Foreign investors have accelerated their selling of Japanese government bonds (JGBs) while Japanese investors are simultaneously increasing purchases of overseas bonds and equities, a flow combination that leaves the Japanese yen exposed to further depreciation, according to Geoff Yu, senior market strategist at BNY Mellon.
The warning, issued in a market note on Wednesday, underscores a persistent structural challenge for the yen: even as Japan’s economy shows signs of recovery, capital flows are working against the currency. BNY Mellon’s analysis points to a widening gap between where Japanese money is going and where foreign money is pulling back.
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Capital flows point in one direction
Yu highlighted that foreign investors are not just trimming JGB holdings — they are doing so at an accelerating pace. At the same time, Japanese institutional investors, including pension funds and life insurers, have been steadily increasing their allocations to overseas fixed income and equities, a trend that has persisted despite occasional bouts of currency hedging.
This dynamic matters because the yen’s value is heavily influenced by cross-border capital flows. When foreign investors buy JGBs, they must convert their currency into yen, providing support. When they sell, that support reverses. Conversely, when Japanese investors purchase foreign assets, they typically convert yen into dollars, euros, or other currencies, adding to selling pressure on the yen.
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The combination of both trends simultaneously is what BNY Mellon describes as a particularly adverse flow mix for the currency.
What this means for the yen’s outlook
The yen has already experienced significant depreciation against the U.S. dollar over the past two years, and BNY Mellon’s analysis suggests that the underlying flow dynamics may not yet have run their course. The bank’s view aligns with a broader market consensus that the Bank of Japan’s ultra-loose monetary policy, while gradually being adjusted, still leaves Japan with relatively low yields compared to the U.S. and other major economies.
For traders and investors, the key takeaway is that traditional supports for the yen — such as Japan’s current account surplus — are being offset by these portfolio flows. Even positive economic data from Japan may have limited impact on the currency if the flow picture remains unchanged.
Yu noted that unless there is a significant shift in either foreign investor appetite for JGBs or Japanese investor demand for overseas assets, the yen is likely to remain under pressure. A sharp global risk-off event could temporarily boost the yen as a safe haven, but BNY Mellon suggests that such a move would be a short-term reprieve rather than a reversal of the trend.
Market participants will be watching upcoming Bank of Japan policy meetings and U.S. inflation data for clues on whether the yield differential that has driven these flows will narrow. For now, the flow signals point in one direction.
This article is for informational purposes only and does not constitute financial advice. Currency markets are volatile and unpredictable; any investment decisions should be made based on individual research and consultation with a qualified financial advisor.
