Japanese Investors Step Up Foreign Bond Sales

The persistence of Japanese selling of foreign financial assets continues to surprise Japanese policy makers and market observers. The Ministry of Finance reported last week's portfolio flows early Thursday in Tokyo. Japanese investors sold JPY1.12 trillion of foreign bonds and JPY105 bln of foreign shares.

The bond sales are the second largest in the past year. Over the 21 weeks of the calendar year, Japanese investors have sold JPY6.4 trillion of foreign bonds ($64 bln). At the same time they have sold JPY4.1 trillion of foreign stocks.

Why are Japanese investors selling foreign assets? We think the sales are a way to repatriate what thus far is a relative small part of their overseas holdings. The sharp decline in the yen offers an attractive opportunity for the proverbial Mrs Watanabe, who frankly is not getting any younger, and may want to top up the funds available for retirement.

Many exaggerated the enthusiasm Japanese investors would have for foreign bonds, that were at near record high prices and of questionable quality (many have lost their AAA rating). We tried to illustrate our point by recalling the quip by the character in a Woody Allen film who complained that the portions were small and the food was poor.

In addition, the sell-off in JGBs and the increase in domestic interest rates may alter the calculus about investing in foreign bonds. And why should Japanese equity investors chase overseas returns when they have the best stock market going?

Foreign investors bought JPY27 bln of Japanese shares in the most recent weekly period. That brings the year-to-date purchases to JPY8.3 trillion. Although some observes may suspect that foreign demand has largely been satiated, we are hesitant to conclude that quite yet. The weekly data is volatile and the 3-week moving average is above the 6-week moving average.

Foreign investors sold a JPY457 bln of Japanese bonds. This is the largest weekly sales in two months. Year-to-date, foreign investors have sold roughly JPY1.1 trillion of Japanese bonds.

The Japanese repatriating funds is clearly one of the sources of demand for the yen. The foreign demand for Japanese shares is not necessarily the demand for yen. Some of the purchases of Japanese shares have been financed by the sale of Japanese bonds. A larger part of the equity purchases appear to have been currency hedged.