Update: Japan's Appetite for Foreign Bonds

Japan reported the April current account figures earlier today.  When it does it also reports its capital account.  In April, Japanese investors sold a net JPY4.3 trillion of foreign bonds.   We also learned that Japanese investors turned net buyers of foreign bonds (JPY3.1 trillion) in May. 

The April data is more detailed and offers a country breakdown that is worth reviewing.   Japan's sales of US bonds (not limited Treasuries) jump off the page.  They sold a  net JPY3.276 trillion of US bonds, accounting for 3/4 of their overall bonds sales.  It was the third monthly sales in the first four months of the year, for a total of JPY4.23 trillion. 

Japanese investors were bought US debt instruments in all but three months in 2016.  The exceptions were the first month of the year and the last two.  That is to say, the divestment of US debt investment began at the end of last year.  In the first ten months of 2016, Japanese investors bought an average of JPY1.82 trillion of US debt instruments a month.  

Japanese investors also were net sellers of core European bonds, including German, French, Dutch, and British bonds.  They also sold Belgium, Dutch and Italian bonds.  However, selling of European bonds was moderated by the purchases of Spanish, Finnish, Danish, and Portuguese bonds.

Japanese investors sold JPY726.4 bln worth German debt instruments in April.  It was the largest sales in three years.  It was second monthly sales of the year.  In 2016, Japanese investors sold an average of JPY46.6 bln of German bonds and notes a month.  In 2015, they sold an average of JPY160 bln a month. 

In contrast, Japanese investors had been keen buyers of French bonds.  Without the risk of the eurozone breaking up, some investors might have seen the French bonds as higher yielding Bunds.   In 2016, they bought an average of almost JPY320 bln a month of French debt instruments.    That said, April was the sixth consecutive month of net sales, and over this period they sold an average of about JPY565 a month.  

While Japanese investors sold British debt instruments for the fourth month in April, they were buyers of Spanish paper for the third month.  Japanese investors continued to diversify into Australia (net buyers for four consecutive months).  They were also buyers of Canadian and Mexican debt instruments in April (combined about JPY100 bln).  Japanese investors also were net buyers of Mexican paper in March.   

Outside of Mexico, Japanese investors were not net buyers of emerging market economy bonds.  In March, they had been buyers of Hong Kong and Indian bonds.  In April, they were sellers bonds from both India and Singapore.  It was the second consecutive months that Japanese investors sold Singaporean bonds.  

Although Japanese investors sold foreign bonds in the week ending last Friday (June 2) for the first time since the week ending April 21, it seems as if the pruning of portfolios has largely been completed in April, the first month of the new fiscal year.   The passing of the political risk in Europe may have encouraged a reinvestment in French bonds.  Japanese investors may also take advantage of the yen's appreciation to buy foreign bonds.  

The US 10-year premium over Japan fell to about 210 bp from over 250 bp before the FOMC rate hike in March.   That move seems over or nearly so.  The German premium over Japan has moved between about 15 bp and 40 bp three times this year.  It is on its third push lower and is a little below 20 bp now.  This is the lowest since April 18. 

The dollar needs to get a foothold above JPY110.70 to be of technical significance.  Today it has stalled in front of JPY110.40, the 50% retracement of the latest leg down that began on June 2 near JPY111.70.  The euro rallied against the yen from mid-April (~JPY114.85) to mid-May (~125.80).  The technical tone does not look as favorable as the dollar.  It appeared to have rolled over but recovered smartly from yesterday low near JPY122.60. 

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