Market participants in Japan are predicting an increase in US dollar-denominated structured products. The rise is boosted by the depreciation of the Japanese yen, which is at its lowest level since 2008.
Hideaki Takahashi, head of the solutions business at Société Générale in Japan, told SRP that US dollar-denominated products could draw investors, with demand for emerging currencies products on the increase due to the expected rise in US interest rates and stockmarkets.
“Investments in structured products denominated in foreign currencies are more sensitive to changes in interest rate,” he said.
According to Takahashi, the market for emerging currency bonds has remained large since 2012 even though the yen depreciated by 20% in 2013 and has stayed flat in 2014.
“In 2014 we see more demand for medium-term structured notes linked to the Brazilian real, Turkish lira and Indonesia rupiah,” he said.
Takahashi expects that if the prevailing market expectation is realised and the yen depreciates even further, we should see more interest in structured products denominated in US dollars on top of more demand for products linked to emerging currencies.
The depreciation of the yen has little effect on equity-linked products, which make up a large share of the Japanese market, according to Takahashi.
“The yen depreciated 20% in 2013 which coincided with a great leap in volumes for equity-linked products,” he said. “The ultra-accommodative monetary policies outlined by Abenomics actually had more to do with the 40% increase in than Nikkei’s level than as a result of depreciation of yen.”
“Recently, within a month, a 5% yen depreciation pushed the Nikkei by just 4%. Overall, there is a positive impact but it is limited,” he said.
Takahashi said that although volumes of equity-linked products have decreased in general compared with 2013, yen depreciation could have a more direct impact on products linked to stocks rather than those linked to the Nikkei index, provided that volatility of individual stocks also increases with further yen depreciation.
Takahashi does not think that the expected rise in consumer prices would affect investors’ appetite for investing. “There will be no direct impact on retail participation,” he said. “But if alternative assets like gold rise in price, then people will buy more gold.”
On September 8, the Japanese yen has reached its lowest value of 106 yen against $1 since 2008, and dropped further to 109 yen per $1 on September 24.
Related stories:
Japanese investors embrace FX-linked products amid depreciating yen