Japan faces ‘heavy’ losses in investments tracking Turkish lira

Japanese investors are gearing up for heavy losses as they face a continuation of this year's downward trend following the recent plunge of the Turkish lira. More than half of the 109 live tranche products linked to the Lira currency pair were issued in Japan with only one of them having a capital protection feature, according to SRP data. As of August 17, a total of 59 products featuring the Turkish lira are live in Japan, and represent a sales volume of around JPY350bn (USD$3.1bn).

A senior structured products sales manager at a global investment bank told SRP that there has been demand for emerging market linked products, notably with private banks in Hong Kong, Singapore and in Japan, when it comes to the Asia Pacific region.

"In Japan, it started with the Brazilian real a few years ago, and then it moved to Mexican Peso and other emerging market currencies," the source said. "For the products issued, you would see adverse mark-to-market impact, which highlights the risk of investing in high yielding markets."

The products issued in Japan generally offer high coupon rates hovering of around 5%, but the attractive yield comes at a cost. For example, both of the two income products tracking the exchange rate of the Turkish lira against the Japanese yen that matured just yesterday, August 16, offered fixed coupon rates of 5.5% per annum. The coupon was distributed twice a year. The sales volume of the products - both distributed by Daiwa Securities - amounted to JPY5.14bn. For investors to have their capital back at maturity, however, the final spot rate had to rise above 80% of the initial rate, which was set in August 2015. For the past three years, the value of the Lira nearly halved against the yen.

This year, the Turkish Lira lost over 30% against the Japanese currency, and on Friday last week, the slide turned into a crash, dropping almost 15% against the yen in a single trading day. More than half of the live products in Japan will mature in the next two years.

Among the 59 live products in Japan, Kommunalbanken and Municipality Finance are the two biggest bond providers in terms of sales volume. Kommunalbanken is a triple A rated Norwegian bank owned by the government and Municipality Finance is AA rated financial services provider based in Finland, according to Standard & Poor's. The issuance volume sparked in 2013, and has been on an upward trend until last year.

While some exchange rate linked products are bound to take a hit from the recent Lira crash, greater concern looms around an emerging market contagion and accordingly, dampening the overall investor sentiment. "The collapse of Lira will definitely impact the demand on structured products linked to emerging market currencies, but then, we come to the secondary impact in the market outside the emerging markets and the FX - that it creates a lot of uncertainty," said the banker. "Uncertainty generally means that people are less likely to invest for yield. They would instead hold cash."

Because of the current market volatility, most of the investors are taking a more cautious approach as opposed to seeking opportunistic trades, according to the source.

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