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MUFG Research Report A4 Template Japan Focus Japan Focus TAKAHIRO SEKIDO Chief Japan Strategist JPY Cross-asset – USDJPY basis swap JPY Investment Strategy Global Markets Research, Tokyo arbitrage flows to pick up specifically in T: + 81 (0)3 6214 4150 E: takahiro_sekido @mufg.jp the belly of JGB yield curve TOMOKI HIRAMATSU Analyst 8 JULY 2021 Global Markets Research, Tokyo T:+81 (0)3 6214 4152 E: [email protected] June securities investing (MoF preliminary version): Foreigners enthusiastic for JPY bonds MUFG Bank Japanese investors turned net buyers of overseas securities in June, by JPY456.8 A member of MUFG, a global financial group billion (after net selling by -JPY796.2 billion in May), according to data released by the Ministry of Finance (MoF) on July 8. They turned net sellers by -JPY348.2 billion of stocks and investment fund holdings (JPY381.2 billion), and net buyers by JPY800.6 billion of medium- to long-term bonds (-JPY1.1695 trillion) and short-term bonds by JPY4.4 billion (-JPY7.9 billion). By investor type, Japanese banks drove net buying with JPY1.4752 trillion, followed by retail investors in the form of securities companies with JPY436.2 billion and investment trusts with JPY211.9 billion. Lifers net bought only JPY149.6 billion, while pension funds (trust banks) were net sellers by -JPY1.1602 trillion. In June, foreign investors accelerated their pace of buying Japanese securities, with JPY4.2238 trillion (JPY320.1 billion), including JPY2.4858 trillion of short-term bonds (JPY830.9 billion) and JPY2.1276 trillion of medium- to long-term bonds (JPY1.7651 trillion). They net-sold stocks and investment fund holdings by -JPY389.6 billion (- JPY614.0 billion). Overseas investors net-acquired JGBs during a redemption month, with a total of JPY40.6 trillion bought (JPY28.2 trillion short-term bonds and JPY12.3 trillion medium- to long-term bonds). GLOBAL JPY MATRIX: MOF MONTHLY SECURITIES FLOWS (MOF PRELIMINARY VERSION) Japanese: Outflows by Sector Foreigners: Inflows Stocks and (JPY Outward Trust Toshin Mid to Short Securities Investment trillion) Flows Banks Lifers banks Investment long term term firms fund (Pensions) Trust bonds bonds holdings Jun-21 0.46 1.48 0.15 -1.16 0.44 0.21 -0.37 2.13 2.49 May-21 -0.80 -1.10 -0.09 -0.29 0.89 0.29 -0.61 1.77 -0.83 Changes 1.25 2.57 0.24 -0.87 -0.46 -0.08 0.24 0.36 3.32 Source: MoF, MUFG May securities investing account (Balance of Payments (BoP)): Japanese diversify overseas assets; foreigners actively buy up medium- to long-term JGBs Japan’s securities investing account (released July 8 by the MoF) showed that Japanese investors continued to unload overseas securities in May, by -JPY527.9 billion (after -JPY886.9 billion in April), while overseas investors turned net buyers of Japanese securities, by JPY141.4 billion (-JPY684.3 billion). Japanese investors turned net buyers by JPY453.9 billion of stocks and investment fund holdings (-JPY2.6407 trillion), while becoming net sellers of medium- to long- 1 Japan Focus │ 8 JULY 2021 term bonds by -JPY984.9 billion (JPY1.6160 trillion). Their trading patterns changed. In May, overseas investors unloaded a net -JPY607.6 billion of Japanese stocks and investment fund holdings (JPY2.0471 trillion) and -JPY959.1 billion (-JPY4.7304 trillion) of short-term bonds, while continuing to net-buy medium- to long-term bonds by JPY1.7080 trillion (JPY1.999.0 trillion). Japanese investors: Diversify with UK, Indonesian sovereign bonds while cutting Treasuries, French sovereign bonds Japanese investors unloaded a net -JPY422.6 billion of medium- to long-term US Treasuries and a net -JPY222.9 billion of medium- to long-term French bonds in May. But they acquired a net JPY119.8 billion of UK medium- to long-term bonds and a net JPY107.2 billion of Indonesian medium- to long-term bonds. The Indonesian bonds largely represented JPY Samurai bond issuances. Japanese investors bought large net amounts of stocks and investment fund holdings in the Cayman Islands (JPY306.4 billion) and US (JPY293.9 billion). Retail money flowed into US stocks, while Japanese banks and lifers in particular focused on US and European credit instruments via Japanese banks via investment funds. Japanese investors unloaded a net -JPY495.8 billion of US medium- to long-term sovereign bonds and a net -JPY331.1 billion of medium- to long-term French sovereign bonds, and net-acquired JPY73.2 billion of US non-sovereign and JPY108.4 billion of French non-sovereign bonds. The US Treasury’s USTIC data due out July 16 will reveal details about Japanese investing in US securities. Overseas investors: Show increasing preference for medium- to long-term JGBs In May, overseas investor net redemptions of Japanese short-term bonds slowed, to -JPY883.3 billion (from -JPY4.8636 billion