Japanese Investment and Yen Trends

By Gaurav Dogra and Brigid Riley

(Reuters) – Japanese investment data from last Friday confirmed a trend suggested by the weakening yen, showing renewed global investor optimism towards the Bank of Japan’s cautious approach to rate hikes and continued yen depreciation.

In the week leading up to August 10, Japanese investors invested the highest amount in long-term overseas bonds in 12 weeks, alongside significant purchases of short-term foreign debt, as reported by the Ministry of Finance.

The yen had been steadily declining, following a sharp rally in early August due to the Bank of Japan’s unexpected hawkish stance on potential rate hikes and concerns regarding a U.S. recession, which triggered a wave of yen-financed carry trades.

Despite signs of renewed carry trades emerging, uncertainties linger. Yusuke Miyairi, a G10 currencies strategist at Nomura in London, observed, “We can kind of say that yen short covering has been already done and now the positioning is light. But is the carry trade back on? I’m not sure.”

As of Friday, the yen hovered near 150, a notable distance from its 38-year lows from the previous month, but also well below the August 5 high of 141.675 yen.

Although recent data has calmed some volatility, which typically disrupts carry trades, Deputy Governor Shinichi Uchida of the BOJ lessened expectations for stringent hawkish moves, allowing for more favorable positioning among investors.

Japanese investors made substantial purchases totaling 1.54 trillion yen in long-term overseas bonds in the last week, marking a significant weekly net purchase, while also acquiring 453.5 billion yen in short-term instruments. In contrast, they sold off foreign shares totaling 328.1 billion yen after three weeks of net acquisitions.

Nomura’s Miyairi warned against over-interpreting the flows data, pointing out that some Japanese investors, like banks, utilize repos for bond purchases. Meanwhile, overseas investors rebounded, buying around $3.5 billion in Japanese shares and exhibiting net buying of long-term bonds for the first time in eight weeks, acquiring a total of 1.44 trillion yen in bonds.

Masafumi Yamamoto, chief currency strategist at Mizuho Securities, suggested that the stabilization of the yen might lead to continued foreign interest in Japanese equities, noting that their recent underperformance presented opportunities for investment.

Exchange Rate: ($1 = 148.9000 yen)