Borrowing in JPY @ the JPY rate?

[ACooke]

Hey guys,

 

I'm tentative to post this as it's potentially a bit of a throw away question but:

 

I continually hear of many people (outside of Japan) being able to borrow in JPY at the JPY rate (sub 2%) against TSE listed securities.

 

I use IBKR - which it seems many people are able to do this through - but am unable to borrow in JPY.

 

I've asked IBKR customer service who can be notoriously difficult especially through their ticket system and didn't manage to get a coherent response - well coherent to me at least.

 

I think the issues might be one of the following so I was wonder if anyone is borrowing in JPY under similar circumstances and can therefore, knock that circumstance off of my list, or even give me some idea of how I might be able to do so? Are people doing it in a more manual way than they elude to via derivatives or something?

 

Sorry for the tedious question but as you can imagine, it's irritating me having to borrow at like 6% when it seems a lot of people are able to borrow at 1.5% through the same brokerage for reasons I can't seem to understand. I'm hoping I'm just missing something.

 

ANYWAY

 

- I use IBKR Australia.

- IBKR Australia doesn't allow you to retain JPY. For eg. a dividend received in JPY will be transferred out of JPY within a day or 2 (i suspect this is the issue).

- I'm not a 'professional' account - I presume there are high-touch accounts for professionals who (understandably) have access to more and bespoke 'products'.

 

 

Thanks in advance, everyone. 

[winjitsu]

Shorting futures, see:
 

 

[TwoCitiesCapital]

1 hour ago, winjitsu said:

Shorting futures, see:
 

 

 

I've never traded futures directly so maybe I have this wrong 

 

But are futures more like stocks where you trade the cash notional?

 

Or are they more like options where you trade some contract premium that is a lot smaller and settle the notional at the maturity if not closed out? 

 

Because I thought it was the latter and thus shorting Yen futures produces little cash to reinvest, but maybe I have that wrong? 

[ACooke]

Wonderful. Thanks @winjitsu I'll check it out.

I do follow both David and Altay but hadn't seen this.

[winjitsu]

On 2/14/2025 at 6:11 AM, TwoCitiesCapital said:

 

I've never traded futures directly so maybe I have this wrong 

 

But are futures more like stocks where you trade the cash notional?

 

Or are they more like options where you trade some contract premium that is a lot smaller and settle the notional at the maturity if not closed out? 

 

Because I thought it was the latter and thus shorting Yen futures produces little cash to reinvest, but maybe I have that wrong? 

 

More like the latter, you put up a certain amount of margin based on the current price vs settlement, though it's not taken out of your account, just your available margin. And settlement is generally cashless, unless your are doing physical commodity futures (some funny stories about interns in investment banks accidentally taking delivery in CME).

 

The amount of margin you put up depends on the contract, though it's generally low for these cashless ones so you can probably re-invest like 80-90%+.

 

 

 

[TwoCitiesCapital]

7 hours ago, winjitsu said:

 

More like the latter, you put up a certain amount of margin based on the current price vs settlement, though it's not taken out of your account, just your available margin. And settlement is generally cashless, unless your are doing physical commodity futures (some funny stories about interns in investment banks accidentally taking delivery in CME).

 

The amount of margin you put up depends on the contract, though it's generally low for these cashless ones so you can probably re-invest like 80-90%+.

 

 

 

 

This is what I figured - so you're not effectively "borrowing" the notional with this strategy to effect a "carry" trade like OP is referencing. You're just short JPY while receiving a small premium and then required to put up initial margin balance along with daily variation margin calls?

 

It doesn't seem to be an effective way to do the carry trade in size as the short-end (JPY) is going to be a significantly larger notional than the cash received to reinvest at higher rates? 

 

 

Edited Tuesday at 02:50 PM by TwoCitiesCapital

[sleepydragon]

I suspect it's not free lunch -- perhaps when you roll the futures you are periodically paying up for the spread. It's the rolling that will cost you. it's also unlimited risk.

Also doing the carry trade you are betting depreciating Yen, and rising USD.  It's a market where nobody has edge.

I know people do this by getting long term mortgage using their paid-off house in the other country, and then use the proceeds to buy house in USA. That's less risky because the loan is long term. But probably too risky using a IBKR margin JPY loan to buy USA stocks, so I didn't do it (I was thinking about doing this)

 

 

[winjitsu]

1 hour ago, TwoCitiesCapital said:

 

This is what I figured - so you're not effectively "borrowing" the notional with this strategy to effect a "carry" trade like OP is referencing. You're just short JPY while receiving a small premium and then required to put up initial margin balance along with daily variation margin calls?

