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3 Apr 2013
Forex Flash: FX stability ahead of key BOJ decision - BTMU
FXstreet.com (Barcelona) - Derek Halpenny, European Head of Global Markets Research at the Bank of Tokyo Mitsubishi UFJ notes that many of the Asian equity markets are moderately lower today, although the Japanese markets are higher in part on fresh record highs in US equities, and also in anticipation of pending aggressive BoJ easing.
He feels that of course the decision from the BOJ will be key and certainly notable steps will have to be taken in order to meet current high expectations. He feels that crucial for the direction of the yen will be whether Japanese investors respond by exporting capital into foreign markets, or accepting greater foreign currency risk through a reduction in current hedge ratios. Halpenny continues to comment that certainly in the run-in to the Japanese fiscal year-end there was no evidence of capital outflows.
He writes, “Indeed, Japanese investors repatriated from both foreign equity and bond markets while foreign investors were heavy buyers of Japanese equities. In the four weeks to 22nd March, Japanese investors sold JPY 1,888.5bn worth of foreign equities and JPY 1,067.8bn worth of foreign bonds. Foreign investors bought JPY 1,595.6bn worth of Japanese equities but sold JPY 1,650.6bn worth of JGBs. Hence, there was an overall net portfolio inflow to Japan of JPY 2,901.3bn over the four-week period.”
However, he feels that this may be about to change as in the latest week foreign investors did sell Japanese equities while Japanese investors could well turn to foreign bond buying after sustained net selling through most of February and March. The key though will be changes to hedging. He sees that life Insurance companies for example currently hold JPY 51 trillion in foreign securities, or 15.4% of total assets as of January according to data incorporating the top 43 life insurers. That equates to USD 545bn at today’s USD/JPY rate. If these entities decide to reduce hedge ratios by 10ppt, this would imply potentially over USD 50bn worth of yen selling.
He finishes by writing, “We suspect that these entities may well start to reduce their foreign currency hedging although this may only materialise at levels closer to the 90.00 level in USD/JPY. But how aggressive the Kuroda BOJ will become will also determine the timing of a potential change in hedging flows.”
He feels that of course the decision from the BOJ will be key and certainly notable steps will have to be taken in order to meet current high expectations. He feels that crucial for the direction of the yen will be whether Japanese investors respond by exporting capital into foreign markets, or accepting greater foreign currency risk through a reduction in current hedge ratios. Halpenny continues to comment that certainly in the run-in to the Japanese fiscal year-end there was no evidence of capital outflows.
He writes, “Indeed, Japanese investors repatriated from both foreign equity and bond markets while foreign investors were heavy buyers of Japanese equities. In the four weeks to 22nd March, Japanese investors sold JPY 1,888.5bn worth of foreign equities and JPY 1,067.8bn worth of foreign bonds. Foreign investors bought JPY 1,595.6bn worth of Japanese equities but sold JPY 1,650.6bn worth of JGBs. Hence, there was an overall net portfolio inflow to Japan of JPY 2,901.3bn over the four-week period.”
However, he feels that this may be about to change as in the latest week foreign investors did sell Japanese equities while Japanese investors could well turn to foreign bond buying after sustained net selling through most of February and March. The key though will be changes to hedging. He sees that life Insurance companies for example currently hold JPY 51 trillion in foreign securities, or 15.4% of total assets as of January according to data incorporating the top 43 life insurers. That equates to USD 545bn at today’s USD/JPY rate. If these entities decide to reduce hedge ratios by 10ppt, this would imply potentially over USD 50bn worth of yen selling.
He finishes by writing, “We suspect that these entities may well start to reduce their foreign currency hedging although this may only materialise at levels closer to the 90.00 level in USD/JPY. But how aggressive the Kuroda BOJ will become will also determine the timing of a potential change in hedging flows.”