Japan: the difference between unwinding and unravelling

The Japanese consumer is, on the whole, deeply conservative, and frugal. Even over a prolonged period of zero-to-negligible interest rates, households have continued to squirrel away their savings, and there is something indicative about this society when one of its best-selling books in recent times has been a guide to living on five yen per day. This endemic ethos has had a profound and enduring effect on the country's economy, whose wider implications we shall address in a moment.

The more pressing issue has its roots in a Japanese banking sector, rolling around in a pool of retail deposits, that has made the cash available to borrowers at rock-bottom interest rates. This proved too much for temptation, and gave rise to what we know as the yen carry trade.

Enterprising investment houses around the world were quick to see the main chance: borrow yen on the cheap, and put the money to use in higher-yielding securities and currencies in other countries. As long as those superior returns outran both Japanese loan costs and currency conversion rates, it was money for nothing and your cheques for free.

It did not take long for Japan's domestic savers to latch on to this cunning plan either. Epitomised by the archetypal Mrs Watanabe, family budget-holders across Japan also acquired an appetite for the better prospects abroad, and punted their barren nest eggs into more fertile foreign incubators. In combination, these two strands produced a steady stream of yen sell-offs, holding down its relative value and providing a boost to Japan's monolithic export-reliant economy.

What differentiates these trends, though, is where the money went. Mrs Watanabe is already pushing the envelope, and plumps for those nice steady Aussie and Kiwi investments - they are paying about five times what the family's savings could earn at home and seem to be, well, nice and steady.

Contrast this with the approach of institutional raptors who have used the cheap cash to lash out on their big new ideas: what about Bulgarian property development, Beijing automotive factories, and let's throw plenty of leverage into the mosh pit? You get the drift.

And then. Everybody wanted their money back, because the model had collapsed, along with large chunks of the global economy. The numbers no longer stacked up, with returns around the world - particularly interest rates - dropping below that viable level, and forex margin calls flashing.

Leading the retreat were hedge funds and other institutional investors, mounting a massive yen buy-back in a scrabble to unwind positions that had become liabilities - and had acquired the taint we have learned to attach to clever investment wheezes. Chip in the repatriation of Japanese civilians' money, and we have a tide that brings Hokusai's tsunami painting to mind.

The trouble is, nobody can calculate for sure how big this pot is: one early Bank of Japan attempt put it at  $400bn -worth, and then gave up trying; other guesses have ramped the number up as far as a trillion dollars. To paraphrase the original witticism - a hundred billion here, a hundred billion there, and pretty soon we're talking serious money.

The unwinding of the yen carry trade, forcing up the currency's relative value, will have repercussions on the Japanese economy, at a time when some fund managers are making bullish noises about re-entering the market. They could be right, with a value-based, buy-and-hold strategy.

For now, though, there is no native consumer demand to speak of, and the country's only economic prop - exports - have become more expensive just as its major trading partners are entering recession. Not easy to sell a Toyota to someone fishing around the back of the sofa for spare change.