The Bank of Japan surprised the markets on October 31 and probably surprised itself just as much. The BOJ meeting was initially to update macro forecasts, but it soon became clear to Governor Kuroda that inflation expectations were being slashed. This reportedly pushed Kuroda into action.
Given his testimony before parliament a day or two before had offered a rather optimistic view, Kuroda's proposal to step up the QQE efforts was a reversal that could several colleagues off-guard. Kuroda knew he could count on support from his two deputies. Reports indicate that he had realized there were two board members who would be opposed. This left four votes that could be contested. In the end, the four were split evenly, creating the 5-4 decision.
It is difficult to separate the impact of this unexpected increase in the already aggressive monetary stance from the more aggressive diversification of the largest government pension fund (GPIF). The dollar was already recovering from the mid-Oct swoon to near JPY105.25 and traded as high as JPY109.50 the day before the BOJ/GPIF announcements.
The direction of the GPIF asset allocation was not a surprise. It had been intimated for several months. It was the magnitude of foreign stock and bond components that was more aggressive than expected. The portfolio flows contained in the September balance-of-payments report suggests that Japanese investors were already stepping up their foreign investment before BOJ/GPIF measures.
Japanese investors bought JPY1.774 trillion of foreign bonds in September. This was three times larger than the monthly average in 2014 and contrasts to average monthly sales of JPY527.4 bln in the first nine months of 2013.
Of note, the JPY369.8 bln purchases of US bonds, was a below the 9-month average of JPY430.8 bln. In the same 2013 period, Japanese investors had been sellers of US bonds (~JPY455 bln per month). Japanese investors bought JPY555 bln of German bunds. This is the most for any single country in September, and is the most German bonds since May 2013. Indeed in six of the nine months in 2014, Japanese were sellers of German bonds. The average monthly sales in the Jan-Sept period was JPY461.4 bln. In the same 2013 period, they were small buyers (JPY34.66 bln).
Japanese investors remain infatuated with French bonds, buying another JPY376.6 bln in Sept, which is just below the monthly average here in 2014 (~JPY386.6 bln). It is three-times larger than the monthly average for the first nine months of 2013. Japanese investors have bought French bonds in six of nine months in 2014.
When asked why they buy French bonds, given the poor economic fundamentals and weak political leadership, many fund managers intimate that they are not buying French bonds, but somewhat higher yielding German bunds, that just so happened to be issued in France. The argument is that unless one think that EMU is about to collapse, French credit is as good as German credit. Perhaps there is a parallel with the US and the agency debt, which many large pools of capital buy instead of (or in addition to) Treasuries.
Japanese investors sold JPY168.4 bln of British bonds in September, completely reversing the JPY124.2 bln bought in August. In the first nine months of 2014, Japanese investors have sold British bonds in four months, which was sufficient to push the year-to-date sales to almost JPY100 bln. In the same year ago period, they sold about JPY760 bln of UK debt instruments.
Japanese investors also stepped you their purchases of emerging Asia bonds. They were sellers of South Korean bonds for five consecutive months before becoming net buyers of JPY21.3 bln in Sept. Japanese investors also bought JPY24 bln of Thai bonds, which is the most since March, and almost three times the monthly average in the first nine months of 2014. Japanese investors purchased JPY45.6 bln of Hong Kong bonds (it is not immediately clear whether these are HK bonds or simply transacted in HK), which is the most since 2007.
It is well appreciated that Japanese investors traditionally preferred buying foreign fixed income to equities. However, in September, Japanese investors bought what appears to be a record amount of foreign equities. The JPY1.398 trillion of foreign equities bought compares with JPY856 bln bought in August, and a monthly average of JPY447 bln in the first nine months of 2014 (average net sales of JPY620 bln a month in the same period in 2013).
Not only did Japanese investors step up their buying of foreign equities, but they were particularly eager for emerging Asian equities. They bought a record (JPY96 bln) of South Korean equities. September was the sixth month in a row that Japanese investors bought Korean stocks. Japanese investors also bought a record (JPY30.2 bln) of Malaysian stocks.