Japan's Portfolio Flows: U.S. Liquidation Dominates

One of the major surprises this year has been that Japanese investors have been net sellers of foreign assets, even as the Japanese government and central bank pursue stimulative monetary and fiscal polices. And the yen trends lower.

A break down of the data warns that there may be less to it than meets the eye. The sales of foreign assets is largely concentrated in the liquidation of U.S. securities.

Record Foreign Notes And Bonds
Along with its current account data, Japan reported also reported Monday on portfolio flows. As we suspected, based on tracking the weekly flows, Japanese investors sold a record amount of foreign notes and bonds in June. The MOF reported a net sale of JPY2.957 trillion notes and bonds. Japanese investors also sold JPY377.7 bln of foreign shares.

Foreign investors, for their part, seemed to largely switch from Japanese bonds to stocks. Specifically, they bought JPY764.5 bln of Japanese shares, while selling JPY756.3 bln of Japanese bonds. There was a liquidation of JPY1.1 trillion of Japanese bills, which may have been related to other trading activity.

T-Bills
Japanese bond and stock sales on a country basis for May were released. It appears that the bulk of the bonds that Japanese investors sold in May were U.S. Treasuries and the roughly $30 bln were a record amount. This follows the $15.5 bln sales in April. May was the fifth consecutive month Japanese investors have reduced their U.S. Treasury holdings and over this period sold about JPY8 trillion.

Japanese investors bought about JPY1 trillion of European bonds in May, the most since January. This was largely accounted for by the purchases of bunds, which did a little more than offset the April sales. Japanese investors turned net sellers of French and UK bonds for the first time since November 2011. Japanese investors sold Australian bonds in May for the seventh consecutive month. Over that period, they sold about JPY1.55 trillion Among the emerging markets, Japanese investors were small net buyers of Korean, Thailand, Malaysia and Singapore bonds.

Mostly U.S. Equities
In terms of equities, U.S. accounted for the bulk of Japanese investor liquidation in May. Of the JPY416.9 bln of foreign equities sold, the U.S. accounted for JPY371 bln. Given role of Luxembourg as a financial center, we do not know what to make of Japan's purchases of JPY57 bln of equities there, except to note that it may be where the transaction took place, but not necessarily the securities bought. The only the country of note in which Japanese investors bought equities was the Netherlands.