As the principle vehicle in the global carry trade, the JPY has been buffeted far more than any other currency by the vagaries of investor risk appetite and given its roughly 15% rise against the USD in the seven months after the credit crisis erupted back . in August, it is little wonder that Japanese politicians have expressed concern about the currency's excessive movements. However, the risk, if anything, is for a similarly turbulent period in the weeks ahead. Indeed, just as speculators have been building up large bets on the unit's continued appreciation, the JPY has been on the slide.

With risk appetites subsiding in the aftermath of last August's credit crisis, speculators reduced their short JPY futures positions and, presumably, given the unknown (but assumedly large) dimensions of the global carry trade, began to swiftly reverse their exposure to the unit. Indeed, CFTC data show that a net short futures position of 190,000 contracts in the JPY last July recently turned into a net long position of some 52,298 contracts. Yet, amidst a general perception that the worst may be over for global markets (as far as the credit-related fall-out is concerned), investors have once more turned to the trades that served them so well prior to the onset of crisis. This has seen a marked depreciation of the JPY generally and USD/JPY has now risen over 6% since the middle of March. Moreover, other more 'fundamental' forces appear to be building that may exacerbate this nascent trend.

These forces pertain to investment flows. Although the latest official data showed that Japanese investors repatriated a net JPY834 billion in fixed income capital in the last week of the 2007/08 fiscal year, this still left the average net weekly flow for the quarter in positive territory i.e. an outflow of capital-and to the tune of JPY347.7 billion. Given that Japanese investors repatriated an average of JPY179.3 billion per week in Ql last year (and JPY255.5 billion the year before that) as part of a familiar "window dressing" exercise ahead of financial year book-closing, then it would seem that in 2007/08, the opportunity cost of their doing so was that much greater. That Japanese investors remain predisposed to yield-seeking in foreign bond markets is unsurprising given the depressed level of JGB yields (of 1.3% on the 10-year note) and fears of deflation's return (amidst growing doubts over the Japanese economic outlook).

Given that low Japanese interest rates make FX hedging attractive to foreigners when purchasing Japanese assets, it is these outward bound fixed income flows (by far the dominant asset class) that should preoccupy currency markets. Any further downward pressure upon the JPY can only add to the pain of those speculators running long positions in the unit, which means in the event of their sudden capitulation, the Japanese unit could be sent sharply lower across the board.

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