Observations about the Yen Conundrum

The yen appears to simply trend higher regardless of the extension of the BOJ's QE and what happens in other markets. Neither the rising equity markets (risk-on) nor the widening on interest rate differentials (10-year) has been able to deter yen buying. The market appears to have turned cautious about pushing the dollar below JPY80. The G20 statement is understood not to necessarily stand in the way of further BOJ intervention under the principle of avoiding excessive fluctuations.

We continue to be struck by the strength of Japanese portfolio capital outflows during this fiscal year. Unlike Americans, who when investing offshore prefer equities, Japanese investors prefer fixed income. Using weekly MOF data, during the current fiscal year, Japanese investors have bought about JPY20 trillion of foreign bonds (~$245 bln) and about JPY1.2 trillion (~$15 bln) of foreign equities. At the same point in the last fiscal year, Japanese investors bought about JPY5.25 trillion of foreign bonds and about JPY1.06 trillion of foreign stocks.

Japan's cumulative current account surplus in the first five months of the fiscal year is about JPY6.4 trillion compared with JPY5.0 trillion in the first five months of last fiscal year.

It is also interesting to see what foreign bond markets Japanese investors prefer. The weekly MOF series does not offer a country break down, for that we have to look at the monthly reports. Using the monthly time series, we find that during the current fiscal year (through August) Japanese investors have bought a monthly average of JPY3.15 trillion of foreign bonds.

US bonds account for a little more than half with a monthly average of JPY1.7 trillion. This is more than three times above the monthly average in the first five months of the last fiscal year. In these numbers it is difficult to find how the lower US interest rates have deterred Japanese investors.

Japanese investors have bought a monthly average of JPY142 bln of British bonds this fiscal year vs a net seller of JPY41.1 bln on average in the first part of the last fiscal year.

Japanese investors have more than tripled their purchases of German bonds to JPY172.8 bln from JPY52.32 bln. The increased in German purchases appears to have come at the expense of French bonds where the ave monthly purchases has slowed to JPY62.3 bln form JPY165 bln in the first several months of FY09.

Also of note, Japanese investors have slowed their purchases of Australian bonds from a monthly average of JPY201.8 to JPY164.75 bln this year.

Japanese investors continue to divest of Korean bonds, though at a slower rate than last (-JPY4.6 bln vs -JPY21.06 bln). This has been offset in part by the switch to the buy side of bonds from Thailand (JPY5.8 bln monthly average this year from a net seller of JPY21.5 bln monthly average in the first part FY09).