in April and -JPY5.9001 billion in March), but their pace of net acquisitions of medium- to long-term sovereign bonds picked up, to JPY1.7531 trillion (from JPY1.3179 trillion in April, after net selling by -JPY1.6791 trillion in March). Overseas investors bought a net JPY131.1 billion of Japanese local government bonds in May but turned net sellers of other bonds (corporate bonds) by -JPY229.1 billion (after net buying by JPY146.3 billion in April and JPY1.1376 trillion in March). Overseas investors bought more medium- to long-term JGBs in April and May after the BoJ’s assessment of monetary easing policy in March helped to dispel any uncertainties. Global JPY Facts: USDJPY basis arbitrages picking up, especially in the belly Japanese investors built up their foreign bond positions with US and European sovereign debt at the start of the new fiscal year in April, then worked to diversify their foreign bond portfolios in May after Golden Week. Their acquisition of French and Indonesian debt followed big JPY Samurai bond issuances by a French bank and the Indonesian government. Japanese investors gradually shifted from foreign stocks to foreign bonds as the rise in US and European stock prices paused, and they also bought JPY Samurai bonds as they bought more JPY bonds. In May, foreign investors may have bought global JPY (offshore JPY) bonds, and they worked to build their positions with JPY bonds with medium- to long-term JGBs. 1Yr TDBs issued by the Ministry of Finance in 2020 are nearing redemption. Looking ahead, we think that foreign investors will maintain their JPY bond positions after redemptions of short-term TDBs, putting their excess JPY funds into the medium-zone JGBs in particular. Lower US Treasury yields support and even improve the relative appeal of JPY bond asset swaps. We recommend that foreign investors accumulate more 6Mo-12Mo TDBs and the belly of JGBs, depending on year-end premium, and that Japanese investors buy more medium-term bonds, which could benefit from the belly of JPY basis premium in their outward direct and securities investing. We also recommend that Japanese investors determine their optimal level for outward direct investing (FDI) and cross- currency funding with USD using JPY basis, based on the strength of foreigners’ JPY cross-currency investing appetite. 2 Japan Focus │ 8 JULY 2021 GLOBAL JPY MATRIX: PORTFOLIO INVESTMENT ASSETS BY CURRENCY AND COUNTRY (US, EUROPE AND CHINA) USD DENOMINATED SECURITIES FLOWS EUR DENOMINATED SECURITIES FLOWS Source: MoF, Refinitiv Source: MoF, Refinitiv GERMANY SECURITIES FLOWS FRANCE SECURITIES FLOWS Source: MoF, Refinitiv Source: MoF, Refinitiv CHINA SECURITIES FLOWS (JAPANESE OUTFLOWS) CHINA SECURITIES FLOWS (CHINESE INFLOWS) Source: MoF, Refinitiv, MUFG Source: MoF, Refinitiv, MUFG 3 Japan Focus │ 8 JULY 2021 GLOBAL JPY MATRIX: EURJPY FLOWS UK SECURITIES FLOWS ITALY SECURITIES FLOWS Source: MoF, Refinitiv, MUFG Source: MoF, Refinitiv, MUFG SPAIN SECURITIES FLOWS NETHERLAND SECURITIES FLOWS Source: MoF, Refinitiv, MUFG Source: MoF, Refinitiv, MUFG BELGIUM SECURITIES FLOWS IRELAND SECURITIES FLOWS Source: MoF, Refinitiv, MUFG Source: MoF, Refinitiv, MUFG 4 Japan Focus │ 8 JULY 2021 GLOBAL JPY MATRIX: BALANCE OF PAYMENT Current Financial JPY trillion Trade Services Primary account account balance account income March 2.6493 0.9865 -0.0432 2.0381 2.3168 April 1.3218 0.2895 -0.9548 2.1753 -0.2427 May 1.9797 0.0020 -0.2555 2.4518 2.7038 Note: + Surplus or net foreign asset increase, - Deficit or net foreign asset decrease Source: MoF, Refinitiv, MUFG CURRENT ACCOUNT FINANCIAL ACCOUNT Source: MoF, Refinitiv Source: MoF, Refinitiv SERVICES ACCOUNT PRIMARY INCOME Source: MoF, Refinitiv Source: MoF, Refinitiv 5 Japan Focus │ 8 JULY 2021 GLOBAL JPY MATRIX: JAPANESE INVESTORS (OUTWARD SECURITIES INVESTMENT FLOWS) EQUITY AND INVESTMENT FUND SHARE EQUITY AND INVESTMENT FUND SHARE (NET) Source: MoF, Refinitiv Source: MoF, Refinitiv LONG-TERM DEBT SECURITIES LONG-TERM DEBT SECURITIES (NET) Source: MoF, Refinitiv Source: MoF, Refinitiv SHORT-TERM DEBT SECURITIES SHORT-TERM DEBT SECURITIES (NET) Source: MoF, Refinitiv Source: MoF, Refinitiv 6 Japan Focus │ 8 JULY 2021 GLOBAL JPY MATRIX: OVERSEAS INVESTORS (INWARD SECURITIES INVESTMENT FLOWS) EQUITY AND INVESTMENT FUND SHARE EQUITY AND INVESTMENT FUND SHARE (NET) Source: MoF, Refinitiv Source: MoF, Refinitiv LONG-TERM DEBT SECURITIES LONG-TERM DEBT SECURITIES (NET) Source: MoF, Refinitiv Source: MoF, Refinitiv SHORT-TERM DEBT SECURITIES SHORT-TERM DEBT SECURITIES (NET) Source: MoF, Refinitiv Source: MoF, Refinitiv 7 Japan Focus │ 8 JULY 2021 GLOBAL JPY MATRIX: MOF WEEKLY SECURITIES FLOWS JAPANESE INVESTORS OVERSEAS INVESTORS OUTWARD SECURITIES INVESTMENT INWARD SECURITIES INVESTMENT JPY billion Equity and Long to
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