Why the poison of speculation is needed in society

June 27, 2022
by Noriyuki Morimoto

There was a time when commodity futures in Japan were associated with azuki (red) beans, which were known as the red demon. The price of azuki bean futures (currently traded as Azuki [Red Bean] Futures) was extremely volatile, and therefore a target of speculation, a demon that attracted and ruined people.

Generally speaking, market prices for commodities such as azuki beans fluctuate extremely widely. For the producer, the cost of production is not linked to the selling price, which could easily result in a below-cost situation. Therefore, hedging instruments are needed.

Since commodity futures are not the trades in fictitious items, but can be settled with actual products, the price of futures is linked to the price of the actual item. Hence, the producer can sell the futures contract first and lock in a profit when the futures price is above the cost of production. For producers, commodity futures are important as a hedging instrument.

Commodity futures, on one hand, provide opportunities for speculation and, on the other hand, play an important social function as a hedging instrument for commodity producers. If producers’ hedge sales concentrate on a given time, prices will collapse. In order for them to sell hedges at reasonable prices, purchasing by speculators is needed. In order for hedge selling to be possible, there must be an inflow of speculative funds.

Thus, speculation has social significance. The same is true of currency speculation. The huge amount of currency speculation is the reason for the smooth settlement of the actual demand foreign exchange transactions. Therefore, speculation loses its social legitimacy when excessive inflows of speculative funds cause price volatility, which in turn affects real economy such as commodity production.

Market economies, including commodity and foreign exchange, function properly as long as they can skillfully utilize the poison of speculation, but on the other hand, when they are exploited by the poison, they become dysfunctional. However. This is the nature of a market economy, and there is nothing we can do about it.


[Category /Art Investment]

Noriyuki Morimoto
Noriyuki Morimoto

Chief Executive Officer, HC Asset Management Co.,Ltd. Noriyuki Morimoto founded HC Asset Management in November 2002. As a pioneer investment consultant in Japan, he established the investment consulting business of Watson Wyatt K.K. (now Willis Towers Watson) in 1990.