Japanese housewives' US$18 billion bet backfires
Japanese investors' US$18 billion bet on Brazilian local debt has backfired as the real, Brazil's currency, has taken a big hit in emerging markets.
DWS Investments' US$615 million Brazil fund, which is marketed to Japanese pensioners and individual investors, lost 4.3 per cent in yen terms over the past 12 months, versus an average return of 12 per cent on developing-nation debt tracked by JPMorgan Chase.
Daiwa Asset Management's US$6.9 billion Brazil Bond fund, fell 0.5 per cent, and a similar fund from UBS declined 1.9 per cent.
Brazilian policymakers have helped spark a 10 per cent plunge in the real against the yen over the past year by carrying out the biggest interest-rate cuts in the Group of 20, buying dollars and imposing taxes on foreign investors.
Japanese individual investors, often referred to as "Mrs Watanabe" because many are housewives, have ploughed into higher-yielding Brazilian local bonds. They're now turning to Turkish and South African bonds to bolster returns, according to JPMorgan.
"Japanese investors have been mainly suffering from foreign-exchange losses from Brazil bond funds," says Masatsugu Yamamoto, senior portfolio manager of the global fixed-income group at DIAM, which has about US$132 billion of assets under management. Policymakers in Brazil "obviously prefer a weaker currency", he says.
Karina Byrne, a spokeswoman at UBS in New York, didn't return a phone call and e-mail to comment on the fund's performance.
Total assets in UBS' Brazil Real Bond Fund have decreased by 35 per cent in the past year to 34 billion yen (HK$3.4 billion).
No Daiwa officials were willing to comment on the Brazil Bond fund.
Paul Terres, an emerging-market debt manager who oversees the DWS Brazil Bond Fund, says his fund's underperformance is temporary because the currency will rebound as growth picks up. The fund has returned 22 per cent in yen terms since its inception in October 2008, compared with a 9.4 per cent advance for Japanese securities tracked by Bank of America.
"I still see the currency appreciating, probably not as much as it was before," Terres says. "People investing in the funds have confidence in Brazil. The attractiveness is still there."
Against the dollar, the real depreciated 12 per cent in the past year, the most among 16 major currencies. While real-denominated bonds rose 18 per cent in the past year, declines in the local currency reduced those returns to 6.3 per cent against the yen, according to JPMorgan. Japanese government bonds rose 2 per cent over the same span.
Average yields on Brazilian local bonds have tumbled to 8.8 per cent from 11.3 per cent in the past year as the central bank cut interest rates by 5 percentage points to a record 7.5 per cent to fuel economic growth. Japanese 10-year bonds yielded 0.82 per cent.
Latin America's largest economy will expand 1.9 per cent this year - one-third of the average of China, Russia and India - say economists. Growth will accelerate to 4.1 per cent next year, their forecasts show.
Brazilian President Dilma Rousseff imposed a tax on currency derivatives trading in July last year and has kept a 6 per cent tariff on foreign bond investors in an effort to weaken the real and revive a manufacturing industry hurt by cheaper imports.
The efforts are curtailing Japanese demand for Brazilian bonds, the Asian nation's third-largest foreign debt holding after the US and Australia. Holdings of Brazilian debt among Japanese mutual funds have declined to 1.4 trillion yen as of July, from 2.1 trillion yen at the end of 2010, according to Japan's Investment Trust Association.
Brazilian Finance Minister Guido Mantega said on September 18 that the Federal Reserve's third round of quantitative easing would erode the competitiveness of Brazilian manufacturers by weakening the US dollar. Mantega coined the term "currency war" in 2010 to describe the use of monetary policy by industrialised nations to boost exports.
"QE3 is a worry of ours," Mantega told reporters in Paris following a meeting with his French counterpart, Pierre Moscovici. "It will resolve lots of problems in the US, but the depreciation of the dollar will cause lots of problems for emerging nations."
The Bank of Japan unexpectedly expanded its asset-purchase fund by 10 trillion yen on September 19 to spur the economy. It kept the benchmark interest rate between zero and 0.1 per cent and opened the door for negative interest rates.
Japanese investors, faced with near-zero interest rates, began accumulating Brazilian bonds and increased their holdings to 1.6 trillion yen at the end of last year, according to data compiled by the Investment Trust Association. In 2007, they held 53 billion yen in Brazilian bonds.
About 1.5 million Japanese nationals or people of Japanese descent live in Brazil, according to the country's embassy. Japanese started to immigrate to Brazil in the early 20th century as labourers working in coffee plantations.
While Brazil's efforts to weaken the real have dampened returns, the slump has created buying opportunities, DIAM's Yamamoto says. Assets under his DIAM Emerging Markets Sovereign Open (Real) fund have increased to 126 billion yen from 101 billion yen at the end of last quarter, according to data on the company's website.
Holdings in Japanese mutual funds investing in Brazilian bonds and in so-called currency-overlay vehicles have dropped to US$75 billion this month from a record US$110 billion in July last year, according to Yujiro Goto, a currency strategist at Nomura.
A currency overlay fund known as double-decker buys currencies including the real and invests in higher-yielding securities, such as non-investment-grade US corporate debt, to boost returns.
"No one will be happy with the declines," Goto says. "They are not rushing to sell, but the momentum is very weak."
Real-denominated bonds sold to Japanese investors accounted for less than 10 per cent total issuance in the first half of this year, down from more than 30 per cent in 2011, according to Junya Tanase, the chief currency strategist at JPMorgan in Tokyo. The share of Turkish lira bonds, which yielded 7.8 per cent on average, rose to 24 per cent from 7 per cent.
"Such shifts will probably continue with the convergence in yield levels in higher-yielding emerging-market currencies," Tanase says.