Last Week Saw Heaviest Japanese Selling Of Foreign Bonds Since '15

The week ending June 7 saw Japanese investors sell the largest amount of offshore bonds since ’15 (~Y2.6tn).

• The major XXX/JPY FX pairs weren’t particularly volatile during that timeframe, operating a little shy of cycle highs, suggesting that FX considerations probably didn't meaningfully contribute to the flow.
• 30-Year JGBs hit fresh cycle highs last week, although paper out to 20s failed to challenge extremes registered in the prior week.
• Japanese participants may have used the rally seen in the early part of the week to offload international bond holdings.
• We also note that they may have reacted to the combination of U.S. NFPs, ISM services data and the hawkish cut from the ECB, seen in the second half of the week.
• Another potential explainer is that Japanese market participants may be lightening up on international exposure as they look to deploy fresh capital into JGBs if the BoJ chooses to reduce its JGB purchases at tomorrow’s monetary policy decision.
• A reminder that our Tokyo policy team previously suggested that “the BoJ is likely to consider a reduction in its government bonds purchases as soon as its June 13-14 meeting.”
• This idea has since been supported by similar reports from local press outlets in Japan and other major newswires.
• This comes with 30-Year JGB yields trading comfortably above 2.00%, a level that several of the major Japanese life insurers identified as an entry point in the latest round of semi-annual investment intention releases.

Fig. 1: Net Weekly Japanese Flows Into Foreign Bonds (Ybn)