Gaurav Dogra and Brigid Riley
(Reuters) – Japanese investment data on Friday confirmed what the yen’s slide all week had been suggesting: that after a frightening burst of uncertainty, global investors were again betting the Bank of Japan would slow the pace of interest rate hikes and keep the yen weak.
Japanese investors poured more money into long-term overseas bonds in the week to Aug. 10 than any other time in the past 12 weeks, and also bought large amounts of short-term foreign debt, according to data released by the Finance Ministry on Friday.
The yen has also fallen steadily this week, ending its early August surge after the Bank of Japan’s unexpectedly hawkish stance on further interest rate hikes combined with fears of a US recession prompted an aggressive unwinding of yen-denominated carry trades.
These flows of capital, along with the weak yen, have sparked talk that the carry trade is slowly making a comeback, but not everyone is convinced.
“Short covering in the yen has already been completed and I would say positions are thin now,” said Yusuke Miyairi, G10 currency strategist at Nomura Securities in London.
“But will the carry trade resume? I’m not sure. It’s true that the USD/JPY is approaching $150, but volatility in the FX market remains relatively high.”
The yen traded around 150 yen on Friday, far from the 38-year low it hit last month but well below the high of 141.675 yen it hit on Aug. 5.
However, rapid fluctuations have kept volatility high, and such volatility typically inhibits carry trades.
But it’s become easier for investors to bet on a weaker yen after Bank of Japan Deputy Governor Shinichi Uchida softened his hawkish stance, and positions are also looking favorable, with data released late last week showing that leveraged funds’ net short positions against the Japanese yen have shrunk to the smallest since February 2023.
Long Len Goh, portfolio manager on the fixed income team at Eastspring Investments, said a more hawkish BOJ would have pushed up Japanese government bond yields and attracted Japanese money back home, influencing the “yen weakening formula” that’s essential for carry trades.
“The Bank of Japan has made it clear that it will not raise interest rates even if markets become unstable, so this is a ‘put’ on domestic investors’ overseas investments,” he said.
flow
Japanese investors bought 1.54 trillion yen worth of long-term overseas bonds last week, the largest weekly net purchase in the past 12 weeks, and also bought a net 453.5 billion yen in short-term bonds.
Meanwhile, Japanese investors were net buyers for the third consecutive week, selling foreign stocks worth 328.1 billion yen.
Nomura’s Miyairi cautioned against overinterpreting flow data on yen positions because some Japanese investors, such as banks, often use interbank repurchase agreements (repos) to finance their bond purchases.
Foreign investors also bought about $3.5 billion of Japanese shares last week, reversing a three-week streak of selling that saw the Nikkei stock average post its biggest one-day drop since 1987. The index has since risen more than 20 percent.
Foreigners also became net buyers of Japanese government bonds, reversing an eight-week long sell-off last week. They bought 1.44 trillion yen of long-term government bonds, the most since May 11, and 561.8 billion yen of short-term securities.
Masashi Yamamoto, chief currency strategist at Mizuho Securities, said this “bargain hunting” was likely to continue because the yen has bottomed out and stabilised, at least in dollar terms.
“The slump in Japanese stocks is creating a buying opportunity for foreign investors.”
(1 dollar = 148.9000 yen)
(Reporting by Gaurav Dogra and Paturaja Murugaboopathy in Bengaluru; Additional reporting by Bridget Reilly and Kevin Buckland; Editing by Vidya Ranganathan and Kim Coghill)
