What are Japanese Investors Buying?

Japan reported a larger than expected March current account surplus.  It typically rises in March even though the seasonal pattern is not quite as strong as it is in February.  For the last 20 years, Japan's current account surplus in February is always larger than the January surplus, which has, without fail, been smaller than the December surplus.  The March surplus has been bigger than the February surplus in all but five years since 1998.  

Many observers do not seem to appreciate the Japanese current account surplus is not driven by the trade balance.  Consider that in February on a balance of payment basis, the trade surplus was nearly JPY189 bln while the current account surplus was JPY2.076 trillion.  In March, the trade surplus rose to JPY1.191 trillion, while the current account surplus rose to JPY3.122 trillion, which is the highest since 2007. 

This is in stark contrast with Germany.  German trade and current account figures were released earlier this week.  The February current account was 21.7 bln euros, and the trade surplus was 18.4 bln euros.  In March, the current account surplus widened to 29.1 bln euros, while the trade surplus widened to 25.2 bln euros.  

Investment income drives Japan's current account surplus.  Japan, like the US, exports around 15% of GDP.  Trade is important for Japan because domestic demand tends to grow very slowly with a shrinking population.  Just like a stronger yen may make exports less competitive, it can impact the investment income balance by reducing the yen value of foreign currency earnings.  

With the balance of payments data, Japan reports some details of the country preference of investors. Keep in mind that March is the end of Japan's fiscal year, which may elevate some of the figures.  Trends may be more indicative of preferences.  

Japanese investors sold US Treasuries for the sixth month in March, according to the data within the balance of payments report.  They sold nearly JPY434 bln (~$4 bln) after selling JPY3.6 trillion in February.  Japanese investors continued to buy French bonds (sixth month) and German bunds (third month).  They bought a little more than JPY100 bln of French bonds (on top of the JPY596 bln purchased in February.  Japanese investors purchased JPY175.4 bln of German Bunds after buying almost JPY304 bln in February.  

Within the eurozone, they also bought a record amount of Spanish bonds (which are not limited to sovereign paper.  The JPY282 bln bought appears to be the most since 2005.  They also bought almost JPY120 bln of Dutch bonds, the most since November 2016. After US Treasuries, Japanese investors liquidated the most Italian bonds (~JPY64 bln and JPY62.4 bln in February). 

Japanese investors bought a little more than JPY177 bln of UK Gilts, the most since April 2015.  Japanese investors had been sellers (~JPY289 bln) in March.  Japanese investors returned to the Australian bond market in March (almost JPY109 bln) after having liquidated (JPY124.5 bln) in February.  

The weekly MOF portfolio flow report shows Japanese investors increased their foreign bonds buying in April, at the start of the new fiscal year.  The MOF data shows an average weekly purchase of almost JPY424 bln a week in April, but the first week in May (through May 4) Japanese investors sold near JPY364 bln of foreign bonds.  

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