Bank of Japan insiders and their Japanese housewives.

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, they face no predictable end-of-year accounting issues. Nor are they affected necessarily by tighter monetary policy because they are not borrowing money to invest. What matters to them above all else are interest rate differentials.

Here's the rub. As the Bank of Japan this year plans to lift its overnight rate, the expectation is that the yen will strengthen. One reason for this is that higher rates will cause the unwinding of the so-called carry trade used by hedge funds to purchase Japanese equities by borrowing at close to zero percent interest rates. What Tokyo officials didn't count on was the potential for the yen-weakening housewife trade to easily trump the yen-strengthening, unwind-the-carry-trade bet brought about by the Bank of Japan's current effort to shrink the monetary base.

Be assured, a dramatically weaker yen would be not what the doctor ordered for the Japanese economy, particularly if the price of oil continues to accelerate. Japan, still relatively dependent on U.S. growth and Chinese investment rates, desperately needs to stimulate consumption, and a stronger yen is an important component of the policy mix. The upshot is that Tokyo policy strategists have entered a brave new world as busy housewives working the Internet begin to rule the world.