Yen Weakness and Shifting Capital Flows

LDP head Abe woke the yen market out of its slumber with aggressive campaign rhetoric.  The polls show that he is most likely to be the next prime minister of Japan and will be in a position to enact his plan to ease monetary and fiscal policy dramatically.

The yen has weakened since he began ramping up his comments.  It is the weakest of the major currencies and the weakest among the Asian regional currencies since the beginning of the month.  

 As we have noted in our weekly reports, the speculators at the IMM have piled into short yen positions.  Last week alone the gross short speculative position jumped by more than 50% to 79.7k contracts.  This is the largest gross short position since April's 82.2k contracts, which itself was a four year high.

Real money appears to also be adjusting to the prospects of a weaker yen.  Given that fixed income returns are more influenced by fx swings than equity returns, we would expect foreign investors to favor Japanese stocks over bonds. Japanese investors typically buy more foreign bonds than stocks and the prospect of yen weakness should reinforce this.                                    

MOF data released earlier today covers the week ending Nov 23.   Foreign investors bought JPY275 bln of Japanese shares, the most since mid-March.  The four-week moving average is at its best level in seven months.                      

Foreign investors were larger buyers of Japanese bonds earlier this year, but since mid-year, the purchases are trending lower.  Foreign investors have been net sellers of Japanese bonds in the past two weeks, liquidating about a quarter of what was  bought in the first half of November.

Japanese investors do not appear to have altered their behavior very much.  The MOF had indicated that Japanese buying of foreign bonds was up about 285% in the first ten months of the year compared with the year ago period.   Japanese investors have, if anything, slowed their foreign bond purchases in recent weeks.  The four-week average stands at about JPY237 bln, the lowest since mid/late Aug.                                                                 

Japanese investors continue to sell foreign stocks.  The amounts are modest, but divestment streak is unabated.  They have sold foreign shares for seven consecutive weeks and 8 out of the past nine weeks.  In fact, since July, Japanese investors have net buyers of foreign share in only two weeks.