Japanese investors snapped up 5 trillion yen of foreign assets while the yen sat at better levels
Japan's record effort to prop up the yen has handed carry traders a cheaper entry point rather than closing the trade down.
Japanese investors net bought more than 5tn yen of foreign equities and long-term bonds over the two weeks ended August 15, reversing net selling of over 300bn yen in the prior two weeks, according to Ministry of Finance data cited by CNBC.
The purchases followed last month's joint US-Japan intervention, which lifted the yen from around 164 per US dollar to roughly 155 before the currency surrendered much of that move and drifted back toward 159.
Jesper Koll, expert director at Monex Group, told CNBC that intervention has "turbo charged" the carry trade, and that it will re-assert as long as the cost of money in Japan stays below returns overseas.
He added that Japanese retail and institutional investors have used the stronger yen to build new positions in non-yen assets, particularly higher-yielding US bills and bonds.
The incentive behind the trade survived the operation intact.
The US-Japan 10-year yield spread stood at roughly 1.8 percentage points as of August 20, CNBC reported, leaving the yen under pressure unless the Bank of Japan raises rates enough to narrow it materially.
"The intervention only addressed a 'symptom', but [is] not curing the 'disease,'" Francis Tan, Asia chief strategist at Indosuez Wealth Management, told CNBC, pointing to Japan's low borrowing costs and wide rate differentials with other major economies.
Masahiko Loo, fixed income strategist at State Street Investment Management, said pension funds and asset managers have kept selling yen against higher-yielding G10 currencies.
The market is "far less one-sided than before the intervention," he told CNBC, but funding in yen stays attractive while US-Japan rate differentials remain wide.
Leveraged funds cut net short yen positions from almost 138,000 contracts at the end of June to 59,526 as of August 11, according to Commodity Futures Trading Commission data reported by CNBC.
Ashwin Binwani, founder of Alpha Binwani Capital, said institutional investors remained positioned in carry trades against a basket of G10 currencies led by the Australian dollar, and that he exited long dollar-yen positions after the intervention before re-establishing them just above 157.
That unwind has narrowed the gap between yen and Swiss franc short positions, prompting the start of a rotation toward the franc as a funding currency, Reuters reported, citing analysts and investors.
Swiss rates sit at zero against Japan's 1 percent.
"Not only are Swiss rates lower than the Japanese yen, but (franc) volatility is lower as well," Adarsh Sinha, head of global G10 FX strategy at BofA, told Reuters.
BofA has a long-standing recommendation to sell the franc against the yen targeting 190 yen per franc, from 196 at the time of the Reuters report and 200 before the intervention.
Chris Turner, global head of markets at ING, told Reuters it will "take a lot to shift away from the yen as a funding currency," though enough is happening to break the habit.
He said Japan wants a stronger yen while Switzerland wants a weaker franc.
Rabobank last week raised its nine- to 12-month euro-franc target to 0.95 from 0.94, Reuters reported, reflecting expectations of further franc weakness.
The franc traded around 0.9385 against the euro, near its weakest in about a year, having softened roughly 4 percent from March's 11-year peak near 0.9 and fallen nearly 7 percent from an 11-year high against the dollar set in January.
Koichi Sugisaki of Morgan Stanley wrote that the trigger and primary purpose of the intervention was to squeeze speculative positions and discourage rapid, one-way market moves, and the firm noted that the yen's direction reaches US yields, borrowing costs, and volatility even in portfolios holding no yen at all.
Goldman Sachs estimated Tokyo deployed as much as US$85bn over the first two days of the operation, Goldman Sachs Research strategist Karen Fishman said on the bank's Exchanges podcast, adding that Japan retains enough dollar cash for a couple more rounds of similar size.
