FXStreet (Delhi) – Robin Winkler, Strategist at Deutsche Bank, suggests that they expect post-BoJ outflows to push USD/JPY toward 125 even if the structural GPIF re-allocation is petering out. Key Quotes “Japanese banks are the largest holders of JGBs after the BoJ. Over the past fifteen years, banks’ holdings have also been most sensitive to yield changes, even more so than pension fund holdings. A 50bp decline in the 10-year yield would typically see banks’ share of outstanding JGBs fall by up to 1%. Banks therefore are not only the largest but also the most price-sensitive holders of JGBs. Hence, even if BoJ critics are right in arguing that banks’ propensity to sell JGBs is lower than in the past given their minimum collateral requirements, banks are still likely to end up with the largest excess funds as JGB yields fall and QQE continues. So where will banks’ excess funds flow: into the non-financial sector as expected by the BoJ, abroad as hoped by yen bears, or simply back into BoJ deposits? We expect to see all these flows in some measure, as in past years, but we believe that a disproportionately large share of banks’ excess funds is likely to flow abroad. Although banks, including Japan Post, are the largest holders of JGBs, these comprise only 12% of their total assets of ¥1,800trn. Changes in JGB yields, therefore, are unlikely to unleash tectonic shifts in banks’ balance sheets, but even marginal changes are large when measured against Japan’s balance of payments. In the average quarter since 2000, Japan’s banks invested roughly ¥1trn in overseas securities. During quarters in which JGB yields fell by 50bps, however, they would have bought an additional ¥1.2trn, all things constant. Although banks would have added to their stocks of cash and deposits by the same amount as they underweight JGBs, in relation to their aggregate balance sheet they display a higher propensity to invest in foreign assets than in cash and deposits. Importantly, this result is conservative considering that BoJ current accounts now yield negative at the margin. Hence, the flow of funds from the past fifteen years suggest that banks are likely to keep some of the proceeds from JGB sales in liquid form whilst also stepping up foreign security investment meaningfully. Other institutional and retail investors are also likely to rotate into foreign assets as JGB yields fall.” For more information, read our latest forex news.