Global Market: Japanese investors extend foreign bond selling streak to four weeks

Japanese investors sold a net 760.6 billion yen of foreign equities during the week.

Investors sold a net 339.7 billion yen ($2.15 billion) of overseas long-term bonds during the week, broadly in line with the revised 345.7 billion yen sold in the previous week. The latest outflow was significantly lower than the 1.9 trillion yen in net sales recorded in the week ended September 19.

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The sustained withdrawals have fuelled expectations that Japanese institutional investors could gradually repatriate funds as domestic government bond yields rise. Yields on 30-year Japanese government bonds have nearly doubled over the past two years to around 4%, making them increasingly competitive with US Treasuries after accounting for currency-hedging costs, as per the report by Reuters.

Japanese investors have withdrawn approximately 5.34 trillion yen from foreign bonds on a net basis this year, the largest outflow since 2022, Reuters reported, citing finance ministry figures.

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However, life insurers, among Japan’s biggest institutional investors, have played a relatively limited role in the selling. The sector, which manages around $2.5 trillion in assets with roughly a quarter invested overseas, accounted for only 289 billion yen of net foreign bond sales this year.

The limited selling suggests that higher domestic yields have not yet triggered a broad-based repatriation of overseas investments by major life insurers. Other categories of Japanese investors have accounted for most of the withdrawals, according to the data, the report stated.

Japanese investors also sold a net 760.6 billion yen of foreign equities during the week, partly reversing the previous week's net purchases of 1.33 trillion yen.

Meanwhile, overseas investors increased their exposure to Japanese debt and equities. Foreign investors purchased a net 1.08 trillion yen of Japanese long-term bonds, the largest inflow in four weeks, and bought a net 841.6 billion yen of short-term bills.

Foreign investors also purchased a net 3.52 trillion yen of Japanese equities, marking their biggest weekly net investment since April 11, the finance ministry data showed.

Despite the strong foreign inflows, Japan's stock market faced renewed pressure on Thursday. The Nikkei share average slumped 4.9% following media reports about distressed debt at US cloud-computing provider CoreWeave, while stronger-than-expected US inflation data heightened concerns that interest rates could remain elevated.

The developments highlight the contrasting investment flows in Japan, with domestic investors continuing to reduce overseas bond holdings while foreign investors increase their exposure to Japanese debt and equities. However, whether rising Japanese government bond yields will prompt a sustained return of domestic capital remains uncertain, as per the report.