Cautiousness of Japanese investors into BOJ meeting – Nomura

Momentum of Japanese investment in foreign bonds has again been weak of late and they were net sellers of foreign bonds over the past two weeks, albeit by small amount, points out the research team at Nomura.

Key Quotes

“USD/JPY traded at a yearly high, which likely discouraged Japanese investment in USTs without FX hedging. After FX hedging, USTs remain unattractive, leading to weaker momentum of foreign bond investment.”

“USD/JPY has depreciated since last Thursday and, from the level of spot, unhedged investment in USTs is becoming more attractive. Nonetheless, uncertainty on the BOJ’s policy stance has risen as well and has led to higher JGB yields and volatility.”

“Thus, in the short-term, Japanese investment in foreign bonds may remain weak, while we expect dip buying demand to be strong if USD/JPY breaks 110, leading to stronger UST investment without FX hedging.”

“In the margin trading market, the latest OTC positions as of end-June, released by the Financial Futures Association Japan, declined to JPY356bn ($3.2bn) of USD/JPY long positions, from JPY1357bn as of end-May.”

“Margin traders’ USD/JPY positions show limited risk of USD selling, even if the BOJ surprises the market next Tuesday. As contrarians, margin traders will be buyers of USD/JPY if spot declines further to below 110.”

“Japanese investors’ cautious stance over the past several weeks stands in clear contrast to the re-accumulation of JPY short positions by offshore accounts, although these positions were already likely reduced somewhat since last Tuesday.”

“Into the interesting BOJ meeting next Tuesday, the recent, cautious stance of Japanese investors suggest they have significant room for to buy USD/JPY.”