Bank of Japan insiders and their Japanese housewives.

• Author: Smick, David M.
• Position: Change in banking systems

One reason Bank of Japan officials these days look t so weary is that the nature of the Japanese financial system has changed. Today perhaps the largest and certainly most unpredictable force affecting foreign exchange markets involves, of all factors, Japanese housewives and heads of households who are now heavy purchasers of foreign fixed income investments and increasingly are bypassing financial institutions in making their purchases.

Consider the numbers. Overall liquid financial assets of Japanese households total [yen] 1,400 trillion. Liabilities (mostly mortgage loans) total [yen] 400 trillion. That leaves net investment assets of roughly [yen] 1,000 trillion in the hands of households which are a) on average far more computer savvy than their U.S. and European counterparts, and b) increasingly going through the Internet to make investments.

Today Japanese housewives and heads of households are in the hunt for ever higher yields. Back in 1990, and even up through 2000, individuals could find attractive rates of return of up to 6.5 percent from the postal savings system alone. Today of course that rate has plunged to less than one percent.

The end result is that a mere one percent of these investments makes the Japanese housewife perhaps the largest market force in global foreign exchange. Two percent of these net assets is large enough to crack the global currency market.

All of which is why Bank of Japan officials these days look so weary. These savers are different from other investors. As Tokyo strategist Tadashi Nakamae points out...