July 19, 2013 / 2:16 AM / in 4 years

UPDATE 1-Japanese investors buy most foreign bonds since "Abenomics"

* Japan investors bought $11 bln of foreign bonds last week

* Foreign investors net buyers of Japan stocks for 4th straight week

By Dominic Lau and Lisa Twaronite

TOKYO, July 19 (Reuters) - Japanese investors were net buyers of foreign bonds for a second straight week last week by purchasing the largest amount since September 2012, indicating they may be starting to seek higher returns overseas, after the Bank of Japan’s radical easing.

Should the trend towards net buying continue, it could provide another piece of early evidence that Prime Minister Shinzo Abe’s expansionary stimulus policies are having their desired effect ahead of an election for parliament’s upper house on Sunday.

Purchases of overseas assets could potentially weaken the yen, and give a tailwind to Japanese exporters. But if the buyers hedged their bond purchases, that would blunt any impact on foreign exchange markets.

Japanese investors bought 1.106 trillion yen ($11 billion) of foreign bonds in the week through July 13 after buying 974 billion yen in the previous week. The month of July is on track to mark the first monthly net foreign bond buying in six months.

“I think a lot of the banks have started to buy U.S. Treasuries or German Bunds because yields have gone up a lot, but I don’t think life insurance companies have really changed their game plan so much,” said Tadashi Matsukawa, head of Japan fixed income at PineBridge Investments.

“I imagine, banks are very speculative players in the market, so they thought that maybe it’s a good time to take some long positions in U.S. and German rates,” he said.

Yields on benchmark 10-year U.S. Treasuries have eased back to around 2.50 percent after hitting a 23-month high of 2.7550 percent on July 8 on the back of a strong of U.S. June jobs report, which raised the likelihood that the U.S. Federal Reserve will scale back its $85 billion a month bond-buying programme later this year.

“When we start to see that dollar/yen rate, or euro/yen rate, is stabilising and rather Japanese yen is on the weak side, people start to have confidence in investing overseas,” said Yuuki Sakurai, president of Fukoku Capital Management, which has 1.81 trillion yen under management as of March 31.

“Obviously, people are very much cautious about investing in emerging markets, so what they would do is that they may buy U.S. Treasuries, German Bunds. They may have to shift a little bit towards foreign currency to hedge towards the future movement of the yield going up in Japanese government bonds.”

The yield on the benchmark 10-year Japanese government bond has mostly stuck in a narrow range of 0.80 to 0.90 percent since late May, with the BOJ committed to achieving a target of 2 percent inflation in two years.

The Japanese central bank stunned financial markets on April 4, promising to inject $1.4 trillion into the world’s third-largest economy in less than two years.

It had earlier raised expectations that the aggressive push to reflate the economy would spark a flight of capital out of the country.

But in the first six months of 2013, Japanese investors had repatriated 15.54 trillion yen, including foreign securities and money market instruments, defying earlier expectations.

That compared with an outflow of 6.67 trillion yen for the same period last year.

The BOJ’s aggressive easing has also lifted foreign investors’ interest in Japanese equities. They bought 398.2 billion yen of Japanese stocks last week.

Foreign investors bought 8.79 trillion yen of stocks in January-June, compared with only 580.6 billion yen for the same period last year.

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