Foreign Investors Flock to Japanese Bonds Amid Promising Market Conditions

Foreign investors purchased Japanese government bonds worth 1.89 trillion yen last week, reversing a net selling trend, due to attractive yields and hopeful prospects for interest rates. A significant U.S. investment commitment may influence cross-currency swaps, affecting dollar-based investor returns. Meanwhile, Japanese investors are divesting from foreign bonds.

Foreign investors flocked to Japanese government bonds (JGBs), purchasing 1.89 trillion yen ($12.13 billion) worth last week as appealing yields and cautious outlooks on Bank of Japan's rate hikes enticed buyers. This activity broke a two-week trend of net selling, according to Japan's Ministry of Finance.

Analysts suggest that Japan's $550 billion U.S. investment commitment could impact the cross-currency basis swap market for dollar exposure, potentially boosting hedged returns on Japanese bonds for U.S.-based investors. Concurrently, foreign investments in Japanese stocks increased by 402 billion yen, marking nine consecutive weeks of rise.

The Nikkei reached a pinnacle of 59,332.43, driven by gains in software shares amid a respite from AI disruption fears. Meanwhile, Japanese investors conducted their largest net sales of foreign long-term bonds since April, selling about 1.9 trillion yen, but invested 408.5 billion yen in foreign stocks.