(Bloomberg) -- The Bank of Japan’s decision to raise interest rates last week was appropriate and the disruption to financial markets from unwinding of carry trades would have been much bigger had it waited longer, a senior Nomura Holdings Inc. executive said.
“The BOJ has been completely vindicated,” Christopher Willcox, head of trading and investment banking at Japan’s largest brokerage, said in a Bloomberg Television interview on Wednesday. There are still more carry trades to be unwound, he said.
The Bank of Japan has faced a wave of criticism after its monetary policy tightening appeared to have helped set off a historic plunge in Japanese stocks and contribute to global market turmoil. The benchmark Topix Index suffered a record two-day decline before rebounding Tuesday, as worries over further rate increases and gains in the yen spooked investors. It rose slightly on Wednesday morning.
Willcox said the so-called carry trade, in which investors borrow in currencies with low rates and invest in higher-yielding markets, still has further to run after the BOJ’s rate hike caused many traders to close their positions.
“If they didn’t start to move, the carry trade would only have gotten bigger,” said Willcox. “The BOJ is playing it extremely smartly.”
JPMorgan Chase & Co.’s co-head of global FX strategy Arindam Sandilya estimated Tuesday that the carry trade unwinding is between 50% and 60% complete. Willcox said it’s probably “a bit more than that.”
Willcox said the recent market gyrations were mainly caused by a higher perceived risk of recession in the US and an expectation for a more aggressive response from the US Federal Reserve, rather than the BOJ’s actions and dollar-yen moves. He said he believed the US will avoid a recession.
BOJ Governor Kazuo Ueda has been unwinding years of massive monetary stimulus as the country exits decades of deflation. Ahead of last week’s meetings, some politicians had urged the central bank to act to normalize policy as a weak yen eroded households’ spending power.
“There was pressure on the BOJ caused by dollar-yen,” Willcox said. “It seems like the deflationary environment in Japan is being dealt with. But they always knew that this unwind was going to be very difficult.”
The yen fell to 144.75 per dollar on Wednesday morning in Tokyo. It has gained about 11% since the end of June as expectations mounted that the yawning gap in interest rates between Japan and the US would soon narrow.
Willcox said he expects the yen to trade at around 148 against the dollar by year’s end and potentially hit 140 next year, a level he predicted in March as well.
The Topix Index gained 0.9% on Wednesday morning, while shares of Nomura were little changed. Nomura tumbled around 19% Monday, the most in at least 50 years, before rebounding 11% on Tuesday as the benchmark gauge recovered.
Any lasting stock market selloff would hurt Japanese brokerages that have been benefiting from a pickup in investing driven by a rebound in local equities that hit a record earlier this year. Nomura’s net income rose more than analysts estimated last quarter, spurred by wealth management along with trading and investment banking.
“We’re by no means satisfied” with recent results, Willcox said. His wholesale division — which comprises global trading and investment banking — has been hiring as well as trying to maintain a lid on expenses.
The wholesale business posted a pretax profit of 21.1 billion yen, a 10-fold jump from a year ago but still quite a way to go toward its full-year target of 130 billion yen.
“We’re keeping our costs under control and investing in our risk management, but we’re also investing in the business in an aggressive way,” he said.
--With assistance from Adrian Wong and Taiga Uranaka.
(Updates with comments throughout)
©2024 Bloomberg L.P.
