What Have the Japanese Been Buying?

The Japanese balance-of-payment figures that were released yesterday contained a country breakdown of the destination of its portfolio flows.

There were four noteworthy developments.
First, Japanese investors bought US bonds in July for the first time on a monthly basis here is 2013. The JPY2.7 trillion (~$27 bln) bought was the largest since March 2011 and accounted for 78% of the foreign bonds Japanese investors bought in July. Note that in the previous six months, Japanese investors had sold JPY9.24 trillion worth of US bonds.

Second, in Europe, Japanese investors continue to show a preference for French bonds. They bought another JPY584 bln worth. Since the start of 2012 there has only been one month in which Japanese investors were net sellers of French bonds (this past May). During this time Japanese investors have bought a net JPY6.2 trillion (~$62 bln) worth of French bonds.

Third, while US and French bonds account for nearly all Japanese net purchases of foreign bonds, Japanese have also been fairly consistent buyers of Dutch bonds. In July, they bought JPY410 bln, which is the most since January. Since the beginning of 2012, Japanese investors have bought JPY3.44 trillion (~$34 bln) of Dutch bonds. Both, French and Dutch bonds trade like (somewhat) higher yielding German bunds and the Japanese purchases help make it a self-fulfilling prophecy.

Fourth, Japanese investors had been sellers of Australian bonds since last October. They turned net buyers in July to the tone of JPY91.3 bln. During the selling spree, they divested JPY1.5 trillion of Australian bonds.

Japanese investors have been selling foreign equities on a streak that goes back to July 2012. They sold another JPY479 bln in July. They have sold JPY6.69 trillion (~$67 bln) of foreign shares since July 2012. The pace has slowed slightly in the past three months (average monthly sales ~JPY427 bln) compared with the past six months (average monthly sales ~JPY710 bln).

We know from the weekly MOF data, that Japanese investors have turn to net sellers of foreign bonds in the last three weeks of August (~JPYJPY1.75 trillion). They have also been buyers of foreign stocks in the last two week of August (~JPY75 bln).

One of the big stories this year has been the outflows from emerging markets. This looks to have abated recently. In the past 10 sessions, the MSCI Emerging Market equity index has rallied 9% and is now at three month highs.

Of note, already this month, foreign investors have bought $2.74 bln of Korean shares. This cuts the net outflow this year by more than half. The Kospi is up 3.5% so far in September. Taiwan has reported a net inflow of $1.97 bln into its equities and this more than doubles the net inflow seen in the first eight months of the year. The Taiex is up 2.3% this month. Foreign investors have also been buying a small amount ($72 mln) of Indonesian shares this month, after selling about $840 mln worth of their shares in the Jan-Aug period.

Although flow data is not available, we note that there have been several impressive moves in emerging market equities. China's Shanghai Composite has gained more than 20% off the late June lows. It has now retraced more than 61.8% of this year's decline and today closed above the downtrend line drawn off the Feb and May highs.

Brazil's Bovespa Has Rallied Impressively
The year's low was set in early July and since it has rallied nearly 24%. Yet it has retraced a little more than half of this year's losses. While the Shanghai Composite and the Bovespa are higher on the year, Mexico's Bolsa is still off about 4% for the year, through yesterday. Interesting Brazil has hiked the overnight rate 175 bp this year while Mexico has cut rates twice (both times by surprise) for a total of 75 bp. . The Bolsa has retraced a about 40% of this year's decline.