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It has generally taken international coordination to forge real inflection points in the yen’s value. But as Alphaville explored on Monday, when it comes to FX, Japan’s Ministry of Finance looks generally to have bought low and sold high. Which got us wondering: how good a trader have they actually been?
Interventions run through the Foreign Exchange Fund Special Account, which was set up way back in 1949. It funds any purchases of dollars/ euros/ Indonesian rupiah (yes, really) by issuing short term bills. And when the MoF wants to buy back the yen they’ve gone short, these bills are redeemed.
If the FEFSA were a macro hedge fund it would charge hefty fees on total returns. The MoF — as manager and principal — similarly takes a cut, but the cut is taken only from the fund’s overall surplus, which consists of interest income and any realised trading P&L, minus financing costs. Part of the surplus is reinvested in the fund, and part cashed out in the form of transfers to the MoF’s General Account to pay the salaries of teachers and nurses, rather than then iPad butlers sometimes employed by hedgies.
While hedge funds get a fixed 2 & 20 (or whatever), the MoF sweeps to the General Account a fluctuating share of the surplus:
But while the financial statements show handy trading profits, what they don’t show is the MoF’s mark-to-market P&L. What might that number be?
Every month, Japan’s Ministry of Finance releases data detailing FX interventions. We cross-referenced their data going back to 1991 against daily currency rate closes, and assumed that the interest rate paid or received on foreign currency balances and yen balances corresponded to the central bank policy rates.
According to Chris Scicluna, head of research at Daiwa Capital Markets Europe, FEFSA profits transferred to the revenue of the General Account for the following fiscal year are converted from foreign currency to yen.
We think that cashing out the bulk of the positive carry each year would require the MoF to flush these transfers through foreign exchange spot markets — how else do you realise in yen those dollar interest payments?
Annoyingly, we can’t find any published time-series for these trades. Nor can we find a time-series (at least one in English) of these transfers from FEFSA to the General Account that stretches back into the 20th century.
In an effort to pull together some kind of number, we’ve observed that over the past six years transfers to the General Account have averaged three-quarters of the portfolio’s reported positive carry. And so we’ve recklessly backcast this heuristic through the data in the quest to produce a cool chart.
Please now take a moment to wonder at the product of our labour:
We count the total amount of yen sold against the US dollar in foreign exchange interventions since 1991 at ¥50.35tn — which is around US$330bn using current exchange rates. The constantly shifting US dollar value of these cumulative interventions is shown by the red line.
And we count the quantity of US dollars amassed (including a quarter of the interest rate differential paid on these US dollar holdings) to be around US$660bn. The evolution of this total is shown by the blue line. The gap between these two numbers (shaded) is currently in the region of $330bn.
We built this chart out with care, using daily data to map intervention points and accrue positive or negative carry. But given the heroic assumptions made, we’re keen to slap this estimate with a big enough health warning to prevent all but the most cavalier from leaning too hard on our results. However, even if it’s off by a cool hundred billion dollars, the unrealised P&L looks pretty big.
That said, tweaking the assumption as to how much the MoF skims makes quite lot of difference to the unrealised P&L estimate. For example, if we drop the assumption that the MoF skims three-quarters of the carry off each year, the unrealised P&L estimate jumps to around $610bn. Or if we assume that the MoF skims all the positive carry into the budget this unrealised P&L falls to a mere $255bn.
If you wanted to see how the unrealised P&L varies depending on what sort of assumption we use, toggle the drop-down in the chart below:
This Friday the MoF is set to publish January’s intervention data. So we’ll soon get to see whether last Friday’s rate check was followed up with some actual dollar sales/ yen purchases (as long as any trading came before Thursday which we understand was the cut-off). To the extent that the BoJ was in the market on the MoF’s behalf, the world’s largest long dollar/ short yen carry trade will shrink — if only at the margin.
We know that the MoF doesn’t really operate as a big macro hedge fund. Its interventions are conducted instead, they write, merely “to contain excessive fluctuations in foreign exchange rates and to stabilize them”.
But if it was a big macro hedge fund, we imagine that crystallising hundreds of billions of dollars of unrealised P&L would be tricky even in as liquid a cross as USDJPY without moving the market substantially. So it’s lucky not only that the issue is moot but also that President Trump seems relaxed about the prospect of a weaker dollar (even if his Treasury secretary appears less so).
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