 

It doesn't seem to be an effective way to do the carry trade in size as the short-end (JPY) is going to be a significantly larger notional than the cash received to reinvest at higher rates? 

 

 

 

But it is the carry trade, since you're short the JPY, paying that 1.5% of interest, and your keeping your base currency as the margin reserve, AUD for OP in this case, earning 4% interest on it. And you to settle up whatever the currency appreciates/depreciates at the end.

But yeah the margin requirement means you can't be 100% short JPY / long AUD like you can with the notional.

[TwoCitiesCapital]

1 hour ago, winjitsu said:

 

But it is the carry trade, since you're short the JPY, paying that 1.5% of interest, and your keeping your base currency as the margin reserve, AUD for OP in this case, earning 4% interest on it. And you to settle up whatever the currency appreciates/depreciates at the end.

But yeah the margin requirement means you can't be 100% short JPY / long AUD like you can with the notional.

 

I was under the impression the carry trade was typically a long/short arrangement where the sides were equal and invested and the proceeds used to actually buy assets. Not just held earning the overnight rate? 

 

In this scenario, you're short a ton of JPY notional with little upfront cash received, only receive a small portion of contract value over time via the variation margin payments (assuming it immediately moves in your direction), and even then most of that isn't investable but needs to remain held in cash to settle variation margin movements against you?

 

So it's a very large short bet on JPY with a very small long bet on higher yielding assets - i.e. the vast bulk of the risk in the short currency side which has little offset. 

 

But the whole idea of the carry trade isn't a currency bet, but a rate differential - borrow at 1% and invest at 4-6% and try to hedge the currency movements while retaining a positive yield differential (or accept the currency fluctuations as long as the yield differential remains large enough to cover them). Right? 

 

Am I just missing something about how the mechanics of this are supposed to work? 

 

Edited Tuesday at 06:14 PM by TwoCitiesCapital

[winjitsu]

 

29 minutes ago, TwoCitiesCapital said:

 

I was under the impression the carry trade was typically a long/short arrangement where the sides were equal and invested and the proceeds used to actually buy assets. Not just held earning the overnight rate? 

 

In this scenario, you're short a ton of JPY notional with little upfront cash received, only receive a small portion of contract value over time via the variation margin payments (assuming it immediately moves in your direction), and even then most of that isn't investable but needs to remain held in cash to settle variation margin movements against you?

 

So it's a very large short bet on JPY with a very small long bet on higher yielding assets - i.e. the vast bulk of the risk in the short currency side which has little offset. 

 

But the whole idea of the carry trade isn't a currency bet, but a rate differential - borrow at 1% and invest at 4-6% and try to hedge the currency movements while retaining a positive yield differential (or accept the currency fluctuations as long as the yield differential remains large enough to cover them). Right? 

 

Am I just missing something about how the mechanics of this are supposed to work? 

 

 

The carry trade is borrowing in a cheap yields, and investing in something higher yield. You can get very creative with it. Currency pairs, bond pairs, currency/stock etc.

 

Back in the 2014 EU Crisis, you had short German Bonds, Long PIG bonds, and when those heavily in-debted PIGs had issues, you saw the unwind of the carry trade and a crisis. In the Asian Financial Crisis, you had many folks borrowing USD, investing in ASEAN currencies and bond that had higher rates and a unsustainable dollar peg, which also blew up. Carry trade can also help explain forex moves, for example the high rates on USD right now attract investors in low interest rate countries like JPY, CNY, CHF to sell their currencies and buy USD.

 

In Japan you have Short Yen, Long Something Higher Yield. The carry trade in short yen is enormous right now given their decade of ZIRP, as shown by the slight move in exchange rates back in August leading to some catastrophic rolling margin liquidations.

 

In our particular case, the futures contract is Short Yen / Long Aud. Then OP is using Aud to acquire Japanese Stocks, so the trade ends up Short Yen / Long Japanese Stocks. The future contracts being necessary here since he can't go short Yen in his IBKR Aus account directly.

 

I think you have the margin backwards for future contracts. You only put up a small margin amount for the contract value. Initial margin on Yen/USD futures is 3k on 12mm Yen Contract (80k USD). Put in another way, you have 3k USD tied up to cover a 12mm yen position.

 

[TwoCitiesCapital]

Right, but you don't get the Yen, right? 

