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Foreign fund inflows to Japan soar in January
Thu February 12, 2004 12:55 AM ET
By Hideyuki Sano
TOKYO, Feb 12 (Reuters) - Hopes for a continued economic recovery in Japan and expectations of further gains in the yen against the dollar helped spur a surge in buying of Japanese assets by foreign investors in January.
But some analysts warned that the fund flows, while expected to continue for now, were partly a result of easy monetary policies in the United States and Japan. Future credit tightenings could put a damper on such purchases, they said.
Net buying of Japanese bonds by foreigners, based on contracts, totalled 1.3344 trillion yen ($12.66 billion) in January, the most since January 2001 and more than double December's 567.9 billion, the Finance Ministry said on Thursday.
Their buying rose as the yen has been constantly appreciating against the dollar, hitting a three-year high of 105.16 yen on Wednesday.
Japanese bond prices are also being supported because the Bank of Japan has pledged to keep the banking system flooded with more than 30 trillion yen of cash, pinning short-term rates at around zero and prompting investors to buy longer-dated bonds.
Foreign investors also poured money into Japanese stocks, buying 1.4642 trillion yen in net terms in January.
This compares to net buying of 663.4 billion yen in December and is the largest net purchase amount since August.
"Foreign investors are buying Japanese shares because corporate profits are increasing," said Tohru Sasaki, chief foreign exchange strategist at JP Morgan Chase in Tokyo.
The fund inflows helped the yen rise against the dollar over the month despite Japan's massive seven trillion yen dollar-buying intervention in January.
The buying spree by foreign investors started last year.
Similar data from the Finance Ministry -- capital flows based on settlements -- released also on Thursday showed foreign buying of Japanese stocks in 2003 came to 9.77 trillion yen, the second-largest amount since such records began in 1981.
The other side of the coin was Japanese investors' fervent buying of foreign bonds, including U.S. bonds. Their foreign bond buying in 2003 was also the second-largest in history at 17.85 trillion yen.
Their purchases of U.S. bonds totalled 6.90 trillion yen, the largest since 1996, when country-by-country data started to be made available.
This hardly helps the dollar, however, as Japanese investors almost always hedge currency risk when buying foreign bonds.
But there was an even bigger buyer of U.S. bonds -- the Bank of Japan. The central bank repeatedly bought dollars to curb the yen's strength, offloading 20 trillion yen and allocating some of those purchased dollars to U.S. Treasuries.
The government does not publish the amount of the BOJ's net bond buying, but securities held as part of Japan's official reserves -- most of which are thought to be U.S. Treasuries -- rose by $138.2 billion to $526 billion in 2003.
Analysts say the BOJ's huge purchases, on top of the Fed's policy of keeping short-term rates at a 45-year low of one percent, have helped Treasury yields stay at historically low levels. The 10-year U.S. Treasury yield (US10YT=RR: Quote , Profile , Research ) has moved around four percent since 2003.
That in turn could have prompted U.S. investors to seek higher-yielding opportunities abroad, including Japanese assets, analysts say.
"We have a liquidity-driven market as central banks are printing money globally," said Takuji Aida, a senior economist at Merrill Lynch.
"When the Fed raises interest rates, I think that's probably when the liquidity market will end," he said.
Investors may not have to worry about that for now. Fed Chairman Alan Greenspan on Wednesday said he could be patient about an interest rate rise, hinting that the U.S. central bank intended to keep rates low. ($1=105.35 yen)
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