Japanese investors went on a record shopping spree in global debt markets last week as the yen strengthened and their hunt for yield intensified.
Net buying soared to ¥4.24 trillion ($41 billion), surpassing the previous high of ¥2.55 trillion set in July 2016, according to preliminary figures from the Finance Ministry going back to 2005.
The data suggests that far from being scared off by the coronavirus pandemic and fears in the oil market, normally cautious Japanese investors helped drive the debt rally last week. The fund flows for the record purchases were so great that they likely curbed what would have been an even larger gain in the yen.
“This weekly purchase is massive,” said Tsuyoshi Ueno, a senior economist at NLI Research Institute in Tokyo, who added that the Government Pension Investment Fund (GPIF) had probably been active. “Along with the move by the public fund, banks may have also bought as the dollar-yen was in a downtrend during the week.”
Preliminary monthly figures showed this week that proxies for Japanese pension funds bought a record amount of overseas debt for a second month in February. With Japan’s benchmark 10-year government bond yield likely to remain negative for the foreseeable future, the pressure to keep buying debt abroad will continue, even as rates fall elsewhere.
Fears of virus-induced damage to global growth prompted the U.S. Federal Reserve to cut borrowing costs at an emergency meeting last week, quickening a drop in U.S. Treasury yields to record lows.
With the yen climbing to a six-month high last week, purchases overseas became cheaper for Japanese institutions. Gains have accelerated this week, propelling the Japanese currency to its highest level against the dollar since 2016.
Still, Bank of America has said that cross-border flows from a re-balancing of Japan’s public pension funds has prevented the yen from strengthening further than it could have.
“It’s likely that pension funds bought overseas bonds as the yen strengthened,” said Yujiro Goto, head of foreign exchange strategy at Nomura Holdings Inc. in Tokyo. “Should the GPIF increase allocations further, expectations of more outflows may help limit a rally in the yen.”