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Foreign Exchange

Record foreign bond-buying from Japanese life insurers to increase pressure on JPY

Flow data show Japanese life insurers are set for record first-quarter purchases of foreign bonds, which has the potential to accelerate the recent weakness in the yen.

Monthly data from Japan’s Ministry of Finance (MoF) show Japanese life insurers turned net buyers of foreign bonds in January and February, after being net sellers in five of the six months during the second half of 2011. Lifers bought ¥575 billion in the first two months of the year. The total first-quarter record total is ¥582 billion in 2004, so just modest buying in March will mean the first quarter of 2012 is a record for life-insurer buying of foreign bonds since the current data series began in 2002.

Derek Halpenny, head of FX research at Bank of Tokyo-Mitsubishi UFJ, says while much of these purchases will be funded in the swaps market, about 30%, especially those from the larger life insurers, will be funded by spot purchases.

Other flow data from the MoF also points to further yen weakness.

Weekly figures released on Thursday in Japan revealed ¥367.1 billion of foreign-bond purchases, the ninth week out of 10 in 2012 of net buying.

There has also been notable drop-off in foreign demand for Japanese short-term securities.

Since the USDJPY rally began at the start of February, foreign investors have been net sellers of short-term securities totalling ¥169 billion. The average monthly purchase in the second half of 2011 was ¥1,750 billion.

 Yen at weakest since post-tsunami intervention  

 
 Source: Bloomberg

The figures reflect the change in sentiment towards the yen since the Bank of Japan (BoJ) announced a surprise rise in its quantitative-easing programme last month.

Adding to the upward pressure in USDJPY have been rising US bond yields as data from America have beaten expectations and transformed the dynamics in the FX markets.

This has seen the yen shed its haven status and allowed investors to focus on the country’s deteriorating trade position and the worrying implications for Japan’s huge debt mountain of its ageing population.

The yen is the worst-performing currency this month, with its losses outpacing the Ugandan shilling, the second worst performer.

Indeed, USDJPY broke above ¥84 in Tokyo hours on Thursday. That was the first time it breeched that level since April 2001, after the co-ordinated central bank intervention to weaken the currency in the wake of the volatility after the earthquake and tsunami that triggered a nuclear disaster in March.

Many now believe that intervention to weaken the yen from the BoJ – under instruction from the MoF – has now been priced out of the market.

That is important because the BoJ’s policy of leaning against the wind with its intervention strategy, which meant it stepped in to the market at increasingly lower levels to support USDJPY, had been an invitation to all speculative investors to make profits out of any losses the central bank was prepared to accept.

Ulrich Leuchtmann, head of FX research at Commerzbank, says that means the BoJ’s intervention strategy achieved the exact opposite of what had been intended.

“USDJPY traded at a lower level than was fundamentally justified,” he says. “This effect has now been priced out as USDJPY is appreciating and intervention is no longer an issue.”

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