J.P.Morgan: JPY: A Few Factors Dampening Outbound Investment

J.P.Morgan note that "Japan's purchases of overseas securities remain moderate, resonating with our view that the current pace of investment outflows is no longer sufficient to generate sustained, idiosyncratic JPY weakness. Japanese investors net bought just over JPY1 trillion worth of overseas debt last week, but conversely net sold an almost equal amount of foreign equities, leaving net outflows at just JPY0.2 trillion. This inflection in equity flows—from sustained buying earlier this year to what appears to be profit taking over the past several weeks—has been large enough to flip the balance of residents' portfolio investment to a trend of net inflow back to Japan. Net equity inflows suggests that residents' yen purchases may have actually supported last week's decline in USD/JPY to some degree. An additional factor dissuading long-term investors (primarily lifers and pension funds—the main purchasers of overseas debt thus far this year) from initiating fresh USD longs may reflect current USD/JPY levels relative to UST-JGB yield spreads. The 10Y USD/JPY forward rate looks to have settled around the 100 level, right at the upper limit of its 70-100 yen range over the past 25 years. In other words, relative to the 50bp or so spread on 10Y yields, it already looks elevated from a long-term perspective; in 2015, the last time it reached 100, spot USD/JPY was trading around 125. In addition, recent lifer flows have likely been FX-hedged given the decline in hedging costs over the past few months. And increased diversification in debt flows into non-US fixed income markets suggests that incremental debt purchases, to the extent that they are lingering, could be more influential for cross-Yen pairs than for USD/JPY."