Japanese institutional investors other than public pension funds have kept a low profile on foreign bond and equity markets since the beginning of the new fiscal year.
They seem to be in no mood to gear up for increased purchases of foreign currency-denominated financial products in the near term. There are good reasons for this.
For one thing, heightened tensions in the Middle East have prompted Japanese investors to play it safe.
They are cautious about taking risks and are reluctant to commit themselves to new investments liable to incur foreign exchange losses.
Nevertheless, in terms of foreign-exchange rates, market participants do not expect the yen to gain ground against the dollar or euro in the coming months.
One factor behind this is the Finance Ministry’s opposition toward the dollar sinking below 130 yen.
Another factor is the concern over the diminishing credibility of major financial institutions in Japan.
The computer fiasco suffered by the Mizuho Financial Group has forced the Bank of Japan to maintain high liquidity in the banking system.
The balance of reserves held by commercial banks in the BOJ’s current account has stayed above 15 trillion yen since the beginning of April, a level well above the BOJ’s maximum target aimed at providing interbank lending markets effectively with interest-free money.
The BOJ is probably seeking to maintain high liquidity in the money market as the computer problems cited above may lead to serious questioning of the group’s credibility among its clients.
The BOJ now appears to be guarded against a run on Mizuho banks.
Vague anxiety over the health of the whole financial system has not been erased in the wake of special bank inspections conducted by the Financial Services Agency.
Thus, when it comes to analyzing the prospects for the yen’s value against the dollar, worries linger over several factors. These include the possibility of a further slide in Tokyo stock prices and a further downgrade of Japan’s sovereign debt rating.
More computer problems at the nation’s banks will no doubt prompt hedge funds and other investors to sell the yen aggressively.
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