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Reuters Edge

New Japanese fiscal year seen supportive for U.S. bonds

NEW YORK (Reuters) - Japanese purchases of U.S. government securities could be a supportive seasonal influence for prices of U.S. Treasuries in April, as Japanese investors return as buyers in a new fiscal year.

The north side of the U.S. Treasury Building in Washington is seen February 22, 2001. Japanese purchases of U.S. government securities could be a supportive seasonal influence for prices of U.S. Treasuries in April, as Japanese investors return as buyers in a new fiscal year. REUTERS/William Philpott

Though the U.S. Treasury Department’s International Capital (TIC) flows data are not yet available for February and March, analysts said Japanese investors typically repatriate some funds before the fiscal year end on March 31, and can be expected to boost their offshore investments to meet return requirements as the new fiscal year begins.

Japanese Ministry of Finance capital flows data show that Japanese investors have been net sellers of foreign bonds in recent weeks, IDEAglobal currency analyst David Powell.

“We cannot assume that all of these bonds are U.S. bonds, but probably the majority of them are,” he said.

Putting the phenomenon into a wider context, Powell said that over the last ten years, a clear pattern has emerged of large domestic outflows from Japan in April.

“That suggests that we will certainly see an increase in Japanese purchases of U.S. Treasuries in April,” he said.

Seasonal patterns have grown less pronounced though, as Japanese participants in the international capital markets have grown more numerous and diverse, Powell said.

Years ago Japanese investors were comprised of pension funds and insurance companies, “but now appetite has grown for these securities from retail investors who are not as sensitive to fiscal year-end balance sheet considerations,” he said.

While the seasonal changes remain, they may also be less meaningful than they once were because they occur against a backdrop of greatly reduced Japanese investment in U.S. Treasuries since 2004, observed Ward McCarthy, economist and managing director at Stone and McCarthy Research Associates.

“Japanese participation in the U.S. Treasury market has dropped off a lot since 2004,” he said. “They’re still the largest holders of U.S. Treasury debt, but there really has been very little change in their holdings for a long time.”

Several factors account for that diminished participation, McCarthy said, including improvements in the Japanese economy and financial markets, less effort expended by the Bank of Japan to try to support the U.S. dollar, and less involvement in yen-carry trades than prevailed a few years ago.

In carry trades, investors borrow in low-yielding currencies and invest in assets with higher returns to take advantage of the rate differential.

U.S. TIC data show that during the 12 months ending January 2007, Japanese investors bought just $18.2 billion in Treasury coupons, or approximately $1.5 billion a month, a sharp contrast from the 12 months ending January 2005 when Japanese investors purchased $134.5 billion of U.S. government debt, McCarthy noted.

“Over that two-year period, there has been a pronounced decline in Japanese appetite for U.S. Treasuries,” McCarthy said. “They’re not the huge force that they were in 2004.”

While Japanese investors bought $18.2 billion in Treasury coupons during the 12 months ending January 2007, China purchased almost twice that amount, a total of $34 billion during that period.

“China’s been getting more and more involved in both the U.S. Treasuries and agencies market,” McCarthy said.

“They have an awful lot of dollars that have to go someplace. There has been a lot of saber rattling and talk that they will divert some dollars somewhere else, but the bottom line is they have a lot of dollars and they will keep getting a lot of them because China is just starting to flex its industrial muscle. So some of those dollars will continue to be reinvested here.”

Still, Japan’s appetite for U.S. Treasuries and agencies securities is not about to disappear, said Chris Rupkey, vice president and senior financial economist at the Bank of Tokyo/Mitsubishi-UFJ.

“Demand for Treasuries is also driven by the carry trade and as far as we can tell, that carry trade is still alive and well and that will cause the Japanese to commit funds to the U.S. Treasuries market.”

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