profit of $8,600 per month.

But probably not in the last month, for since March 1 the yen has suddenly risen by about four percent against the dollar.

This sounds like something that is going to end in tears. 

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Christopher Chantrill blogs at www.roadtothemiddleclass.com.  His Road to the Middle Class is forthcoming.

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©2007 Christopher Chantrill