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Japan's fondness for yen has survived the central bank's vow to print the currency with abandon. In the week after the Bank of Japan's (BOJ) declaration that it would double the monetary base, large resident investors sold a net ¥548-billion yen ($5.7-billion) in foreign bonds, bills and equities. That suggests they either don't believe the inflation threat – or are even more wary of foreign assets.
The initial response to the BOJ's money printing is counterintuitive. If the central bank's promise of 2-per-cent inflation in two years is credible, Japanese investors ought to be heading overseas in search of a better real return. Analysts at HSBC calculated in March that a relatively small shift in portfolios would require Japanese institutions to buy $1-trillion in overseas bonds. Government bond yields across the developed world have fallen in recent weeks as investors anticipated a Japanese cash exodus.
One possible explanation is that Japanese investors don't expect the BOJ to succeed. If deflation persists, then even close-to-zero nominal returns on Japanese government bonds may have their appeal. But other market signals suggest otherwise. The expected future inflation rate, implied by the yield difference between five-year government bonds and inflation-protected securities of same maturity, has trebled to 1.56 per cent since last August.
A more plausible reason may be that, adjusted for risks, world markets are still not attractive enough for Japanese investors to shed their home bias. Expectations of an economic revival have brought the domestic equity market to a boil – the Topix index is up 41 per cent in the past year. And long-term Japanese government bonds have still provided higher yen-denominated returns this year than U.S. Treasuries.
The latest data is not totally conclusive. Though large investors, including banks and asset managers, account for 80 per cent of net outbound investments, smaller investors don't always behave the same way. A fuller picture of outflows will emerge when the first-half balance-of-payment data is released in August. For now, however, Japan's cash exodus remains more hoped-for than real.