Last updated: May 10, 2013 1:14 pm

Japanese investors switch to foreign bonds

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Japanese investors have turned into net buyers of foreign bonds for the first time since the Bank of Japan drastically loosened its policy stance, reversing a recent trend and prompting further yen weakness.

By joining foreign hedge funds and other non-Japanese investors who have been selling yen-based assets in droves, Japanese investors could help extend the yen’s decline against the dollar, euro and other currencies, analysts said.

The yen fell further below the psychologically important Y100 level against the dollar on Friday. By midday in London the dollar had risen more than 1 per cent against the yen to hit Y101.72, its strongest level since the collapse of Lehman Brothers in 2008.

“The first concrete signs of Japanese real money outflows have at last been detected for the new fiscal year [from April 1],” said Garreth Berry, a strategist at UBS.

Foreign currency traders said the yen had scope to weaken significantly further because many hedge funds had closed or reduced their short yen trades in recent weeks.

Hedge funds were scrambling to re-enter those trades on Friday, according to traders in London and New York. Traders at Société Générale reported a flood of interest from Japanese exporters looking to hedge their overseas exposure. But traders at JPMorgan said the majority of yen selling was still driven by hedge funds rather than domestic Japanese investors.

“Ninety per cent of yen selling has been from speculative names – there’s still not the flow we need to see coming into the market from Japanese investors. We think that 100 will be the trigger we need to see that money move,” said Richard Usher, a senior currency trader at JPMorgan in London.

“The market had almost given up on the trade – many people that had been long all year have cut their positions over the previous weeks. Now, all these people are kicking themselves and coming back in again.”

Data released on Friday by the Japanese finance ministry showed that Japanese investors bought Y204bn more of foreign bonds than they sold in the week to April 27, then extended the buying to a net Y310bn the following week, a week in which they also became net buyers of foreign stocks.

Japanese investors have used the yen’s recent falls as an opportunity to sell overseas holdings against expectations they would increase them.

In the six weeks to April 27 they had been net sellers of foreign bonds despite the Bank of Japan’s new policy of significantly increased purchases of Japanese government bonds designed to force investors to seek out riskier assets.

Many had assumed the BoJ’s move, initiated last month by its new governor Haruhiko Kuroda, would force Japanese insurance companies and other institutional investors to quickly begin filling their portfolios with foreign debt.

But following the release of Friday’s data and Thursday’s fall by the yen below the Y100 barrier, analysts said the Japanese currency could slide to Y105 or even Y110 in the next few months.

John Praveen, chief investment strategist at Prudential International Investments Advisers, noted that the yen traded at an average of Y105 to the dollar between 2000 and 2012, a period that included both highs and lows for the currency.

“This suggests there is room for the yen to weaken further,” he said.

Analysts at Credit Suisse said: “We want to see how flows behave in the wake of the recent dollar-yen break above [Y]100 before exhibiting confidence that the Bank of Japan’s April 4 monetary policy shock is changing Japanese asset allocations.”

The Nikkei 225 stock average surged 2.72 per cent on Friday in response to the yen’s latest losses, which help lift profits at companies such as Toyota and Canon, which sell most of their products outside Japan. That brought the Nikkei’s rise this year to just below 40 per cent.

European stock markets also rose on Friday, helped by further encouraging signs from the US economy and accommodative monetary policy from the world’s leading central banks.

The yield on 10-year JGBs jumped 6.5 basis points to 0.655 per cent, the highest level since March 12. Trading in bond futures was temporarily halted by circuit-breakers that are triggered by especially sharp price movements.

The automatic stabilisers have been activated several times since the BoJ’s policy began disrupting bond markets last month.

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