Foreign Investors Increase Purchases of Japanese Bonds Amid Speculation of Interest Rate Hike

Foreign investors have acquired a massive 1.15 trillion yen of Japanese bonds, signaling anticipation of Japan ending its negative interest rate policy.

Foreign investors have shown a significant increase in their purchases of Japanese bonds last week, as anticipation grows that Japan may soon end its long-standing negative interest rate policy and begin raising rates this year. According to data from the Ministry of Finance, foreign investors acquired a massive 1.15 trillion yen (about $7.8 billion) of long-term Japanese bonds on a net basis last week, marking the largest weekly net purchase since early-April 2023. Additionally, Japanese short-term debt securities attracted a net 2.22 trillion yen in overseas capital last week, following approximately 2.75 trillion yen of net purchases in the previous week.

Sources have indicated that the Bank of Japan will consider ending its negative interest rate policy next week if Friday's preliminary survey on big firms' wage talks outcome yields positive results. This potential move would signify a significant shift away from the central bank's decade-long stimulus program. Yields on one-year Japanese treasury bills have seen a relatively sharp increase of 8 basis points in 2024, reaching a near decade high of 0.067%. Similarly, six-month yields, which have been negative for eight years, rose above zero last week. It is important to note that bond yields rise when prices fall, and higher yields have the potential to attract new investors.

In other news, overseas investors were net buyers of Japanese equities for the second consecutive week, securing 198.35 billion yen in stocks despite a slight pullback from record highs. The Nikkei share average experienced a 0.56% decline last week, ending its five-week winning streak. Foreign investors made net purchases of cash equities and derivative contracts totaling 176.39 billion yen and 21.96 billion yen, respectively, last week.

On the other hand, Japanese investors made significant purchases of long-term foreign bonds, totaling about 1.58 trillion yen, marking the largest weekly net purchase since January 12. They also invested approximately 6.6 billion yen in short-term debt instruments. Conversely, domestic investors withdrew roughly 616.5 billion yen from foreign equities, extending their net selling streak into a second consecutive week.

The recent surge in foreign investment in Japanese bonds, coupled with the potential shift in the Bank of Japan's interest rate policy, reflects a changing landscape in the Japanese financial market. Investors will be closely monitoring developments in the coming weeks to gauge the impact on bond yields and equity markets.