Foreign investors bought a record amount of Japanese bonds last week and analysts said they would keep on buying as long as the yen looked likely to climb higher.
Foreign investors bought a net 767 billion yen ($7.18 billion) of Japanese bonds in the holiday-shortened week of January 12-16 after net purchases of 61.2 billion yen the previous week, Ministry of Finance data showed on Thursday, .
The ministry said that net capital inflows of 2.2209 trillion yen last week were also a record weekly high, even though it was only a four-day week because of a national holiday on January 12.
Analysts said that the heavy inflows contributed to the strength of the yen, sending it to a three-year high of 105.70 yen per dollar last Friday and prompting the Bank of Japan to intervene to hold it down.
"With the yen rising, foreigners needed to increase yen-based assets," said Soichi Okuda, senior economist at Sumitomo Corp.
"After a weak US labour report earlier in the month, the risk that the Federal Reserve would tighten monetary policy receded and bonds have been supported globally. That is why they chose bonds over stocks."
US Treasuries scored their biggest gains in more than two years on January 9 after nonfarm payrolls rose by a negligible 1,000 in December, even though the unemployment rate fell to 5.7 percent from 5.9 percent.
On Friday, January 16, the yield on the cash benchmark 10-year Japanese government bond (JGB) fell to a one-and-a-half month low of 1.265 percent while the yield on five-year bonds hit a five-month low of 0.505 percent.
On Thursday, the 10-year JGB yield was at 1.315 percent while the dollar hovered around 107 yen.
"As long as there are prospects of a stronger yen, I think this trend of buying Japanese bonds will continue," said Okuda.
However, Hideo Kumano, senior economist at Dai-ichi Life Research Institute, said he expected that foreign purchases of Japanese stocks would dominate capital inflows.
"I think this bond-buying will not last long. Rather, I think Japanese stock-buying will be a continuing force," he said.
Foreign investors had been net buyers of Japanese stocks for nine consecutive months as of the end of December. They bought a net 209.4 billion yen of Japanese shares last week.
"It's not like bonds, where most investors hedge (foreign exchange risks). Stock purchases will have a bigger impact on forex," Kumano said.
Meanwhile, Japanese investors were heavy net sellers of foreign bonds, dumping 1.1708 trillion yen last week after buying a net 1.398 trillion yen the previous week.
Traders attributed the sales to profit-taking by Japanese banks ahead of their fiscal year-end book-closing at the end of March.
"There is pressure to lock in profits as soon as possible ahead of book-closings and I think such selling was reflected in the data," said a trader at a major Japanese bank.
Riding on expectations that the Fed would not raise official interest rates until the end of the year at the earliest, the yield on 10-year US Treasuries fell to a three-month low of around 3.91 percent on January 16.
That compared with about 4.08 percent at the end of the previous week.
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