By Hideyuki Sano
TOKYO (Reuters) - Japanese investors bought a net 2.5367 trillion yen ($22.34 billion) of U.S. bonds in September, their largest net purchase in more than two years, reversing many months of selling in a move that could potentially cap the yen.
Data from the Ministry of Finance on Thursday showed Japanese investors bought 2.2759 trillion yen ($20.03 billion) of Treasuries in that month, also the biggest amount since July 2016, enticed by rise in their yields to near seven-year highs.
During the twelve months to August, they were net sellers on nine of those months, offloading a total of 10.3 trillion yen, largely because the cost of currency hedging on the dollar has risen.
The hedging cost is closely tied to U.S. short-term interest rates and has risen to more than 2.5 percent by the middle of this year, compared to around 1.5 percent until October last year.
Because currency hedge has become so expensive, some Japanese investors now appear to be buying foreign bonds without currency hedging, said Naoya Oshikubo, senior manager at Sumitomo Mitsui Trust Asset Management.
"As the Fed is pretty bullish on interest rate hikes to neutral levels, this is supporting the dollar against the yen. So some investors seem to be buying U.S. bonds without currency hedging," he said.
Still, many Japanese investors see limited upside for the dollar, given a variety of concerns such as further escalation in the Sino-U.S. trade war and a possible slowdown in the U.S. economy.
The Republicans' loss of the House after the midterm election this week is also seen as killing off any chances of a repeat of a strong dollar rally that followed after President Donald Trump's election victory two years ago.
The dollar rose 2.3 percent versus the yen in September and hit an 11-month high of 114.55 in early October, though its trading range so far this year has been one of the narrowest in many years.
Japanese investors also continued to pour a large amount of money in European bonds.
They bought 678.9 billion yen of French bonds, bringing their total buying so far this year to almost 4 trillion yen, and snatched 896.3 billion yen of German bonds, their first net buying in six months.
Their foray into UK bonds continued into the seventh straight month, with buying of 332.4 billion yen in September, and they purchased 183.1 billion yen of Irish bonds - the largest in eight years.
In total, Japanese investors bought about 4.7 trillion yen of foreign currency bonds in September, largest amount since July last year, the data also showed.