Japanese investors dumped Australian debt at the fastest pace on record earlier this year as the Aussie dollar rose sharply against the yen, and a marked shift in policy easing expectations in Australia could see the trend continue.
The yen hit new lows this week, touching its softest level in more than three years against the US dollar and its lowest since 2008 versus the Australian dollar.
The slide came in the wake of growing expectations that Japan's Prime Minister Shinzo Abe and the central bank will soon deliver bold reflationary policies to jumpstart the world's third-largest economy. The moves should further weaken the yen.
With the Aussie dollar jumping an eye-popping 12 percent in three months, Japanese investors have rushed to book profits.
Data showed they sold 439 billion yen ($4.57 billion) worth of Australian debt in January, the largest amount since public records started in 2005, according to RBC Capital Markets.
"This may imply that Japanese investors do not expect the yen price of Australian dollar rate products to move much higher," said Michael Turner, a strategist at RBC in Sydney.
"They think the Aussie/yen may be near the top of the range, or Australian interest rates are near the bottom, or some combination of the two," he said.
Japanese investors are keen buyers of Aussie dollar-denominated assets, such as the country's triple-A rated government bonds, because of Australia's relatively high interest rates compared with the rest of the world. Foreigners own 70 percent of Australian government bonds.
But as markets have sharply scaled back expectations on further policy easing in Australia, bonds have become less attractive, giving investors further incentives to continue to take profits.
While there is understandable scepticism among the Japanese community that Abe would be more successful than previous leaders in resuscitating the ailing economy, some analysts said the dumping of Australian assets had more to do with booking gains than politics. "The Aussie dollar had rallied so much that it was more about taking profits off the table," said Damien McColough, strategist at Westpac Bank, having returned from a trip in Japan where he met with fund managers and insurance firms.
He expected more selling in coming months, although at a slower pace. He added there was a general view among investors that the government's policy impact would probably not be sufficient.
Japanese investors have switched out of Australian dollar assets into higher yielding and more risky bond markets such as Russia, Mexico, Turkey and Indonesia, according to Westpac. The bank also notes a shift into equities.