 

It's like an option. When I short a call on Apple, I don't get $24k of cash to invest. I get a very small fraction of the notional (the premium).

 

When you short a futures contract, which is functionally just a series of TRS, you don't get the cash upfront, right? You just enter a contract for future settlement and commit to the margin associated. 

 

So you can short $100 million JPY/AUD (obvious denominated outside of USD, just follow me here) and get $100 million worth of AUD. 

 

But going short $100 million in JPY/AUD futures doesn't produce $100 million in cash to invest in AUD. 

 

That's where my confusion is. It's just a large currency short. If it starts moving your direction, you get the variation margin, which can be invested, but it's still small relative to the notional and assumes the position immediately money in your favor. 

Edited Tuesday at 07:49 PM by TwoCitiesCapital

[winjitsu]

11 hours ago, TwoCitiesCapital said:

Right, but you don't get the Yen, right? 

 

It's like an option. When I short a call on Apple, I don't get $24k of cash to invest. I get a very small fraction of the notional (the premium).

 

When you short a futures contract, which is functionally just a series of TRS, you don't get the cash upfront, right? You just enter a contract for future settlement and commit to the margin associated. 

 

So you can short $100 million JPY/AUD (obvious denominated outside of USD, just follow me here) and get $100 million worth of AUD. 

 

But going short $100 million in JPY/AUD futures doesn't produce $100 million in cash to invest in AUD. 

 

That's where my confusion is. It's just a large currency short. If it starts moving your direction, you get the variation margin, which can be invested, but it's still small relative to the notional and assumes the position immediately money in your favor. 

 

Some math, and lets assume they are just forward contracts with the promise to deliver $100mm notional, and there are no forex moves. The expected delivery price is JPY(1+JPY Interest Rate) / AUD (1+AUD Interest Rate) based on interest rate parity. AUD is giving 4.5%, while Yen is giving 0.5%. Being short JPY/AUD futures means you should be making money over the life of the contract.

 

Correct, you don't get the yen. The future's role here isn't to give you the cash, it's to hedge or swap risk from AUD to yen, so he can "borrow" at the yen rate while continuing to hold AUD.

 

You are also correct that this is a currency short. In OP's case, he wants to be short $100mm yen on margin to utilize the low interest rates. His question was how could he express this short.

 

So the following scenarios are similar (though not exactly the same), assuming you start with $100mm AUD and the margin requirement is 3% on contract:

 

1. $200mm AUD yielding 4.5%, -$100mm Yen cost 0.5%

2. Short Yen/Aud future covering $100mm yielding 4% (4.5% - 0.5% simplification), $3mm AUD in margin reserve yielding 4.5%, $97mm AUD, available and not margined, yielding 4.5%.

 

Can we agree the EV from these two cases are the same?

 

Now relax the no forex movments constraint, and you have some real risk. Both cases you will be hurting if the yen strengthens. But if the Yen slides from 120 to 160 like it has over the past few years, you have an incredibly profitable trade.

Edited Wednesday at 07:46 AM by winjitsu

[TwoCitiesCapital]

8 hours ago, winjitsu said:

 

Some math, and lets assume they are just forward contracts with the promise to deliver $100mm notional, and there are no forex moves. The expected delivery price is JPY(1+JPY Interest Rate) / AUD (1+AUD Interest Rate) based on interest rate parity. AUD is giving 4.5%, while Yen is giving 0.5%. Being short JPY/AUD futures means you should be making money over the life of the contract.

 

Correct, you don't get the yen. The future's role here isn't to give you the cash, it's to hedge or swap risk from AUD to yen, so he can "borrow" at the yen rate while continuing to hold AUD.

 

You are also correct that this is a currency short. In OP's case, he wants to be short $100mm yen on margin to utilize the low interest rates. His question was how could he express this short.

 

So the following scenarios are similar (though not exactly the same), assuming you start with $100mm AUD and the margin requirement is 3% on contract:

 

1. $200mm AUD yielding 4.5%, -$100mm Yen cost 0.5%

2. Short Yen/Aud future covering $100mm yielding 4% (4.5% - 0.5% simplification), $3mm AUD in margin reserve yielding 4.5%, $97mm AUD, available and not margined, yielding 4.5%.

 

Can we agree the EV from these two cases are the same?

 

Now relax the no forex movments constraint, and you have some real risk. Both cases you will be hurting if the yen strengthens. But if the Yen slides from 120 to 160 like it has over the past few years, you have an incredibly profitable trade.

 

+1 

 

Thanks!