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18 Apr 2013
Forex Flash: JGB market could damage the yen – UBS
FXstreet.com (Barcelona) - Volatile JGB yields failed to trigger a major selloff by foreigners. Foreign holdings of Japanese bonds were only marginally trimmed by Y176bn last week. “This bears watching though, after all, foreign holdings of Japanese government bonds and T-bills have steadily increased in recent years, and now stand at Y84 trn. That's a big number – more than all the overseas assets of Japan's life insurance industry.” notes Research Analyst Gareth Berry at UBS.
As such, even a partial retreat from the JGB market by foreigners, were it to happen, could be severely detrimental to the yen. “Accelerated BoJ bond purchases offer a good reason for foreigners to stay put, but if this excessive JGB volatility continues, patience could run out at some point.” Berry warns.
Moreover, the overnight data suggests that Kuroda's initiative has impressed foreign equity investors at least, and they have reacted in size. Foreign net equity inflows to Japan hit Y1569 bn last week - the largest since records began in 2005. According to Berry, Much of this was likely to have been hedged on the FX side, so the benefit to the yen was smaller than it sounds. Nevertheless, the unhedged component probably prevented the USD/JPY from reaching 100 last week.”
As such, even a partial retreat from the JGB market by foreigners, were it to happen, could be severely detrimental to the yen. “Accelerated BoJ bond purchases offer a good reason for foreigners to stay put, but if this excessive JGB volatility continues, patience could run out at some point.” Berry warns.
Moreover, the overnight data suggests that Kuroda's initiative has impressed foreign equity investors at least, and they have reacted in size. Foreign net equity inflows to Japan hit Y1569 bn last week - the largest since records began in 2005. According to Berry, Much of this was likely to have been hedged on the FX side, so the benefit to the yen was smaller than it sounds. Nevertheless, the unhedged component probably prevented the USD/JPY from reaching 100 last week.”