Derek Hakpenny, European Head of GMR at MUFG, suggests that the weakness of the dollar triggered by the Fed has reinforced the downward pressure on USD/JPY that was initially prompted by the upturn in financial market volatility and the impression that the BOJ was running out of policy options to stimulate economic growth. Key Quotes “These developments have had a telling impact on foreign investors’ appetite for holding Japanese equities. Data released today in Japan by the MOF revealed the 12th consecutive week of Japan equity selling by foreign investors. The selling in the latest week totalled JPY 359bn and the total over the 12-week period reached JPY 7trn – the largest and most sustained period of selling since ‘Abenomics’ was launched back in 2012. Fears of the impact yen strength might do to the economy is certainly a factor but there must also be some serious doubts amongst foreign investors over the whole ‘Abenomics’ project. The sustained selling is also telling when compared to the portfolio flows taking place elsewhere in Asia. The upturn in investor sentiment since mid-February and reduced fears over a hard landing in China has resulted in a surge in portfolio flows into Asian equity markets. For the month of March equity inflows into South Korea reached over USD 3bn, the largest since April last year; in Taiwan the inflow in March totalled close to USD 5bn, the largest since 2007; while in Thailand and India equity inflows in March reached levels not seen since 2014. With sentiment so poor in Japan it is hard to envisage a sudden upturn in risk appetite amongst Japanese investors. Portfolio outflows have accelerated notably into foreign fixed income markets, notably since USD/JPY began its sudden drop. In the eight weeks since the start of February, Japanese investors have bought close to JPY 9trn worth of foreign bonds. However, it is very likely that in the circumstances in which those outflows took place (following the sharp plunge in USD/JPY) Japanese investors hedged these outflows aggressively. These outflows are also most likely not a function of increased risk appetite but more a function of the falling value of foreign investments in yen terms that prompted a rebalancing as we approach the fiscal year-end in Japan. It is certainly possible that once we enter the new fiscal year that new investments on a less hedged basis may occur helping to provide some momentum for USD/JPY to move higher. But this is very questionable at this point in time. We’ve just had some very dovish rhetoric from Fed Chair Yellen that suggests a greater focus on limiting the scope for US dollar appreciation. The cost of hedging foreign fixed income for Japanese investors remains relatively cheap by historic standards. We would not be surprised to see outflows perhaps providing USD/JPY with much needed support on an approach to the 110.00 level but talk of new fiscal year outflows driving USD/JPY higher seems premature to us.” For more information, read our latest forex news.