DB FX Daily: Japanese Portfolio Flows Turning

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FX Daily: Japanese Portfolio Flows Turning

Japanese Portfolio Flows Turning

This week brings Japan's 2006 fiscal year to a close, which has in the past been associated with seasonal JPY strength as subsidiaries of Japanese exporters repatriate capital home and onshore investors liquidate part of their foreign currency positions. As we showed in last week's FX Strategy weekly however, most of the corporate-related flows have likely already taken place, while the significant number of new foreign currency trust issues this week may see renewed capital outflows out of Japan rather than the usual JPY demand. Looking at the long-term trend in Japanese portfolio flows over the last twelve months, it would however seem that portfolio flows are turning more JPY-friendly. Both equity and money market inflows remain positive, though equity inflows have decelerated since the start of last year. More importantly, net bond flows have jumped to their highest level since 1998, bringing total annual portfolio inflows to $150bn.

Looking at the other components of the Japanese balance of payments, the improvement in portfolio flows appears to have been offset by a significant rise in outflows related to offshore bank borrowing in JPY, part of which is likely to reflect the growing size of the JPY carry trade over the course 2006. With these flows likely of a more speculative nature prone to quick reversals, and the US-Japanese rate differential having already peaked in mid-2006, it would appear that the conditions for a turn in the two-year USD/JPY bull run may be slowly falling into place.

Pre-G7/IMF FX Chatter Likely

The ecofin meeting this afternoon could see some renewed statements relating to FX from the EU finance ministers, who amongst others are likely to discuss the upcoming agenda for the G7/IMF meetings to take place on April 14/15th. Recent official commentary on exchange rates has however been more guarded, with the ECB's Trichet calling for "disciplined commentary" on FX, Japan's Watanabe saying that market moves have been reflecting the G7 message and US Treasury secretary Paulson arguing that "it will take time" to sort out global imbalances. As such, we would not expect any escalation in verbal intervention beyond that seen ahead of last month's finance minister meeting in Essen.