Rising Oil Prices and Middle East Tensions Drive Foreigners Away from Japanese Bonds

Japanese bonds saw significant foreign outflows amid rising inflation risks and escalating Middle East tensions, with 1.17 trillion yen divested in a week. Oil prices surged due to a U.S.-Israeli conflict with Iran impacting energy infrastructure. Yet, foreigners remained net buyers of Japanese equities for the 11th week.

In a week marked by escalating geopolitical tensions, Japanese bonds experienced the sharpest weekly foreign outflow in nearly 2-1/2 months up to March 7. The ongoing U.S.-Israeli conflict with Iran raised fears of inflation as oil prices soared to multi-year highs, driving a net divestment of 1.17 trillion yen ($7.36 billion) in Japanese bonds, as reported by Japan's Ministry of Finance.

Oil prices surged, with U.S. crude reaching $119.48 a barrel, its highest since June 2022, following Iran's attacks on energy infrastructure in Gulf countries. The West Texas Intermediate (WTI) crude last traded at $94.5 per barrel. In this climate, foreigners sold 963.6 billion yen worth of Japanese long-term bonds and withdrew 208.8 billion yen from short-term debt securities.

Despite these sell-offs, foreigners bought 385.5 billion yen in Japanese equities, marking the 11th consecutive week of being net buyers. Meanwhile, Japanese investors turned to foreign markets, purchasing 399.8 billion yen in foreign long-term bonds and investing 163.1 billion yen in foreign equities.

(With inputs from agencies.)